China a goldmine for drug makers, but it has its perils

Multinational drug companies now employ more sales agents in China than in the US, their largest market.

Several, including Merck and GlaxoSmithKline, are making huge scientific investments in the country, including building research and development centres. In the next few years, China is poised to surpass Japan as the world's second-largest pharmaceutical market.

The booming Chinese demand for drugs could not come at a better time for Western manufacturers, whose sales have been slumping because of patent expiration in the US and price controls in Europe.

But selling drugs and other healthcare products in China is fraught with peril, as shown by allegations this week that Glaxo funnelled payments through travel agents to doctors, hospitals and government officials to bolster sales.

Chinese officials have compared the company's operations to organised crime and have detained four executives for questioning.

Shortly after government investigators raided Glaxo's Shanghai offices last month, the British executive in charge of the Chinese operations left the country. He has not been back.

Earlier this month, the top makers of infant formula, including Abbott and Nestle, lowered their prices in China under government pressure, while officials are investigating the pricing policies of up to 60 foreign and domestic drug companies. The rash of investigations is one measure of how critical the healthcare market has become to global companies, and to the Chinese government.

The Chinese have made no secret of their goal of pushing the country's domestic drug industry into more direct competition with the world's top manufacturers.

Several factors are contributing to the boom in China. The growing economy has given rise to a middle class that is increasingly able to afford expensive Western drugs.

And under a new healthcare program, China has expanded insurance coverage to hundreds of millions of new patients - 95 per cent of the population had insurance in 2011, up from 43 per cent in 2006, according to a report by consulting firm McKinsey & Co.

By 2020, China's spending on healthcare is expected to grow to $US1 trillion from $US357 billion in 2011. Even as foreign companies raise their investment, the Chinese are also looking to capitalise on the booming healthcare market. The government identified the medical industry as one of seven areas for development in its most recent five-year plan, and the country's medical sector invested $US160 billion in R&D in 2012.

But some believe Western companies will have an edge because consumers might be willing to pay more for brands that are known for high-quality ingredients.

"There are so many drugs that are poor quality in China, so the ability to differentiate yourself is important," said Craig Wheeler, chief executive of US drug maker Momenta Pharmaceuticals.

Mr Wheeler said the crackdowns were to be expected. "These markets are maturing and are going to be ... more highly regulated."

Glaxo has been struggling to rebuild its image after a $US3 billion fine in the US last year when the company admitted improperly promoting its antidepressants and failing to report safety data about the diabetes drug Avandia. Andrew Witty, who took over as chief executive in 2008, has repeatedly pitched the company as a global leader in ethical practices and said it had moved on from its lapses.

Chinese investigators told a different story this week, however. They said senior executives had organised fake conferences, overbilled for training sessions and paid kickbacks in cash and luxury travel. The illegal activity was funnelled through travel agencies, some of which hired young women to engage in "sexual bribery" with Glaxo managers to win long-term contracts with the company.

The Chinese government said it had detained four senior executives - all Chinese nationals - but noted that the British head of the Chinese operations, Mark Reilly, had left the country. Glaxo confirmed Mr Reilly was working from the company's offices in Britain.

On Monday, one of the detained executives admitted to much of the activity, according to news reports. Liang Hong, the vice-president of operations for Glaxo in China, said the payments to doctors and government officials contributed to the higher prices of the company's drugs in China. Glaxo said it was "deeply concerned and disappointed" by the accusations.