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By Adam Jourdan
SHANGHAI May 25 A crackdown on corruption and
pricing in China's fast-growing pharmaceutical market has
squeezed profits and margins, raising a red flag to global Big
Pharma that the days of easy growth in the country may be over.
A Reuters' analysis of more than 60 listed Chinese
healthcare firms shows average profit margins declined to around
10 percent last year from 15 percent in 2012. Average net
profits fell 2.1 percent, down from close to 20 percent growth
in previous years.
China has been a magnet for the big global pharmaceutical
companies and other healthcare firms as growth slows in Europe
and the United States. It is the largest emerging drugs market
and is set to be the global number two overall within three
years, according to consultancy IMS Health.
While global drugmakers withhold their China profit figures,
the analysis suggests profit growth is harder to come by - a
concern as many global firms look to China as a future growth
"Most companies, local and foreign, have enjoyed an easy
growth phase for 5-6 years as money was thrown at the healthcare
system to improve access," said Alexander Ng, Hong Kong-based
associate principal at McKinsey & Co. "Now China is more into
cost containment mode... and the squeeze on pricing and margins
is a lot more apparent."
Over the past year, China has cracked down on high prices
and corruption in the healthcare sector. Authorities probed
drugmakers over pricing in July, while a high-profile
investigation into British drugmaker GlaxoSmithKline Plc
led to executives at the company being charged with bribery
earlier this month.
Industry and legal sources said the investigations into the
sector are likely to grow more intense, meaning downward
pressure on profits is likely to remain.
The climate of investigation has stymied sales growth, with
some doctors saying they are worried to meet pharmaceutical
reps, fearing being caught in the glare of China's watchdogs.
In 2013, Chinese authorities visited global drugmakers
including Novartis AG, AstraZeneca Plc, Sanofi
SA, Eli Lilly & Co and Bayer AG as
part of a broad investigation into the sector.
GSK, which saw its China revenues plunge 61 percent in the
third quarter last year, has since overhauled its management
structure in China, stopped payments to healthcare professionals
and changed its incentive systems for drug reps.
"Of course there will be an impact on sales. The pattern of
selling through bribing definitely won't work anymore," said a
Shanghai-based sales executive at another global drugmaker,
speaking on condition of anonymity.
The Reuters' analysis showed combined revenue growth in the
sector fell to 17.9 percent last year, from 22.6 percent in 2012
and more than 28.8 percent in 2011.
Price cuts are also putting a strain on profits and margins
as China's leaders look to cut a healthcare bill that is set to
hit $1 trillion by 2020, according to McKinsey & Co. Combined
profit growth dropped to around 5.2 percent last year from 23.9
percent in 2011, according to the Reuters' analysis.
While authorities have made some moves to step back on price
caps, Chinese healthcare procurement still puts the main
emphasis on cost, creating an incentive for firms to push prices
lower to beat rivals to contracts.
"The industry is in a very competitive stage, where firms
want to take market share to stay in the game, but at the same
time can't deal with the low prices," said Yu Mingde, president
of the Chinese Pharmaceutical Enterprises Association, an
organisation supervised by China's cabinet.
The crackdown on pricing has pushed some Chinese firms out
of business and forced global drugmakers to rethink their China
strategy, industry sources and analysts said, putting greater
emphasis on high-tech drugs which command greater pricing power.
International drugmakers have long banked on being able to
charge a steep premium in emerging markets for branded generic
drugs that have gone off patent in their home market.
Generics specialist Actavis Plc pulled out of China
this year, saying the market was too risky and not a
"When you have 5,000 competitors you have to be special, and
being a foreign company is no longer enough," said Guillaume
Demarne, Shanghai-based business development manager at
healthcare research body Institut Pasteur.
Rising competition in the market will also likely spur a
round of consolidation as firms look to strengthen in terms of
scale or technology to stay ahead of rivals, analysts said.
Bayer said in February it would buy Chinese traditional
medicine maker Dihon Pharmaceutical, while Shanghai Fosun
Pharmaceutical Group Co Ltd said last month it plans
to take U.S.-listed Chindex International Inc private
in a $461 million deal with equity firm TPG.
"The level of industrial concentration will rapidly increase
by way of acquisitions and reorganisations," Fosun
Pharmaceutical said in a statement with its annual earnings.
M&A activity this year has so far outstripped 2013, said
Phil Leung, China healthcare head and Asia Pacific M&A head for
consultancy Bain & Co, noting that local and global firms were
looking at acquisitions, joint ventures and other tie-ups.
Drugmakers with advantages of scale, low-cost production or
unique, in-demand products should hold their own, he said, while
others would struggle to survive.
"In this environment, the strong will get stronger and the
stragglers will be more exposed."
(Additional reporting by Li Hui in BEIJING and SHANGHAI
newsroom; Editing by Ian Geoghegan)