A China Headache for World's Big Pharma Companies
China seems destined to become the world’s biggest pharmaceutical market; however, whether the profits multinational corporations (MNCs) realize will be similarly attractive remains very much in doubt.
In 2011, the top ten MNC pharmaceuticals selling into China generated well over $20 billion in sales within China. Growth rates for these ten MNCs in China ranged from 15-32 percent, with average growth greater than 27 percent.
China is not only one of the world’s fastest growing markets for both prescription and over the counter drugs; it is already the third largest. Yet for all the excitement surrounding the growth potential for companies such as Pfizer and GlaxoSmithKline , both of whom have made major moves to re-orient sales’ resources away from developed economies towards China, questions remain about whether MNCs can be successful long-term within the country.
Nowhere in the world are the twin pressures of increasing healthcare access while controlling costs more obvious than in China. A recent study by Yanzhong Huang at the Council on Foreign Relations shows that healthcare outcomes in China have broadly deteriorated since Mao. For all the positive benefits economic reforms and privatization have done in China, improving healthcare access for the average Chinese has not resulted. As illustrated by the 12th Five-Year Plan, China’s Central Government is focused on expanding the nation’s public insurance scheme, significantly investing in new hospitals and clinics, and making more healthcare services accessible.
This should translate to exciting growth opportunities for a variety of healthcare MNCs. Medical device companies like Boston Scientific , J&J and Medtronic are aggressively expanding into China. Even insurance company WellPoint has announced its entry with the hopes that it can develop a private healthcare insurance business. While these companies have many reasons to be excited about the market opportunity in China, the recent experience of MNC pharmaceuticals should strike a note of caution.
In the space of eighteen months, pharmaceutical companies operating in China have born the brunt of a series of policy decisions, all of which have been set in motion by the Chinese government’s need to expand coverage while controlling costs. The longest one coming has been the elimination of differential pricing on approximately 100 drugs MNCs sold into China. For the better part of twenty years, these drugs had benefited from special pricing as part of an agreement between the Chinese government and the pharmaceutical industry. Beyond this, the Anhui Model, a blind bid and tender process, reduced prices on some drugs by up to 90 percent. MNCs watched as domestic Chinese pharmaceutical companies bid prices down in an effort to use volume gains to offset collapsing margins.
The Anhui Model has already resulted in several high profile quality problems, but it has also allowed provincial leaders to claim success because it did result in lower costs on many prescription drugs. Medical device companies, for now spared, will continue to watch whether the Ministry of Health embraces the Anhui Model and perhaps even expands it into the device sector, or whether a more comprehensive national pricing strategy that evaluates quality and outcomes is selected. This will be an important signal for pharmaceutical and medical device companies in China.
Additionally, MNC pharmaceuticals in China were recently greeted with the news that the country had modified its patent laws specifically to allow for compulsory licenses (CLs). CLs are used by nations in rare situations where a particular drug is deemed too expensive to purchase, yet necessary for the public’s health. They are covered by WTO protocols and, while rarely used, are powerful negotiating tools. Most industry watchers agree with the legality of China’s patent reforms, while equally admitting that it suggests the country has several CLs it intends to pursue.
On their own, any of these policy decisions would have been unsettling. Combined, they speak to the ways in which the market opportunity for MNC healthcare companies in China might not successfully develop. Investors will need to pay close attention to how a possible recession in China impacts the government’s planned investments in this sector, as well as whether proposed reforms to the healthcare space incentivizes industry or mandates price controls, technology transfer or otherwise wall off lucrative parts of the market. While these might help reduce costs in the short term, they would dramatically dis-incentivize MNCs to make the sort of investments China needs.
Benjamin Shobert is the Founder and Managing Director of Rubicon Strategy Group (www.RubiconStrategyGroup.com), a consulting firm that provides market access strategy for healthcare companies entering emerging economies.