China: An Increasingly Risky Bet for Drug Makers

October 21, 2013, 7:34 PM

China: An Increasingly Risky Bet for Drug Makers

For the world’s largest pharmaceutical companies, China is an increasingly critical, yet risky bet. Multinational drug companies expect sales from China to continue to grow quickly, as they did last year, accounting for 3.8% of total sales, up from 3% in 2011, according to a new report from consultancy McKinsey & Co. Meanwhile, nearly half of the 50 senior pharmaceutical industry executives surveyed said that they expect China to account for over 10% of their global sales by 2020, when China is projected to become the world’s second-largest pharmaceutical market. Sales of 85 brands exceeded $50 million in China last year, with 11 surpassing $200 million, according to the study.For years, drug companies have seen big potential in China, where the government began overhauling its healthcare industry in 2009, developing a national insurance system. Easier access to medicine for the country’s 1.34 billion citizens has propelled growth for the sector.

But the good news stops here: China’s becoming a bigger headache, McKinsey said. The business models that presented drug makers with solid growth in China are now under pressure. Regulatory risks are rising, with China clamping down on drug pricesand protectionism on the rise.

Multinational drug companies report obstacles to getting new products to market and a fragmented system of getting drugs into pharmacies, the McKinsey report said.

In recent months, pharmaceutical companies have been under a microscope in China and officials have launched crackdowns largely focusing on foreign companies. Authorities in late June opened an investigation of U.K. drug maker GlaxoSmithKline PLC, alleging the company bribed doctors and hospitals across China to boost drug sales in pharmacies. GlaxoSmithKline said it is cooperating with authorities in the investigation.

The Administration for Industry and Commerce this summer visited the offices of Denmark’s Novo Nordisk A/S and France’s Sanofi SA. Novo Nordisk said it hasn’t been accused of wrongdoing. Authorities have announced a formal investigation of Sanofi, which said it is cooperating with investigators.

Pharmaceutical companies also face an underfunded system that is aiming to contain costs and squeeze out profit, the report said, noting that while the government plans to increase spending on healthcare to 7%-7.5% of GDP by 2020, up from its current 5.6%, spending is still far lower than the 12% of GDP in France or 18% of the U.S.

Hospitals, many of which have costs that far outweigh their revenue, have buffered their revenue by over-prescribing drugs in recent years, but the government is looking to reform payment systems and cost structures to prevent such reliance on the drug industry. That will no doubt affect pharmaceutical sales, McKinsey said.

There’s no easy solution for pharmaceutical players, McKinsey said. Companies will need to boost compliance structures, form more partnerships with local research and development companies, target diseases prevalent to China and cater to government initiatives.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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