[Ip-health] Economist: Pharmaceuticals in China-So long, easy money

Thiru Balasubramaniam thiru at keionline.org
Fri Jun 13 04:04:15 PDT 2014


Pharmaceuticals in ChinaSo long, easy moneyForeign drug firms face a severe
profit squeeze

Jun 14th 2014 | SHANGHAI | From the print edition

MULTINATIONAL drug companies, now looking forward to a sustained boom in
the Chinese market, should instead be bracing themselves for a collapse in
profits over the next few years. So concludes a new report by Bain &
Company, an American management consultant.

China is already the world’s third-biggest market, behind only America and
Japan, and is likely to consume $75 billion-worth of medicines this year.
Sales have been growing at a compound annual rate of nearly 25% since 2009.
Rising incomes and rapid ageing mean that demand for drugs should continue
soaring. The expansion of publicly funded health insurance should also, in
theory, bolster demand.

However, as Bain points out, foreign drugmakers now make most of their
profits not from new products still under patent, but from branded
medicines whose patents have expired. In America such older drugs have tiny
margins because of the fierce competition from makers of unbranded
“generic” copies. In China the off-patent medicines are highly profitable,
partly because locally made generic versions are of poor quality. Alas for
the foreign drugmakers, reforms under way are likely to trigger a slump in
sales of their lucrative off-patent drugs (see chart).
Marking down the markups

One reform aims to remove some perverse incentives in the health system.
The peddling of overpriced pills has long lined the pockets of underpaid
doctors and padded the profits of underfunded hospitals. Selling drugs to
patients at a markup, especially foreign firms’ branded, off-patent ones,
provides 40% of Chinese hospitals’ revenues and nearly all their profits.
Now, officials are instituting a “zero markup” policy on drugs at
hospitals, and cracking down on unnecessary prescriptions. They are pushing
to improve the quality of Chinese-made generics, thus taking away the
justification for the price premium enjoyed by foreign branded drugs.

Even the expansion of state health insurance, which will soon cover nearly
everyone in China, is not the good news it seems for drugs firms. The
government will become a near-monopsony buyer, and is determined to use the
power this brings, as well as explicit price controls, to rein in the cost
of all but the most innovative treatments.

Another reform that will hit foreign drug firms is President Xi Jinping’s
anti-corruption drive. GlaxoSmithKline, a British firm, has been accused by
Chinese officials of orchestrating “massive and systemic bribery” to get
doctors and hospitals to overpay and overprescribe. The firm, which
acknowledges local employees acted outside its “processes and controls”,
has suffered a sharp drop in sales in China. With investigations into other
foreign firms rumoured to be under way, the freewheeling marketing
practices that have propped up the industry’s business model in China
surely cannot last.

As demand for branded medicines has boomed in recent years, the foreign
drug firms have recruited armies of sales reps to sweet-talk doctors and
hospital bosses: their numbers almost trebled between 2008 and 2012. If
they do not make drastic cuts in the cost of this sales force, in line with
the expected slump in demand for the medicines they are peddling, Bain
reckons the foreign firms’ Chinese profits could vanish entirely in five to
seven years.

There is a ray of hope for the longer term, though. The Chinese authorities
are moving to clarify and speed up the hitherto murky procedures to win
approval for new medicines. It is uncertain how big or profitable the
market for such patented drugs will be, because the government’s
reimbursement policies are not yet clear. But Bain expects that growing
demand for them will help to limit the foreign firms’ loss of market share
to local generics firms.

That said, it will be much harder work than peddling old pills. Having
spent a fortune to develop the new drugs, firms will then have the further
cost of educating doctors and hospitals about their benefits, which will
require a more skilled sales force. Although the Chinese market still looks
a promising one for the longer term, the foreign drugmakers face a severe
squeeze in the next few years, and not all of them may be able to withstand

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