For Drug Makers, China Becomes a Perilous Market

The booming Chinese demand for drugs couldn’t come at a better time for Western manufacturers, whose sales have been slumping because of patent expirations in the United States and stringent price controls in Europe.

But selling pharmaceuticals and other health care products in China is increasingly fraught with peril, as shown by allegations in China this week that GlaxoSmithKline funneled payments through travel agents to doctors, hospitals and government officials to bolster drug sales in the country.

Chinese officials have compared the company’s operations to organized crime and have detained four Chinese executives for questioning. Shortly after government investigators raided the British drugmaker’s Shanghai offices last month, the British executive in charge of the company’s Chinese operations left the country. He hasn’t been back since.

Earlier this month, the top manufacturers of infant formula, including Abbott and Nestlé, lowered their prices in China under government pressure, and Chinese officials have said they 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 health care 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.

As a result, global companies can expect more scrutiny, said Tarun Khanna, a professor at Harvard Business School who has studied foreign investment in China.

“Practices that may have been O.K. some time back may be more scrutinized by foreigners now,” he said, especially as the government seeks to shift from an export-based economy to one that is also focused on selling to Chinese consumers. “They’re trying to get more balance back.”

Several factors are contributing to the boom in China, experts said. China’s growing economy has given rise to a middle class that is increasingly able to afford expensive Western drugs, and to treat conditions – such as depression and respiratory illnesses – that may have otherwise gone undiagnosed or unmedicated.

And under a new health care program, China has expanded insurance coverage to hundreds of millions of new patients – 95 percent of the population had insurance in 2011, compared to 43 percent in 2006, according to a recent report by the consulting firm McKinsey Company. By 2020, China’s total spending on health care is expected to grow to $1 trillion, from $357 billion in 2011, according to McKinsey.

Even as foreign companies raise their investment, the Chinese are also looking to capitalize on the booming health care market. The government identified the medical industry as one of seven key areas for development in its most recent five-year economic plan, and the country’s medical sector invested $160 billion in research and development in 2012, nearly surpassing Japan, according to a recent report by the Boston-based Lux Research.

“China is interested in building a very strong, homegrown industry,” said Kevin Pang, a research director at Lux.

But some believe Western companies will have an edge because consumers may 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 A. Wheeler, the chief executive of the American generic drug maker Momenta Pharmaceuticals. His company is developing complex drugs known as biosimilars through a business deal with Baxter, which has an established presence in China.

Mr. Wheeler said the recent crackdowns are to be expected. “These markets are maturing, and these markets are going to be therefore more highly regulated,” he said.

The bribery investigation into GlaxoSmithKline comes as the company has been struggling to rebuild its image in the wake of a historic $3 billion fine in the United States last year, in which the company admitted to 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 has moved on from its previous lapses.

Article source: http://www.nytimes.com/2013/07/17/business/global/for-drug-makers-china-becomes-a-perilous-market.html?partner=rss&emc=rss