Drug makers find a new market
CHINA POISEd to become the world’s second-largest marketplace for pharmaceuticals — but there are problems
Multinational drug companies now employ more sales agents in China than they do in the United States, their largest market. Several, including Merck and GlaxoSmithKline, are making huge scientific investments in the country, including building research and development centres. Within the next few years, China is poised to surpass Japan as the world’s second-largest pharmaceutical market.
The booming Chinese demand for drugs could not 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 funnelled 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 of Glaxo last month, the British executive in charge of the company’s Chinese operations left the country. He has not been back since.
Meanwhile, Chinese authorities have barred Steve Nechelput, a British finance executive at the pharmaceutical giant, from leaving the country while they carry out the investigation into bribery and corruption, people familiar with the case said Wednesday.
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 OK some time back may be more scrutinized by foreigners now,” he said, especially as the government seeks to shift from an exportbased 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 — like depression and respiratory illnesses — that may have otherwise gone undiagnosed or unmedicated.
And, under a new healthcare program, China has expanded insurance coverage to hundreds of millions of new patients — 95 per cent of the population had insurance in 2011, compared with 43 per cent in 2006, states a recent report by the consulting firm McKinsey & Co. By 2020, China’s total spending on health care is expected to grow to $1 trillion, from $357 billion in 2011, says McKinsey.
Even as foreign compan- ies 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 major 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, states 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 U.S. generic drugmaker Momenta Pharmaceuticals. His company is developing complex drugs known as biosimilars through a business deal with Baxter, which has an established presence in China.
Wheeler said the recent crackdowns were to be expected. “These markets are maturing, and these markets are going to be therefore more highly regulated,” he said.
GlaxoSmithKline has been struggling to rebuild its image after a $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 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 had moved on from its previous lapses.
Chinese investigators told a different story on Monday, however. At a news conference in Beijing, they said senior executives had organized fake conferences, overfilled for training sessions and paid kickbacks in cash and luxury travel. The illegal activity was funnelled through travel agencies, authorities said, some of whom even hired young women to engage in “sexual bribery,” or activities, with Glaxo managers to win long-term contracts with the company.
The Chinese government said it had detained four senior executives — all Chinese nationals — but noted that the British head of the Chinese operations, Mark Reilly, had left the country shortly after authorities raided their offices. A company spokesman confirmed that Reilly left China about 10 days ago, and that he was working from the company’s offices in Britain. He declined to comment on whether Reilly planned to return to China.
On Monday, one of the detained executives appeared on Chinese television and admitted to much of the activity, state news reports.
In the interview, Liang Hong, the vice-president of operations for Glaxo in China, acknowledged organizing fake conferences and other activities, and said the payments that were made to doctors and government officials contributed to the higher prices of the company’s drugs in China.
In a statement, Glaxo said it was “deeply concerned and disappointed” by the accusations. “GSK shares the desire of the Chinese authorities to root out corruption,” the company said, adding that it had stopped its relationships with the travel agencies identified in the investigation and was reviewing past transactions with them.
“These allegations are shameful and we regret this has occurred.”