Big pharma's Chinese dreams are bruised but not broken. China's fast-growing drug market was supposed to save pharmaceutical groups from patent expiries and western governments' cutbacks. The GlaxoSmithKline bribery scandal might signal a new wave of price pressure and slower growth. But China needs big pharma just as it in turn needs China.
The year of the snake is proving constrictive for foreign pharmaceutical companies in China. The government announced in January the fourth round of price cuts in two years. In July, it began investigating pricing practices at over 60 foreign companies. Now a bribery probe could further hurt those groups' already-modest margins. GlaxoSmithKline, so far the only company to admit guilt, hurriedly moved to appease the authorities with a promise of price cuts. Glaxo's stock fell almost two percentage points after it fessed up - a fair whack given its China business was less than three per cent of last year's sales - although the share price recovered a little later in the week. The bigger concern is that a snowballing crisis could pave the way for a broader squeeze on profits.
China has been one of the few bright spots for big pharma in recent years. Healthcare spending more than doubled between 2006 and 2011, but was still a relatively small 5 percent of GDP in 2011. Drugs coming off-patent tend to resist competition from generics for longer than in more mature markets. AstraZeneca, whose revenue is collapsing in developed markets, saw growth of 22 per cent in China during the first quarter, nearly three times the rate in other emerging markets. Glaxo's revenue grew 16 and 17 per cent, respectively, over the past two years.
The bribery scandal adds to an already tricky economic and political environment. While the central government plans to boost healthcare spending, local governments will be under pressure to contain costs as the economy slows, and revenue from land sales falls. Deep-pocketed foreign multinationals, who cannot afford to pull out of China, could make easy pickings. Still, China needs big pharma too. Its population is aging, and moving to urban areas. Its demand for treatment for chronic illnesses will only grow. The government has pumped an estimated $160 billion into developing a domestic pharmaceutical industry, but it needs foreign firms' know-how and investment too. The hope is that Chinese firms one day will compete on a global scale. For now, both sides need each other.
