China’s Corruption Crackdown Hits Big Pharma

Source: Thinkstock

Source: Thinkstock

China’s corruption crackdown is beginning to affect Big Pharma, and the industry, which has enjoyed easy growth in China for years now, may have to compensate as the country becomes more serious about corruption allegations.

A recent report from Reuters announced that the 60 Chinese healthcare companies included in their survey saw average profit margins decline to around 10 percent last year, from 15 percent in 2012. The source reports that net profits also fell, 2.1 percent in 2013, down from around 20 percent growth in previous years.

Previously, China has been a hotspot for Big Pharma companies. Large drugmakers in particular have been experiencing dwindling growth in both Europe and the United States, and have relied on the emerging markets in China to drive growth.

“Most companies have enjoyed growth for 5-6 years as money was thrown at the healthcare system to improve access,” said Alexander Ng, a Hong Kong-based associate principal at McKinsey & Co. “Now China is more into cost containment mode … and squeeze on pricing and margins is a lot more apparent.”

China has been cracking down on corruption in virtually every sector imaginable. In the pharmaceutical industry, this has resulted in numerous investigations into artificially high drug prices as well as bribery allegations, the most recent of which includes a probe into GlaxoSmithKline’s China unit and Roche Holdings Ltd. Chinese officials say that the most recent string of investigations is only the beginning. “The investigation into GSK may be coming to a close, but these types of probes in the pharmaceutical sector are becoming a weekly occurrence,” a sales representative for the Chinese unit of a major global drugmaker said, according to Reuters.

Chinese officials have recently visited Novartis AG, AstraZeneca Group Plc, Sanofi SA, Eli Lilly & Co., and Bayer AG all as part of a series of investigations into the pharmaceutical industry in China. As a result of the GSK investigation, the company has since overhauled its management structure and changed the way it incentivizes sales for its drug representatives.

“Of course there will be an impact on sales. The pattern of selling through bribing definitely won’t work anymore,” adds a Shanghai-based sales executive at another global drugmaker, who spoke anonymously in an interview with Reuters earlier this month.

The intense climate created by the investigations also means physicians may be less inclined to meet with pharmaceutical representatives for fear that the meetings may place them under scrutiny from China’s healthcare watchdogs, putting yet another damper on sales growth.

The news brings the reliability of pharma ETFs into question, which have been recently reported as being a “safe haven” from the current slump of biotech ETFs. With the recent surge in investigations, recently considered “an overhang on the sector in the short term,” by Yahoo Finance, it’s possible that the industry may continue to suffer losses to its profit margins.

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