For drugmakers, China becomes a perilous market

New York TimesJuly 16, 2013 

Global drug companies now employ more salespeople 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 centers. 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 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. GSK has its U.S. headquarters in Research Triangle Park and is one of the Triangle’s largest employers.

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 Nestle, 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 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 & Co. By 2020, China’s total spending on health care is expected to grow to $1 trillion, from $357 billion in 2011, according to McKinsey.

In a statement, GSK said it was “deeply concerned and disappointed” by the allegations. “GSK shares the desire of the Chinese authorities to root out corruption,” the company said, adding that it has stopped its relationships with the travel agencies identified in the investigation and is reviewing its past transactions with them. “These allegations are shameful, and we regret this has occurred.”

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