Corruption crackdown in China drug sector hits profits

A crackdown on corruption and pricing in China’s fast-growing pharmaceutical market has squeezed profits and margins, raising a red flag to global Big Pharma that the days of easy growth in the country may be over.

Analysis of more than 60 listed Chinese healthcare firms shows average profit margins declined to around 10 per cent last year from 15 per cent in 2012. Average net profits fell 2.1 per cent, down from close to 20 per cent growth in previous years.

China has been a magnet for the big global pharmaceutical companies and other healthcare firms as growth slows in Europe and the US. It is the largest emerging drugs market and is set to be the global number two overall within three years, according to consultancy IMS Health.

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While global drugmakers withhold their China profit figures, the analysis suggests profit growth is harder to come by – a concern as many global firms look to China as a future growth driver.

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

Over the past year, China has cracked down on high prices and corruption in the healthcare sector. In 2013, Chinese authorities visited global drugmakers including Novartis AG, AstraZeneca, Sanofi SA, Eli Lilly & Co and Bayer AG as part of a broad investigation into the sector.

GSK, which saw its China revenues plunge 61 per cent in the third quarter last year, has since overhauled its management structure in China, stopped payments to healthcare professionals and changed its incentive systems for drug reps.