Despite Political Obstacles, Healthcare Multinationals Flock To China

by: Stock Traders Daily

By Barry S. Cohen

The chance of a recession and politics could make it difficult for multinational pharmaceutical companies to make strong headway into the Chinese market. Nowhere in the world are the pressures greater to expand access to better healthcare while at the same time controlling costs.

Examples abound. One policy decision eliminated differential pricing on approximately 100 drugs multinational companies, or MNCs, sold into China. For nearly two decades, these drugs had benefited from special pricing as part of an agreement between the Chinese government and the pharmaceutical industry. Furthermore, a blind bid and tender process reduced prices on some drugs by up to 90 percent. MNCs watched as domestic Chinese pharmaceutical companies bid prices down in an effort to use volume gains to offset collapsing margins.

Despite the caution flags, large MNCs continue to pour substantial resources into the Chinese market, and for good reasons:

  • By 2016 China is expected to be the second-largest drug market, forecast to reach nearly $165 billion that year
  • During the next several years the Chinese drug market is supposed to grow at a rate of 15 percent to 18 percent a year compared with little or no gains for the Western countries
  • Growing affluence is permitting many Chinese to pay out of pocket or pay high insurance deductibles to gain access to innovative Western medicine
  • China needs new drugs to treat higher-than-average incidences of hepatitis B and neck and head cancers. China also has growth potential for drugs to treat arthritis, diabetes, osteoporosis, high blood pressure, high cholesterol, depression and HIV/AIDS.

Both Pfizer (NYSE:PFE) and GlaxoSmithKline (NYSE:GSK) are believers. The two members of Big Pharma have made major moves to re-orient sales resources away from developed economies toward China. Eli Lilly (NYSE:LLY) and Novartis (NYSE:NVS), among others, have opened new R&D facilities in China, primarily in Shanghai. And given the country's mammoth diabetes problem, Sanofi (NYSE:SNY) is moving deeper into the country. The company's Lantus insulin product is estimated to have 17 percent of the Chinese market.

Large pharmaceutical companies hoping to stake a claim in China may be eying two of the country's largest medical research testing companies as a vehicle to gain entry. Both WuXi PharmaTech (NYSE:WX) and ShangPharma (NYSE:SHP) have been mentioned as possible takeover targets.

Even insurance company WellPoint (NYSE:WLP) has announced its entry with the hopes that it can develop a private healthcare insurance business. And medical device companies like Boston Scientific (NYSE:BSX), Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT) are also aggressively expanding into China.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Barry Cohen, Stock Traders Daily. Neither Mr. Cohen or Stock Traders Daily receive compensation for writing this article from the companies mentioned in this article.