A bitter pill as China crackdowns squeeze pharma margins

Sat May 24, 2014 10:17pm EDT
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By Adam Jourdan

SHANGHAI (Reuters) - 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.

A Reuters' analysis of more than 60 listed Chinese healthcare firms shows average profit margins declined to around 10 percent last year from 15 percent in 2012. Average net profits fell 2.1 percent, down from close to 20 percent 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 United States. 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.

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. Authorities probed drugmakers over pricing in July, while a high-profile investigation into British drugmaker GlaxoSmithKline Plc led to executives at the company being charged with bribery earlier this month.

Industry and legal sources said the investigations into the sector are likely to grow more intense, meaning downward pressure on profits is likely to remain.

Graphic: Reuters survey r.reuters.com/nuw59v   Continued...

The logo of Shanghai Roche Pharmaceutical Co. Ltd. is seen outside their headquarters in Shanghai May 22, 2014. REUTERS/Aly Song