China graft probes a tough tonic as pharma margins bounce

Ridgetech

10/06/2015 22:00

By Adam Jourdan 
    SHANGHAI, June 11 (Reuters) - Sales growth is picking up 
speed at Chinese drugs firms, and margins are widening, in a 
sign that the world's second-largest pharmaceuticals market may 
be rebounding from a crackdown on corruption and high prices.  
    A Reuters' analysis of more than five dozen Chinese 
healthcare companies shows sales growth bounced to 15.6 percent 
in January-March after falling steadily from around 30 percent 
in 2011. There was also stronger growth in margins and profits. 
    Faster growth in China is good news for local and global 
firms chasing a medicine bill estimated by IMS Health to hit 
$185 billion by 2018, but who have taken a hit from a series of 
bribery probes that led to a $500 million fine against British 
drugmaker GlaxoSmithKline PLC  GSK.L  last year.  ID:nL3N0OC1A2  
    "Sales departments did slow down activities in China and 
have taken their time to adapt their sales efforts," said Anand 
Tharmaratnam, head of Asia Pacific for drug development firm 
Quintiles Transnational Holdings Inc  Q.N . "But there are 1.4 
billion people here. They're going to fall ill and that's not 
going to change," he told Reuters at the firm's new regional 
headquarters in Shanghai. 
    Industry executives said firms had adapted their operations 
to the greater levels of scrutiny on marketing and sales since 
the corruption probes; others said spending on wining and dining 
had fallen, helping trim costs and boost margins. 
    The data - a swing from a similar analysis a year ago which 
showed a squeeze on margins and profits  ID:nL3N0OC1A2  - offers 
a rare window into potentially improving prospects for global 
Big Pharma in China, few of which break out local sales. 
    "I'd say overall things have stabilized over the last 6-9 
months in every dimension, and I'm personally cautiously 
optimistic in terms of what we can see happening now in China," 
GSK CEO Andrew Witty said in May. 
     
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    Graphic on China drug firms  http://link.reuters.com/daq84w 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
     
    WINING AND DINING 
    Beijing is helping firms through tax breaks and preferential 
pricing on drugs amid a push to more widely encourage healthcare 
innovation and research. Firms are also shedding staff and less 
profitable products to cut costs. 
    "A combination of these is helping firms improve margins," 
said Guillaume Demarne, a Shanghai-based business manager at a 
firm helping healthcare companies to enter the Chinese market. 
    The Reuters' analysis showed margins widened to 6.9 percent 
in the first quarter after falling to 5.3 percent in 2014. 
Profit growth, which stagnated in 2012 and 2013, started to 
bounce last year and sped to 26 percent at the start of 2015. 
    A Shanghai-based compliance expert who works with drug firms 
said the corruption crackdown had reduced "wining and dining" 
between firms and local partners or regulators, hampering 
business in the short-term, but now helping trim costs. 
    "With the anti-corruption drive you've seen lower costs of 
entertaining, and this has helped some firms streamline their 
business," another industry insider said. Both asked not to be 
named as they are not permitted to speak with the media.  
    Investigations into healthcare have by no means ceased; 
China launched probes into two healthcare officials last month 
and sources told Reuters earlier this year that regulators had 
quietly started to probe the medical devices sector. 
    A Deutsche Bank report said 83 percent of industry 
executives expect drug sales growth at hospitals, the dominant 
sales channel for medicine in China, to accelerate this year. 
 
    WINNERS AND LOSERS 
    Longer-term, analysts said growth in the market was likely 
to cool amid a wider economic slowdown, but the prospect of 
rising healthcare demands from China's ageing population was too 
enticing for global firms and investors to ignore. 
    This has driven up Chinese healthcare stocks to record 
highs. The CSI300 Health Care Index  .CSI300HC  of Shanghai and 
Shenzhen-listed firms is up 63 percent this year, beating the 
wider index's 50 percent gain. 
    Broader healthcare reforms are likely to benefit firms with 
exclusive drugs, medicines on China's essential drug list (EDL), 
and strong R&D pipelines, analysts said. Retail drug sales will 
also benefit from a drive by Beijing to push medicine sales away 
from hospitals. 
    Goldman Sachs had buy ratings on Lijun International 
 2005.HK , WuXi PharmaTech  WX.N , China Medical Systems 
 0867.HK , Fosun Pharmaceutical  600196.SS  and CSPC 
Pharmaceutical  1093.HK  among others. 
    "Medical reforms like the separation of drugs from medical 
treatment will move drug sales more into private drug stores 
rather than in-house hospital pharmacies," said Frank Zhao, 
chief financial officer at China Jo-Jo Drugstores Inc  CJJD.O . 
    "This should propel growth of retail sales." 
 
 (Additional reporting by Ben Hirschler in LONDON; Editing by 
Ian Geoghegan) 
 ((adam.jourdan@thomsonreuters.com; +86 21 6104 1778; Reuters 
Messaging: adam.jourdan.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA HEALTHCARE/