Ever since the bribery scandal in China erupted four months ago, there has been growing acceptance among multi-national drugmakers that the Chinese government probes into marketing practices were going to hurt business. But how bad is it?
None of the largest drugmakers are offering specifics, but they did provide some predictably dour assessments to one Wall Street analyst. Of nine multinational drugmakers queried, seven acknowledged the bribery scandal has been a drag on operations in China. One large drugmaker, for instance, noted that prescribers are reluctant to grant access to sales reps.
Which ones are hurting? Of course, there is GlaxoSmithKline, which was the initial focus of the Chinese government probe (back stories here and here). The others registering pain are Merck, Eli Lilly, Roche, Sanofi, AstraZeneca and Novartis, according to an investor note by Tim Anderson at Sanford Bernstein. Pfizer and Bristol-Myers Squibb declined to respond, although these drugmakers are likely to be taking a hit, as well.
The Chinese government, you may recall, is believed by some to use the probes as an opportunity to extract lower prices from global drugmakers and, perhaps, bolster its own domestic pharmaceutical industry. The National Development and Reform Commission, for instance, has been examining pricing by 60 drugmakers, including both local and multi-national companies.
In the scheme of things, China does not yet represent a huge piece of business for most of the drugmakers. AstraZeneca had the most exposure as China accounted for 6.9 percent of sales in this year’s second quarter, followed by Roche at 5.2 percent and Sanofi with 4.6 percent. Across the board, sales from China were up from the same period a year ago, but then the scandal broke in June.
The wider impact, of course, is the extent to which the hit on business in China slows growth in the so-called emerging markets that global drugmakers have repeatedly cited as a hot spot for the future. The premise is that these markets – notably, Brazil, Russia, India and China – have pent-up demand and inadequate domestic suppliers.
Yet, emerging market growth has slowed and the sluggishness began before the bribery scandal, according to Anderson. He calculates growth in the third quarter in 2012 was 8 percent for eight of the nine multi-national drugmakers (Bristol-Myers did not provide data) and fell to 6.9 percent in this year’s first quarter and fell another 5.7 percent in this year’s second quarter.
This is an issue for Sanofi, for instance, which derived about one-third of its revenue in this year’s second quarter from emerging markets. Similarly, emerging markets constituted roughly 26 percent of revenue for Roche, Glaxo and Novartis. But there are other likely reasons besides the bribery scandal for the slowdown, Anderson writes, such as price cuts in India and currency weaknesses.
Of course, what remains uncertain is the extent to which the Chinese government probe may widen or leads to a hard-and-fast changes that somehow limit growth, at least for a while. In other words, the current events may prove to a blip or, perhaps, a harbinger of things to come and, in the long run, that could alter what has become a popular calculus among multi-national drugmakers.
Image courtesy of stevedepolo on Flickr Creative Commons
