China may not produce for Big Pharma long-term

China, already the third-largest drug market in the world, yesterday was again placed among the 16 "pharmerging" identified by IMS Health's Institute for Healthcare Informatics. The health information company says markets like Brazil, India, and China will claim 30% of worldwide drug spending by 2016, up from 20% last year because their demand for drugs is growing so much faster than the rest of the world.

Still, Benjamin Shobert, founder and managing director of consultancy Rubicon Strategy Group, says there are significant looming questions about whether the Chinese market will pay off in the long run for Big Pharma. Writing for CNBC, Shobert acknowledges that Big Pharma's top 10 produced more than $20 billion in sales there last year. The average growth rate for the group was more than 27%, with individual returns ranging from 15% to 32%. Companies like Eli Lilly ($LLY), Pfizer ($PFE) and GlaxoSmithKline ($GSK) are making investments based on the potential there.

Yes there is need. He says the overall health of China's population has fallen since the time of Mao and the current government intends to address that issue. Still he warns, while China wants to expand Western-type medicines to its population, it wants to do so at the least cost. It has already changed its patent laws to allow for compulsory licensing, essentially stripping branded drugs of their protection, and giving licenses to generics companies to drastically cut the price of drugs that might be considered essential but too expensive for those who need it. While China may not use that law often, it is a very large tool for hammering out contracts.

Perhaps more ominous is the pricing structure China has used for most of its drugs, something called the Anhui Model. The blind bid and tender process has driven drug prices down as much as 90% when domestic companies have been allowed to bid super cheap prices in hopes of getting a contract, and enough volume to pay the bills. That model is one reason there have been some serious quality problems in the country. China has, for example, been closing capsulemakers found to be using industrial-grade gelatin in their products to cut costs. If the government heads in that direction on pricing, then multinationals are not likely to jump in.

If that is not enough to give drug companies pause, he points to the chance that China could go into a recession, kicking the support out from under all of those rosy projections.

- read the CNBC blog post
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