The London-based multinational drugmaker, also known as GSK, supplies key products such as vaccines in China, as well as drugs for lung disease and cancer. In 2013, the company was targeted by Chinese authorities over alleged corruption, price-fixing and quality controls.
China health care reform poses risks and opportunities for foreign firms
Health care reform in China, unfolding amid a government crackdown on corruption, presents opportunities and challenges to foreign players
China's health care reforms present opportunities and challenges to foreign health care firms, according to speakers at a recent hearing of the US-China Economic and Security Review Commission, a United States government agency that advises Congress on Sino-US relations.
"China's health care reform has generated demand for more and better health care, with opportunities for private and overseas investment," said Huang Yanzhong, senior fellow on global health at the Council on Foreign Relations, a US think tank.
With annual sales of US$71 billion, China is the world's third-largest market for pharmaceuticals, Huang said at the hearing in Washington.
As the annual growth rate of sales in the country is between 15 per cent and 20 per cent, twice the growth rate in the US, China is poised to become the second-largest market by next year, he said.
McKinsey, a US management consultancy, estimated China's health care spending would grow from US$357 billion in 2011 to US$1 trillion by 2020.
The country's market for over-the-counter and branded generic drugs will leap from US$23 billion in 2010 to over US$369 billion by 2020, said Benjamin Shobert, managing director of Rubicon Strategy and senior associate of the National Bureau of Asian Research.
"If this holds, China will become the world's second-largest pharmaceutical market, following the US. Reflecting these realities, US life science companies have made China a central part of their growth plans," Shobert said.
On March 25, Premier Li Keqiang announced that health care reforms would be deepened this year. More play would be given to market forces, while public health care services would be strengthened, Li said.
Efforts would be made to provide universal health insurance, while restrictions on foreign investment in mainland health care companies would be reduced, he said.
Health care services would be extended to remote rural areas, while the government would apply pressure to prevent drug prices from rising excessively, Li said.
A policy statement by the National Development and Reform Commission in October called for more private-sector involvement in China's health care services.
The government's aim to expand health care coverage in rural areas meant potentially vast markets for foreign firms in the sector, said Xiaoqing Lu Boynton, director of Albright Stonebridge, an international strategy company.
"For US pharmaceutical and medical device companies, expanded health care coverage could prove to be an opportunity to increase exports to China," Boynton said.
But the Chinese government's pressure to keep drug prices low could mean potential risks for multinationals, she said.
China's health care reform is unfolding amid the leadership's nationwide anti-corruption campaign, Boynton said, citing the bribery scandal involving GlaxoSmithKline (GSK), the largest British drug firm, that erupted last year.
Other multinational drug firms, such as Sanofi, have also been probed by Chinese authorities.
"The anti-corruption investigations in the health care sector serve the reform goal to rein in costs of drugs and health care products, which are believed to be critical to stimulate domestic consumption," Boynton said.
Following the highly public scandal, GSK announced last year that it would lower the prices of its products in China.
Companies in the pharmaceutical and medical device industries would face heightened scrutiny of their operations and pricing practices in the near to medium term, Boynton warned.
"The heightened scrutiny of the health care sector, which is expected to continue in the coming months, will make the China market more complex. It is important for foreign companies to focus on their compliance efforts to minimise risks," she said.
Shobert said: "China is in the midst of a once-in-a-generation expansion of its health care system. The country is making massive investments in every facet; hospital and primary care infrastructure is being built at a torrid pace, a national insurance plan has been rolled out that covers almost everyone in the country.
"Yet most, if not all of these additional investments are being built on top of a weak foundation. Doctors are chronically overworked and underpaid. Hospital administrators struggle to meet shortfalls between government reimbursement and increasing costs."
The revenue shortfall has caused Chinese hospital administrators to incentivise doctors to prescribe unnecessary drugs and surgery, Shobert said.
"Doctors have supplemented their paltry incomes through the sort of bribes the GSK scandal has exposed," he said.
Surveys of US and European companies with significant investments in China have found growing concern over what these firms perceive as an environment that is less hospitable towards growing market share, Shobert said.
"Many [foreign] businesses believe they are being held to higher regulatory standards by China's ministries than their Chinese competitors, a frustration that seems more explicit and intense than in previous years," he said.
Shobert said China's regulators should apply equal attention to domestic players and make them more accountable, like multinationals.
Unless the government revamps reimbursement practices that cause revenue shortfalls in hospitals and low pay for doc- tors, the only effect of the GSK scandal would be to push corrupt practices from manufacturers to distributors, sales representatives and dealers, Shobert warned.