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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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January 17, 2014

Abandoning the Chinese Drug Market

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Posted by Derek

Here's one of those stories that makes you wonder: one-off or beginning of a trend? A generic drug company, Actavis, has decided to get out of the Chinese market. Too much hassle for too little money, and that last part is something you don't hear about China all that often. (For centuries, entrepreneurs of all kinds have dreamed about "What if just one out of a thousand of them bought my stuff. . .")

“It is not a business friendly environment,” Bisaro said at the JPMorgan Chase & Co. health-care conference in San Francisco. “If we’re going to allocate capital, we’re going to do so where we can get the most amount of return for the least amount of risk. And China is just too risky.”

. . .Given Actavis’s small presence in China, “it wasn’t worth the aggravation, the frustration or the concern,” he said.

Bisaro said there doesn’t appear to be a level playing field, which makes it hard for companies to compete. “You need a certain consistency in application of rules, and I’m not certain China has achieved that consistency yet.”

Generic profit margins are lower, so you won't see the research-based drug companies coming to this conclusion any time soon. But neither is it impossible. Companies would hate to pass up the Chinese market, but there's a set point for everything.

Comments (17) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. anonymous on January 17, 2014 10:13 AM writes...

Having lived and worked in China for big pharma it is clear to me there are several reasons why the (McKinsey) idea of investing in China is not a good idea.

1) 5,000 years of traditional Chinese medicine will be hard to overcome
2) yearly per capita spending on health care by PRC government is 60 USD
3) Mainlanders with money go to Hong Kong for health care
4) Government has no interest in foreign companies profiting on drug sales to Chinese, government sanctioned counterfeit drugs (and those that are just not prosecuted) will erode any potential profit. Any remaining profit will be eroded by additional fees, laws, etc.
5) What motivation does their government have to provide expensive health care to extend life given the fact it institutes a one child policy with forced abortions to control the population size?
6) Companies that have a physical product that CANNOT be faked do well in China (Maserati, Ford, etc.) while those with products that can be faked struggle (designer clothes, pharmaceuticals...). Collaborations with technology transfer result in theft and global competition (see Japanese bullet train experience in China)

Once big pharma has built and trained the drug discovery culture in China, the government will make it painful for the companies to remain. The charges against GSK et al. are just the opening salvo.

Permalink to Comment

2. Anon on January 17, 2014 10:49 AM writes...

@1
Your point 6 is something that stands out as one knows the analysts and upper management jump company to company and use the same financial/business models.


To take it one step further, if you have a fake iphone, pradda purse, etc. you can obviously tell its fake as a regular user. This gives you two categories, 1)those who don't know its fake, come to a realization and buy the correct one and 2)those who buy it knowing its fake for purposes of showing off.

Situation 2 will not happen for pharmaceuticals. Situation 1 will happen except the consumer will not be able to know they have a fake product. At best (as in they lived) they would conclude the medicine doesn't work and would either try another fake drug or refer to Chinese herbs.

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3. Anchor on January 17, 2014 11:15 AM writes...

@ 1- I completely agree with you! The investors in the USA and Europe are delusional that they are going to make money out of China but only on the short run. I read a story of the German giant Siemens, who were once invited to China (the fast train). The Chinese took away all the information, the blue prints etc. and gave the Siemens engineers the boot out of China. China cannot be trusted to keep its word. With an attitude of constant belligerence, it is going to piss off too many people.

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4. Wage Slave on January 17, 2014 11:56 AM writes...

I've been wondering the same about EU for some drugs - why bother if each country is going to prevent a profit or even ROI?

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5. pc on January 17, 2014 12:18 PM writes...

The US population is about 5% of the world and yet spending on prescription drugs accounts for about 35% of the total (global). Chinese population is about 20% but the spending may not be even a third or fourth of the US. One important and simple reason - government will set reimbursement rates, and I believe they would treat this issue more as a national interest matter rather than simple economy. Along the same line the government will try to build up this industry by learning from the foreigners and then "spit" them out once it's all said and done. Look at the 5-year plans. Chinese also have a saying - 以夷制夷· (play off one power against another), that is also often used as a strategy when carrying out such plans.

I'm a Chinese by ethnic and I hope these "smartness" don't come back and bite the Chinese in the long run.

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6. Cellbio on January 17, 2014 12:51 PM writes...

Well said #1. To add to point 6, the Chinese population is divided, I learned from the head of a Chinese Pharma, into citizens (unemployed or farmers), workers and the elite. His number for per capita spending was $300/year for workers and elite (though that number comes through translation). The big money to made, western style margins, is for the elite. They want nothing to do with Chinese manufactured drugs (or baby formula)because the know the quality issues. There is a strong preference for drugs approved in the US. There is a growing business of clinics that one joins like a club to get western meds. It is unclear to me how to make a decent profit in this system as there are a lot of players seeing this as their route to make money (local folks in the clinics, owners of the clinic brand, distributors etc). I also would fear that you would get spit out as soon as the internal quality issue were solved.

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7. Todd on January 17, 2014 3:38 PM writes...

Interesting points, all, but I think it's one of those things where any pat solution is simple, neat and wrong. Any discovery efforts are going to hang around China for 2 reasons. One is the cheap scientific labor (obviously), but the other is that 5k year history of Chinese medicine. Granted, not all of it is good, but it's worth it to have some skin in the game, as it's paid discovery dividends as is. While it may not be worth it forever, it's definitely worth the money on an intermediate scale, if only to suss out any and all quality ideas.

To #6, there's the real issue that China might not EVER figure out that quality issue, especially if doing so has the real chance of stepping on some toes politically. Also, the elite in China is large enough and getting to be wealthy enough to be every bit the equal as the United States. If as you say their tastes run towards branded American meds, it's definitely worth their while. It's not going to be *bigger* than the US, but it will be definitely worth the budget to go for it.

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8. Steve on January 17, 2014 4:41 PM writes...

You can make a lot of money in China selling pharmaceuticals or whatever. The main problem is you can't take it out. Maybe the multinationals have a way but I think even for them there are strict controls on export of capital. So making money in China is great if you want to buy a house in Shanghai but if you want to buy a bottle of wine in San Diego, forget it. You can't take the money with you.

Permalink to Comment

9. Steve on January 17, 2014 4:41 PM writes...

You can make a lot of money in China selling pharmaceuticals or whatever. The main problem is you can't take it out. Maybe the multinationals have a way but I think even for them there are strict controls on export of capital. So making money in China is great if you want to buy a house in Shanghai but if you want to buy a bottle of wine in San Diego, forget it. You can't take the money with you.

Permalink to Comment

10. The Fat Layer on January 18, 2014 11:17 AM writes...

@3 'The investors in the USA and Europe are delusional that they are going to make money out of China but only on the short run.'

Unfortunately that is what investors are now doing: Short-term gains and get out.

Talking to a CEO friend of mine yesterday he said to me that VCs would rather invest today, make a buck tomorrow and get out rather than waiting until the end of the month to see if they can make $100.

Translation: Minimize your risk to the max, make something and get out.

We're 6 years away from the Chinese 20/20 initiative they have, and things are ramping up there with companies trying to capitalize with the money they're getting from the government to put drugs in Chinese clinical trials.

And guess what? I heard that me-too drugs (i.e., change a methyl for an ethyl) is OK by them.

The clock is ticking and it doesn't look like things will get better there.

Anybody else has heard about the Chinese 20/20 initiative? What can you share with the rest of us on that front?

Permalink to Comment

11. Be annoying on January 18, 2014 9:40 PM writes...

One obvious trend in this blogging is to against China what ever the topic is. In deed, some of the problems are there and need to be taken care of. But, have you all-time-questioning people taken a break ever to figure out your inside bias? We are in a more and more globalize world. Why not have the win-win mindset? What benefit can be brought to you if China gets into a disaster and real trouble? Or, you are in a PERFECT country?
I have been enjoying a lot the real science and industry information here. But, find so annoying when some are eager to jump up and down to attack another country as a whole when discussing the problems.

Permalink to Comment

12. Artemisinin on January 19, 2014 1:54 AM writes...

@1 "5) What motivation does their government have to provide expensive health care to extend life given the fact it institutes a one child policy with forced abortions to control the population size?"

I really have problem with your logic here. You are either ignorant or ill-minded. The purpose of China's one child policy is to control the population so less people will fight for the limited resource. How can you reach the conclusion that the Chiese government does not want to provide health care to extend people's life?

Do you Western people really want to see a nation with 2 billion people and everybody there wants to have the American living standard? More relevantly, do you really like to have more "cheap labours" from China to compete with you for job opportunities?

Permalink to Comment

13. Anonymous on January 20, 2014 7:50 AM writes...

Lots of people were laid off on the premise that we needed to penetrate the Asian markets with a local presence e.g. research site with locals.

Surprise you've just taught China your core competency.

Permalink to Comment

14. Anthony on January 20, 2014 1:04 PM writes...

Anonymous's Point 6 needs clarifying. A fake iPhone is still a smartphone, fake designer clothes still look pretty good even if they fall apart faster.

There's no such thing as "counterfeit" drugs. There are placebos, and there are unlicensed real drugs. There probably isn't much of a long-run market for placebos in China - why take a fake viagra when one can take some traditional Chinese equivalent that's cheaper? But the market for unlicensed drugs will be big. It also may be supported, tacitly or explicitly, by the government.

Permalink to Comment

15. China on January 21, 2014 6:46 PM writes...

Guys, no matter what you say or think or dislike or hate, China will keep on going and going as it has done in past 5000 years. And you will lose your jobs slowly to your Chinese counter-part. Hah.

Permalink to Comment

16. anon #1 on January 22, 2014 9:09 AM writes...

@12 - I'm sorry you feel I am ignorant or ill-minded when I am neither. We both understand the motivation is population control. The government has many avenues to improve the quality of life for their people IF they had more resources. Western drugs is not as high on their list as they would like us to believe. I enjoyed my time there and love the Chinese people, but they are victims of their circumstances. The governments actions speak louder than words - when they increase the per capital spending an order of magnitude from $60 USD/yr to $600 USD/yr then they will BEGIN to show a move toward the right direction but it will require two orders of magnitude inocreased health care spending to become similar to the Western world. It is exactly because the resources are limited that they can't spend this amount of money even if they wanted to. Where's the evidence to the contrary?

To all: as far as cheap labor goes, this is drying up rapidly due to the 'success' of the one child policy which has created an inverted population pyramid - 8 great grandparents, 4 grandparents and 2 parents for every child. No aunts, uncles or cousins. And now they are starting to relax this policy so now this child has two children to support! Having 4-8 dependendets per person is quite expensive...

I handed out an 8% pay raise to someone there who was destined for termination for poor performance and the high performers got 15-18% raises. Top performers here got

Permalink to Comment

17. Artemisinin on January 23, 2014 9:58 AM writes...

@ anon #1

I feel I need to take back the "ignorant or ill-minded" comment. However, I still think you have pre-set attitude towards China's "one-child policy". True, it created problems as you mentioned. But it is still much better than there are hundreds of million more people on that already over-crowded land.

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