Let’s start with the bad news. The reputation of some of the world’s largest pharmaceutical companies operating in China is not exactly glowing at the moment.

Besides the ongoing saga at GlaxoSmithKline (GSK) – the UK multinational healthcare company faces allegations of bribery in the country – Chinese government representatives have been turning their attention to other pharmaceutical companies. The offices of at least one other international pharmaceutical company have been visited by Chinese officials against a backdrop of suspicion towards large pharmaceutical companies and their seeming lack of ethical business practices.


Critical mass

This distrust is nothing new globally, with publications such as Bad Pharma by UK physician Ben Goldacre highlighting the way that pharmaceutical companies have been known to bend or even break the rules in the search of profits. What is more, the industry has been handed a series of heavy fines for such misconduct.

What is new, however, is the crackdown on such alleged practices in China. As the country's president, Xi Jinping, continues his drive to stamp out corruption within government organs, it appears that foreign firms are not exempt from scrutiny either.

The difficulty when dealing with pharmaceutical companies is that they provide a critical resource – particularly in a country such as China, which is home to the world’s largest, and increasingly ageing, population. The rise of the middle class has brought with it medical problems that are more common in developed countries in the West, with chronic diseases associated with lifestyle such as diabetes on the rise.

So, while the surfacing of such scandals does nothing for the industry's reputation, the damage to individual companies seems to be limited to the short term. GSK’s sales in China might be down for the time being, but the demand for medicines in the country means that it is pegged to become the world’s second largest drugs market, after the US, by 2016, with sales expected to rise to $165bn, according to research by data provider IMS Health.

It is foreign companies that are, at the moment, best placed to benefit from this growth; China is still reforming its large state-owned enterprises in order for them to compete in the modern economy. Meanwhile, potentially reduced drug approval times and cheaper research costs are driving foreign pharmaceutical research and development to China on a huge scale.

Modernisation agenda

It is not just drugs that China needs in order to improve its healthcare system, it also requires investment and expertise to help it reform and modernise its health and care services across the board. The country's ageing population, along with the rise in wealth and therefore expectations, mean that new services are badly needed. The proportion of over-60s alone is expected to rise to 28% by 2050.

Five years ago, there were only about 70 foreign-owned medical institutions operating in China, but the government’s target, for 20% of its hospital bed capacity to be private by 2015, suggests the scope for growth is still massive.

But despite the need for reform if China is to meet modern healthcare requirements, the desire for continued central government control over healthcare means that the reality is not necessarily matching the rhetoric. The government seems to realise that its current model of funding needs reform, otherwise it will be blamed for poor-quality care in the future. However, if it does not release control, this could lead to investors in the market being blamed if supposed guarantees on opening up and reform do not materialise.

New reforms

While pharmaceutical companies are monitoring the situation closely, they do not seem overly worried that this struggle for control will impair the potential of future opportunities, particularly as the Chinese government continues to pledge support, for research in particular. It might take a few years for these opportunities to really come good, but optimism is relatively high – buoyed by the fact that China’s largest development zones and business parks, such as Tianjin Economic-Technological Development Area and Suzhou Industrial Park, are pouring money into pharmaceutical and biotech clusters.

“The Chinese government has made biotechnology and pharmaceutical research and development a priority for the country, and is making significant financial resources available, as well as providing multiple incentives. In parallel, major pharmaceutical companies have made research investments that have brought technology and processes to the country," says Pedro Lichtinger, former president of US multinational healthcare company Pfizer's global primary care business unit.

Perhaps the biggest development in this area has been in the Shanghai Pilot Free-Trade Zone. It has announced initiatives that offer further opportunities for investment in medical care for foreign enterprises.

Late last year, China issued its 'Tentative Measures for the Administration of Wholly Foreign-owned Medical Institutions in the Shanghai Pilot Free Trade Zone' plan, which cited that a foreign investor that has engaged in medical institution investment or management for five years or more may, upon the approval by the relevant local government authorities, set up a wholly foreign-owned medical institution in the Shanghai Pilot Free Trade Zone. New measures may also open up opportunities for foreign capital to enter the nursing home market in China.

How these initiatives will actually play out is still open to debate though and, until investments are made, it will not be clear how open the market has become in this area.

Avenues of growth

Essentially, though, it will be demand that determines investment levels – not just the demand for new products in China, but the demands of shareholders and company stakeholders in the world’s biggest pharmaceutical companies, who will push these firms to find new avenues for their products.

For example, while it looks likely that China’s drugs market will continue to be dominated by over-the-counter and generic drugs, the latent potential of growth in patented drugs is extremely tempting for multinational pharmaceutical companies – a recent Deloitte report estimated about 25% growth in this market between 2010 and 2015.

This symbiotic relationship is perhaps best illustrated by the growth of contract research organisations (CROs) and contract manufacturing organisations in China – companies that allow research and medical manufacturing to be outsourced, meaning costs can remain lower and quality remain high in China. WuXi Pharmatech, one of the world's largest CROs, has already partnered with US pharmaceutical giant Bristol-Myers Squibb.

China’s share of the global contract pharmaceutical market is predicted to rise from the 7% it accounts for currently to nearer 20% by 2017, according to research by the Chemical Pharmaceutical Generic Association. All this means that, despite the controversy currently clouding the industry, the path looks relatively clear for future pharmaceutical investment in China.