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By Adam Jourdan
SHANGHAI, May 25 (Reuters) - A crackdown on corruption andpricing in China's fast-growing pharmaceutical market hassqueezed profits and margins, raising a red flag to global BigPharma that the days of easy growth in the country may be over.
A Reuters' analysis of more than 60 listed Chinesehealthcare firms shows average profit margins declined to around10 percent last year from 15 percent in 2012. Average netprofits fell 2.1 percent, down from close to 20 percent growthin previous years.
China has been a magnet for the big global pharmaceuticalcompanies and other healthcare firms as growth slows in Europeand the United States. It is the largest emerging drugs marketand is set to be the global number two overall within threeyears, according to consultancy IMS Health.
While global drugmakers withhold their China profit figures,the analysis suggests profit growth is harder to come by - aconcern as many global firms look to China as a future growthdriver.
"Most companies, local and foreign, have enjoyed an easygrowth phase for 5-6 years as money was thrown at the healthcaresystem to improve access," said Alexander Ng, Hong Kong-basedassociate principal at McKinsey & Co. "Now China is more intocost containment mode... and the squeeze on pricing and marginsis a lot more apparent."
Over the past year, China has cracked down on high pricesand corruption in the healthcare sector. Authorities probeddrugmakers over pricing in July, while a high-profileinvestigation into British drugmaker GlaxoSmithKline Plc led to executives at the company being charged with briberyearlier this month.
Industry and legal sources said the investigations into thesector are likely to grow more intense, meaning downwardpressure on profits is likely to remain.
SALES DRAG
The climate of investigation has stymied sales growth, withsome doctors saying they are worried to meet pharmaceuticalreps, fearing being caught in the glare of China's watchdogs.
In 2013, Chinese authorities visited global drugmakersincluding Novartis AG, AstraZeneca Plc, SanofiSA, Eli Lilly & Co and Bayer AG aspart of a broad investigation into the sector.
GSK, which saw its China revenues plunge 61 percent in thethird quarter last year, has since overhauled its managementstructure in China, stopped payments to healthcare professionalsand changed its incentive systems for drug reps.
"Of course there will be an impact on sales. The pattern ofselling through bribing definitely won't work anymore," said aShanghai-based sales executive at another global drugmaker,speaking on condition of anonymity.
The Reuters' analysis showed combined revenue growth in thesector fell to 17.9 percent last year, from 22.6 percent in 2012and more than 28.8 percent in 2011.
PRICING PRESSURE
Price cuts are also putting a strain on profits and marginsas China's leaders look to cut a healthcare bill that is set tohit $1 trillion by 2020, according to McKinsey & Co. Combinedprofit growth dropped to around 5.2 percent last year from 23.9percent in 2011, according to the Reuters' analysis.
While authorities have made some moves to step back on pricecaps, Chinese healthcare procurement still puts the mainemphasis on cost, creating an incentive for firms to push priceslower to beat rivals to contracts.
"The industry is in a very competitive stage, where firmswant to take market share to stay in the game, but at the sametime can't deal with the low prices," said Yu Mingde, presidentof the Chinese Pharmaceutical Enterprises Association, anorganisation supervised by China's cabinet.
The crackdown on pricing has pushed some Chinese firms outof business and forced global drugmakers to rethink their Chinastrategy, industry sources and analysts said, putting greateremphasis on high-tech drugs which command greater pricing power.
International drugmakers have long banked on being able tocharge a steep premium in emerging markets for branded genericdrugs that have gone off patent in their home market.
Generics specialist Actavis Plc pulled out of Chinathis year, saying the market was too risky and not abusiness-friendly environment.
"When you have 5,000 competitors you have to be special, andbeing a foreign company is no longer enough," said GuillaumeDemarne, Shanghai-based business development manager athealthcare research body Institut Pasteur.
M&A DRIVER
Rising competition in the market will also likely spur around of consolidation as firms look to strengthen in terms ofscale or technology to stay ahead of rivals, analysts said.
Bayer said in February it would buy Chinese traditionalmedicine maker Dihon Pharmaceutical, while Shanghai FosunPharmaceutical Group Co Ltd said last month it plansto take U.S.-listed Chindex International Inc privatein a $461 million deal with equity firm TPG.
"The level of industrial concentration will rapidly increaseby way of acquisitions and reorganisations," FosunPharmaceutical said in a statement with its annual earnings.
M&A activity this year has so far outstripped 2013, saidPhil Leung, China healthcare head and Asia Pacific M&A head forconsultancy Bain & Co, noting that local and global firms werelooking at acquisitions, joint ventures and other tie-ups.
Drugmakers with advantages of scale, low-cost production orunique, in-demand products should hold their own, he said, whileothers would struggle to survive.
"In this environment, the strong will get stronger and thestragglers will be more exposed." (Additional reporting by Li Hui in BEIJING and SHANGHAInewsroom; Editing by Ian Geoghegan)
