Growth Endangered By Anti-Corruption Campaign

BMI View: A more 'rational' use of pharmaceuticals through pharmacoeconomics, and a crackdown on illegal rebates and corruption in China's pharmaceutical market could hinder the sector's growth potential. However, over the long term, the government is likely to improve its investment in healthcare in order to retain public support.

President Xi Jinping's anti-corruption campaign has become a centrepiece of his tenure. According to the Central Commission for Discipline Inspection (CCDI), a total of 182,000 officials have been disciplined, with courts nationwide trying 23,000 corruption cases in 2013. Within the pharmaceutical and healthcare industry, a covert sex tape scandal has once more brought GlaxoSmithKline (GSK) into the spotlight. We note that in Q114, GSK continued to be negatively affected by the corruption scandal in China, with the firm's pharmaceutical and vaccines sales in China falling by 20%. Although the revenue decline in China is showing signs of stabilising, the corruption case has yet to reach its conclusion for GSK, and the firm may see more losses from its Chinese business.

We note that since June 2013, when anonymous allegations emerged that a GSK employee in China was part of widespread bribery activities, the Chinese government has uncovered further corruption in the pharmaceutical sector. Since then, it has investigated over 60 drugmakers alongside the drug pricing investigation. However, as of Q114, GSK was the only multinational to have been hit hard, with other major drugmakers continuing to enjoy double-digit growth in China.

Below Global Average Level
Healthcare Expenditure Outlook In China

BMI View: A more 'rational' use of pharmaceuticals through pharmacoeconomics, and a crackdown on illegal rebates and corruption in China's pharmaceutical market could hinder the sector's growth potential. However, over the long term, the government is likely to improve its investment in healthcare in order to retain public support.

President Xi Jinping's anti-corruption campaign has become a centrepiece of his tenure. According to the Central Commission for Discipline Inspection (CCDI), a total of 182,000 officials have been disciplined, with courts nationwide trying 23,000 corruption cases in 2013. Within the pharmaceutical and healthcare industry, a covert sex tape scandal has once more brought GlaxoSmithKline (GSK) into the spotlight. We note that in Q114, GSK continued to be negatively affected by the corruption scandal in China, with the firm's pharmaceutical and vaccines sales in China falling by 20%. Although the revenue decline in China is showing signs of stabilising, the corruption case has yet to reach its conclusion for GSK, and the firm may see more losses from its Chinese business.

We note that since June 2013, when anonymous allegations emerged that a GSK employee in China was part of widespread bribery activities, the Chinese government has uncovered further corruption in the pharmaceutical sector. Since then, it has investigated over 60 drugmakers alongside the drug pricing investigation. However, as of Q114, GSK was the only multinational to have been hit hard, with other major drugmakers continuing to enjoy double-digit growth in China.

The key message that the Chinese government has tried to send out through the anti-corruption campaign is that it will cut down pharmaceutical prices, as well as discipline drugmakers, healthcare professionals and institutions, in order to contain healthcare expenditure. At the end of 2013, the National Health and Family Planning Commission (the NHFPC) introduced 'Regulations on Establishing a Commercial Bribery Blacklist for the Purchase and Sale of Medicines' and 'Nine Prohibitions to Strengthen the Ethical Conduct in the Healthcare Industry'. In June 2014, China's General Office of the State Council released 'Deepening of the Medical Reform - Key Tasks in 2014' to give more detailed guidelines on a more 'rational' use of pharmaceuticals through pharmacoeconomics and a crackdown on illegal rebates and corruption in the pharmaceutical sector.

The sector reforms and anti-corruption campaign will put downward pressure on China's pharmaceutical growth potential. We will look to revise our expenditure forecasts should there be more certain evidence indicating significant medicine price cuts in China. BMI believes that low public healthcare expenditure and the lack of regulatory enforcement are fundamental factors that are hindering the government in its aim to more effectively improve the nation's healthcare standard and widen patient access to medicines.

We note that China's healthcare spending has historically been significantly below the global average level in terms of healthcare expenditure as percentage of GDP. In contrast to other BRIC countries, the Chinese government has not invested sufficient funding into the healthcare sector, but instead allowed patients to shoulder most of the burden. It is not surprising that the poorly funded public healthcare system requires additional resources from bribery and illegal rebates to support its operations.

Below Global Average Level
Healthcare Expenditure Outlook In China
Low Public Spending In Healthcare
BRIC Countries' Healthcare Spending % Of GDP In 2012

Furthermore, the prevalence of petty corruption is relatively common and tolerated in China, as what is considered a corrupt intent by to western standards is often entrenched in a culture where it is expected that the value of a personal relationship is demonstrated through gift giving. It will therefore be very hard for the Chinese authorities to eradicate the practice through an anti-corruption campaign. In fact, addressing corruption in society has been in use as a domestic policy by the authorities since ancient times, in order to consolidate control throughout the vast country, remove political rivals, promote allies and restore public trust in the central government.

President Xi's anti-corruption campaign is more forceful than those implemented by his predecessors. However, the practice is not under legal supervision. It has no aim to establish democracy or addressing the bureaucratic structural issues. President Xi nevertheless plans to attempt to correct the dysfunction of the communist party and launch significant reforms to ensure the party's right to govern China. We currently view this as an upside to our forecast, as over the long term the government may increase its healthcare investment in order to retain public support.

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