A few interesting news bits on the medical front are spotlighting both the opportunities and risks that drug and medical equipment makers face in developing the China market. On the opportunity side, Bristol-Myers Squibb (NYSE: BMY) has announced an expansion of its relationship with Simcere Pharmaceutical (NYSE: SCR) to introduce its drugs into China. Meantime, homegrown medical equipment maker Mindray Medical (NYSE: MR) is also banking on the market’s potential with its newly announced acquisition of a US ultrasound equipment maker. But US drug giant Johnson & Johnson (NYSE: JNJ) is also finding the market contains some risks, as it comes under fire for double standards related to its product recall policies in China.
All of these news bits reflect the fact that China’s drug and medical equipment markets are growing rapidly and offer huge potential for both domestic and global manufacturers. The opportunity comes as Beijing spends billions of dollars to roll out a new system of limited universal health care to replace the old socialist-era network where everyone got their medical care for free through their state-owned work units.
Let’s start with a look at Bristol-Myers Squibb, which says it will develop its rheumatoid arthritis drug Orencia through a tie-up with Simcere dating back to 2010. (company announcement) Orencia is already sold in the US, Europe and Japan, so it looks like getting the proper regulatory approval for China should be relatively easy. In this case Bristol-Myers will draw on Simcere’s government connections and sales channels to get the product approved and distributed in China.
Bristol-Myers and Simcere announced a similar agreement in 2011 to make and sell a cardiovascular compound in China. (previous post) I expect we’ll see more of this kind of tie-up in the years ahead, which should play to the advantage of domestic drug companies like Simcere and Wuxi PharmaTech (NYSE: WX) that have strong connections and sales channels in China. Despite that potential, overseas investors don’t seem too interested in the sector, leading Simcere to announce a privatization plan earlier this year. (previous post)
From this new tie-up, let’s look quickly at Mindray, which has said it will acquire California-based Zonare Medical Systems for just over $100 million. (company announcement) Mindray traditionally focused on exports but has increasingly tapped its home China market to boost its sales. It now gets nearly half of its revenue from the domestic market, and I’m sure it will quickly try to introduce Zonare’s products to China. At the current growth rate, I wouldn’t be surprised to see Mindray’s China sales overtake its exports in the next year or so.
Finally, lets take a look at Johnson & Johnson, which represents some of the downside to the China market as the company deals with negative publicity related to its drug recall policies. Local media are reporting that China’s food and drug watchdog is urging J&J to treat Chinese consumers equally to global consumers in terms of product recalls. (English article) The regulator’s message comes after media reports said that J&J failed to recall drugs in China in 48 out of 51 instances where it issued recalls for its products in other global markets since 2005.
Readers may recall that Apple (Nasdaq: AAPL) faced similar criticism for double standards in its China customer service policies earlier this year, resulting in a media firestorm that led the US tech giant to issue a rare apology. So far we haven’t seen the same kind of media uproar with J&J; but that doesn’t mean that something couldn’t happen, especially if J&J doesn’t show the proper contrition.
Generally speaking, this kind of case shows that foreign companies do need to act carefully when considering their China after-sales policies. In cases that could be perceived as offering lower standards for the China market, these companies need to provide careful and transparent explanations for their decisions, or risk facing the wrath of backlash from angry Chinese media and consumers.
Bottom line: Drug and medical companies will boost their activities in China as the market quickly expands, but need to be mindful of risks such as negative publicity.