Chinese market jitters on surprise RMB drop; Q2 pharma sales lag

Print 25 August 2015
Cornelia Zou / BioWorld

HONG KONG – An unexpected and large drop this week in the reference rate for the value of the Chinese renminbi (RMB) underscored the pressures that companies are facing in a market that remains key to both business and global economic growth.

The People's Bank of China (PBoC) devalued its currency on Monday by setting the daily exchange midpoint 1.9 percent lower, the biggest drop on record. China allows the value of the RMB to fluctuate by 2 percent up or down from a crawling peg to a basket of currencies. Through 2014, the RMB depreciated 2.5 percent against the U.S. dollar. Between 2010 and 2013, the Chinese currency appreciated more than 12 percent against the dollar, following an appreciation of 21 percent between 2005 and 2008.

Even though a cheaper currency should, in theory, boost exports, the possibility of further declines has sent a chill to some sectors of the market. Growth in China has already slowed down significantly this year.

"The PBoC's unpredictable behavior makes their currency policy an extremely difficult one to nail down at present, but we maintain our stance that the only way forward for the [China RMB] over the near future is down," said Andrew Wood, head of Asia country risk research at BMI Research. BMI forecasts a cumulative decline of 10 percent from the RMB's pre-devaluation level of ¥6.2 to the dollar, and has downgraded the end-year forecast on the currency to ¥6.83.

"Obviously there's a currency impact – everyone can see that from a translational point of view – but we haven't formed a view on the fundamental impact for our international companies operating in China," analyst Terence McManus, of Credit Suisse's European pharma team, told BioWorld Today.

The PBoC's announcement followed the release of new figures showing Chinese exports plunged 8.3 percent in July, a drop of a magnitude that no analyst was expecting. Imports dropped 8.1 percent, following a 6.1 percent drop a month earlier.

Credit Suisse's global equity strategy team now sees China as the biggest risk to the global economy and is considering the possibility that GDP growth will slow down to 3 percent as the country works to juggle simultaneous credit, investment and real estate bubbles.

According to Credit Suisse, China's health care industrial output experienced a five-year compound annual growth rate of 22 percent from 2010 to 2014. But in the first five months of 2015, growth for all subsectors, including biologics, medical devices, active pharmaceutical ingredients, chemical drugs, processed Chinese herb and traditional Chinese medicine, dropped to between 6 percent and 9 percent

A restructuring of the health care system and pricing reforms have also helped local generic companies often at the expense of multinational corporations' (MNC) business growth.

"We see local players starting to secure a footing in the market with branded generic local players growing faster than MNCs in some prescription categories," said Credit Suisse in its China health care second quarter update.

According to the investment bank, European big pharma sales growth in China has fallen from 15 percent to 2 percent from the first quarter of 2015 to the second quarter, on average. The number was 14 percent in 2014.

A VISIBLE TREND

Multinationals have been severely affected, recording a slowdown in their China business in the second quarter. Companies have blamed the slowdown on different reasons, from past sales tax disputes, reduced channel inventories, government cost cuts or the broader economic conditions, but the trend is quite visible.

For example, French biotech Ipsen SA said sales in China were negatively impacted by a significant destocking effect in the country's distribution channel during the second quarter in a context of price pressure in some regions. Danish diabetes drugmaker Novo Nordisk A/S, for its part, blamed its 6 percent sales decline on the fall in the overall diabetes care market, driven by cost containment measures, including restriction on access to health care professionals and intensified local generic competition.

"I'm sure you've heard from other companies, there has been a pretty significant drop in the market growth in China," said Chito Zulueta, Eli Lilly and Co.'s senior vice president and president of emerging markets, during the company's second quarter earnings call. "The primary factor that's driving the slowdown is really some government initiatives and policies that are curtailing volume growth. And we're seeing more hospitals and institutions shifting to lower price generics. So we see this continuing at least in the short-term, as the risk pressure within the national government to curtail expenses."

Although sales to China account for only an average of 5 percent of last year's sales for European pharmaceutical majors, China remains an important growth driver for the MNCs. And, despite the sluggish economic growth and unsatisfying sales performance, pharmas continue to have faith in the China market.

"We see a continued commitment from the Chinese government to expand access to health care, to quality health care, to citizens," said John Young, New York-based Pfizer Inc.'s president of established pharma in the company's recent earnings call. "We don't see that trend halting in the short to medium, even the longer term."

"We know that we will continue to see some pressures on our business in China and pricing," said Young. "We factor that into our forward-looking views."

In its half-year report, Astrazeneca plc said China sales in the first half of 2015 increased 19 percent to $1.3 billion, more in line with growth in recent years, with the company's medicines for respiratory, cardiovascular and diabetes diseases delivering particularly strong results. Company management pointed out that the Chinese economy is slowing; however, London-based Astrazeneca plans to accelerate investment in emerging markets such as China, Russia and Brazil.

Paris-based Sanofi SA reported sales growth of 9.2 percent to $600 million, driven by diabetes drug Lantus (insulin glargine) and antiplatelet agent drug Plavix (clopidogrel), but lower vaccine sales did offset that growth.

London-based Glaxosmithkline plc's international sales were also held back by the performance of its China business, which declined 14 percent in the quarter. GSK plans to use new pricing policies to drive volume.

"Actual sales are still low today, but expectations for growth have been high for MNCs, with relatively high levels of doubt over efficacy and safety for local brands still reported in China vs. other emerging markets, theoretically providing a strong framework for MNC growth," said Credit Suisse.

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