China Patent Move Highlights Healthcare Risk 医改东风可借药企切莫贪婪无度

By newsdoug on June 11, 2012

China tempers drug maker expectations with patent tweak Global drug makers like Merck (NYSE: MRK) and Bristol-Myers (NYSE: BMY) have been piling into China’s drug market over the last few years in a bid to take advantage of huge new opportunities presented by the nation’s ongoing health care reform, even as growing signs emerge that risks also exist alongside the potential to make money. The latest of those risks was recently on display in the nation’s patent office, where an intellectual property law was modified to make it easier for Chinese companies to make generic versions of drugs that otherwise would still receive patent protection. (English article) Under those changes, China can permit companies to make generic versions of drugs under patent protection if Beijing determines that there is a state of emergency, or that doing so is in the public interest. The new rules, which took effect on May 1, could also let Chinese companies apply to export such generic drugs. In fact, this kind of move isn’t new, as China took similar action several years ago with European drug maker Roche’s drug Tamiflu when many worried about a bird flu epidemic with the potential to sicken and kill millions of people globally. At that time, Theraflu was one of the few drugs that had been proven effective to treat bird flu, and China pressured Roche to license the drug to several domestic firms in order to boost stocks in case of an outbreak. This new move appears to not only address similar situations to the one with bird flu, but also looks like Beijing’s way of telling the big foreign drug firms that they need to keep prices for their patented drugs at reasonable levels or risk seeing Beijing permit other domestic firms to make generic versions of those drugs. This new message would come as foreign drug makers rush to find Chinese partners for new joint ventures to take advantage of Beijing’s ongoing healthcare overhaul, which is designed to provide basic services to many of the nation’s hundreds of millions of people who otherwise would be unable to afford such services. Most major companies have jumped on the healthcare reform bandwagon, with Bristol Myers, Pfizer (NYSE: PFE) and Merck all announcing new tie-ups with Chinese partners over the last 12 months. (previous post) But China has also sent out increasing signals that its mutibillion-dollar healthcare overhaul won’t just mean lots of new free money for makers of drugs and medical equipment, indicating it intends to control the prices it pays as it overhauls the system. Beijing’s desire to control costs was on display last summer, when domestic player Simcere Pharmaceutical (NYSE: SCR), which has a tie-up with Merck, posted quarterly results that showed its revenue growth was stagnating, and blamed the government’s tough pricing policies as a major factor for stagnation. (previous post) All of this goes to show that healthcare reform will indeed bring big new growth opportunities for both domestic and foreign makers of drugs and medical equipment. But at the same time, Beijing is clearly telling everyone to temper their profit expectations, and sending signals that those who get too greedy could find their patented drugs and other proprietary products being legally copied and manufactured by domestic manufacturers and sold for much lower prices.

Bottom line: New changes to China’s patent laws are sending a signal to drug makers not to get too greedy in their rush to capitalize on opportunities from the country’s healthcare reform.

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