The Growing Diabetes Market in China

China’s diabetes population, and consequently the market for worldwide diabetes treatments, have undergone rapid growth that is expected to continue.
But despite the continued growth of the Chinese diabetes market and the opportunity for investment in the healthcare sector, U.S. healthcare organizations aren’t quite able to crack the code—and it may be because one key detail is getting lost in translation.

Evolving market

Almost 1/3 of the world’s diabetes sufferers now live in China. Although China is still poor compared to the rest of the developed world, the country’s middle class and overall wealth have grown significantly over the last three decades. GDP went from $191 billion in 1980 to 11 trillion in 2015, and life expectancy from 66 to 76 years.
With the modernization of China’s economy also came: the introduction of high-calorie, Western-style fast foods; higher rates of car travel; and more sedentary jobs replacing active, farming ones. Thus, as its middle class and overall wealth was growing, its obesity and diabetes epidemic was increasing in parallel. The country went from 1 percent of the population having diabetes in 1980 to 11 percent of its population having it in 2015.
To keep up with these changing health needs, the Chinese government launched a new initiative, designating a “healthy China” as a priority. The initiative encourages inbound and outbound private investment in the healthcare sector.
Underlining the opportunity “healthy China” presents, in January 2018, Hong Kong began considering a proposal to allow biotech companies to list before they even turn a profit. This proposal could allow more Chinese healthcare companies to raise capital through IPOs—giving them more access to cash to fund research and innovation, which has historically been sluggish in China.

BDO Insights: Why Western orgs have difficulty breaking into China’s diabetes sector

Like the situation in some other industries, a lot of the difficulty Western entities in the diabetes sector face can be attributed to a misunderstanding of what the Chinese government wants from them.
The Chinese government opened the country to foreign investment because it recognized that its innovation and healthcare services were not keeping pace with the country’s economic growth. It needed foreign investment and ideas to catch up.
However, it has become evident that the government only wants help from foreign investment and corporate entities to a certain extent, so they face obstacles when entering the market. U.S. healthcare entities looking to enter the Chinese market should do so by partnering with a local company, rather than purchasing one. This grants them expansion opportunities within China but frees them from navigating the business and regulatory intricacies themselves.

Growing FCPA risk from local China market partnerships

Partnering with a local entity does come with its own risks, though, notably around the Foreign Corrupt Practices Act (FCPA).
Concerns around FCPA risk have been steadily growing among life sciences companies, according to the 2017 BDO Life Sciences RiskFactor Report. According to their latest 10-K SEC filings, more than half (59 percent) of the largest companies listed on the NASDAQ Biotechnology Index cited compliance with the FCPA as a risk in 2017, compared to 42 percent in 2013.
Top reasons for growing FCPA concern included:
  1. More third-party relationships: As businesses expand in China and elsewhere abroad, business partners and third-party relationships increase—along with the risk of corruption.
  2. Exposure to different business cultures: Notably in China, companies expanding abroad are exposed to entirely different business cultures than the ones they’re accustomed to—some of which may view certain acts of corruption, such as bribery, as the norm.
U.S. healthcare entities partnering with local Chinese entities to enter the market can mitigate increased FCPA risk by enhancing fraud and corruption controls based on risk assessments, including accounting controls, training, policies and procedures, and tone at the top. Conducting risk-based due diligence of agents, distribution, other business partners, and employees is also crucial. (You can find more on anti-corruption risk mitigation from our Global Forensics practice here.)

The two-invoice rule

China’s two-invoice rule presents an additional challenge for Western entities. The rule is meant to streamline the pharma supply chain and provide more transparency around pricing. It requires a drug manufacturer to issue just one invoice to its distributor followed by the distributor issuing just one invoice to the end customer (a hospital), capping the number of invoices allowed in the process at two. One sole distributor is permitted to distribute the pharma products between manufacturers and hospitals, and manufacturers are encouraged to sell drug products directly to hospitals with help from logistic service providers.
Foreign pharma companies operating in China likely do not have direct access to their distributor because they often work through other middle men with better knowledge of the Chinese market. To be successful, foreign organizations must be mindful of the potential risks including:
  • restructuring their distribution models and in turn, third-party due diligence processes
  • recommunicating anti-bribery policies and procedures to new distributors
  • updating record-keeping systems, internal controls and ongoing monitoring

How do local healthcare entities fare?

Chinese diabetes entities also face struggles in the market because it’s still largely new territory for China. The diabetes epidemic is relatively recent, and local companies are still catching up to modern innovation and treatment models.
As a result, there’s a dispersed market of small and fragmented companies, so their investment levels must be high to compete.

What’s coming down the pike?

It remains to be seen how the increased trade tariffs between the U.S. and China could impact opportunities in the diabetes sector—for organizations on both sides.
But Hong Kong’s proposal to allow biotech companies to list before they turn a profit could be a gamechanger for local Chinese companies in the diabetes sector. The change could give them access to more capital and allow them to innovate—and grow—much faster. This could also present interesting implications for U.S. companies hoping to enter the China market, and it could even impact cross-border U.S.-China healthcare investment.