Looking At China’s Importance For Pfizer As The Diflucan’s Imports Hit A Bump

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China has stopped the import of Pfizer’s (NYSE:PFE) anti-fungal drug Diflucan as it tightens up the scrutiny of pharmaceutical companies. [1] The authorities have stated that Pfizer failed to file certain supplemental applications which suggests that the issue may be rectified soon. Diflucan’s revenues stood at $185 million for the first nine months of 2012, accounting for less than 1% of the company’s total revenues. While this incident will not impact Pfizer’s upcoming results materially, we take this opportunity to talk about how important China really is for Pfizer.

Our price estimate for Pfizer stands at $33.90, implying a premium of about 10% to the market price.

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The Opportunity In China

The Chinese pharmaceutical market is poised for strong growth despite some challenges inherent in doing business in the country. The ageing population will lead to an increase in the patient pool, which in turn will drive the market. More patients will be able to afford medicines due to rising income and increasing insurance coverage.

According to consulting firm McKinsey, China’s pharmaceutical market has grown at a compounded annual growth rate of 21% during the last few years, amounting to $98 billion in 2012. [2] It is further expected to increase by 17% annually over the next five to six years reaching $310 billion by 2020. [2] The market still accounts for less than 4% of revenues of top 10 multinational pharmaceutical firms indicating large room for growth. [3]

Besides the factors mentioned above, changing disease profile to chronic conditions will also play a vital role in the growth of the country’s pharmaceutical industry. The prevalence of diabetes in China is at disturbing levels according to a publication in the Journal of the American Medical Association. About 11.6% of Chinese adults have diabetes and around 40% of adults between the age of 18 and 29 are on the verge of developing it. [4] That puts China’s diabetes patient count at 114 million individuals, and this figure is likely to go higher. According to IMS health, China’s diabetes market is expected to grow 20% annually and reach $3.2 billion by 2016. This bodes well for Pfizer as the chronic nature of diabetes and other lifestyle related illnesses implies long term treatment, thus ensuring repeated drug sales. [5]

The Challenges

However, there are likely to be some significant challenges that big pharmaceutical companies like Pfizer will face. The regulatory risks are increasing, with the Chinese government cracking down on firms and managers not abiding by the requirements. Additionally, the authorities are also putting price restrictions on certain types of drugs. There are challenges in terms of marketing due to a fragmented distribution system, and many patients have limited access to critical drugs for cancer and immune disorders.

Our price estimate for Pfizer stands at $33.90, implying a premium of about 10% to the market price.

Notes:
  1. China Halts Imports Of Pfizer Medication Diflucan, The Wall Street Journal, Dec 31 2013 []
  2. Global drug makers look to China for growth, McKinsey report [] []
  3. re:2 []
  4. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads, Bloomberg, Sept 4 2013 []
  5. China Diabetes Triples Creating $3.2 Billion Drug Market, Bloomberg, Nov 5 2012 []