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Is Big Pharma Setting Up for a China Sales Catastrophe?

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China's the next great frontier for industries across the markets, but the world's second-largest economy is especially vital to big pharma. The country's on course to become the second-largest pharmaceutical market in the world soon, with sales in the industry expected to eclipse $350 billion by 2020. All the pieces are in place for a coming boom in the Chinese pharmaceutical market.

All the pieces except one, it turns out. Beijing's intensifying investigation into the pharmaceutical industry, among others, is threatening the future of some of these companies in this lucrative emerging market. Will big pharma be forced to take a step back before it can move forward in China?

Glaxo at the center of the storm
GlaxoSmithKline (NYSE: GSK  ) has dominated stories about China's corruption and bribery probes recently. With numerous arrests already made in the case, the situation's getting worse for Glaxo in China. The company has publicly said that it won't leave the market despite the ongoing investigations, but sales are undoubtedly under fire.

Glaxo made less than 4% of its total sales last year from China, but that doesn't mean this is a market it -- or its investors -- can afford to lose much ground in. China has become the company's fastest-growing market by sales, posting 17% revenue growth last year, ahead of fellow emerging markets such as India and Latin America. By comparison, Glaxo's sales in Europe fell 7% in 2012, with U.S. sales falling 2% overall.

Even if Glaxo emerged from this month unscathed, China's growth would be enough just yet to combat the effects of the patent cliff. However, losing ground in the market would mean an even bigger hole for investors, and Glaxo would be forced into finding more ground to make up in sales with less room to maneuver. It's an unenviable position for both the company's shareholders and Glaxo itself, despite the stock's 16% run-up year-to-date.

With the patent cliff still ravaging Glaxo's sales, a major fine from Beijing and toughing out the probe would be a much better option than turning tail and abandoning the country altogether.

Big pharma's big risk
Unfortunately for big pharma, China's investigation has reached beyond Glaxo -- and bad news from other companies would be a huge blow to investors' hopes from this fast-growing pharmaceutical market.

Beijing already launched an investigation into French pharma giant Sanofi (NYSE: SNY  ) back in August. Sanofi's already facing patent questions over some of its drugs in major markets. What would a big step back in China mean for the company? Sanofi's emerging markets posted 10% sales growth in 2012 and made up nearly 32% of the company's total sales. Asian emerging markets in particular, including China, recorded the single highest revenue growth total among all of the company's geographic divisions, posting 17.6% operational growth last year. China in particular helped Sanofi's Lantus and Plavix sales during the year.

Lantus, Sanofi's diabetes treatment, has become the company's star seller, and keeping up sales in China is vital -- particularly as the International Diabetes Federation expects nearly 130 million Chinese citizens between the ages of 20 and 79 to suffer from diabetes in 2030. That's an astronomical market that Sanofi can't afford to pass up to keep its financial growth churning for the long term -- particularly as its stock has only gained around 6.4% year-to-date, a lackluster performance compared to the market's staggering gains overall.

Big pharma companies tangling with the patent cliff are in serious trouble if they face any real danger in China. AstraZeneca (NYSE: AZN  ) and Eli Lilly (NYSE: LLY  ) both are facing massive sales holes in the next few years due to patent expirations. Eli Lilly's Cymbalta, which made nearly $5 billion for the company last year, will lose patent protection at the end of 2013. Meanwhile, AstraZeneca already saw overall sales fall 17% year-over-year in 2012 and expects sales to slump again this year.

Despite that, however, AstraZeneca saw 20% sales growth in China in each of its last two fiscal years. That won't be enough to save the company's financial performance outright, but losing much of that growth would inflict a huge setback for investors' hopes of the company's fight against falling sales. Eli Lilly has seen sales fall across the world as it struggles with the patent cliff and other issues, but a fall in China -- and the company's already battling bribery allegations there -- could mean even more pain for its attempt to restart sales growth.

A situation worth your attention
Few of these companies have any real danger to fear so far. Glaxo investors should rightly be worried, but hard data indicting Eli Lilly, AstraZeneca, or Sanofi has yet to turn up in China's probes.

However, the scale of what's at play in China demands your attention. Even big pharma's strongest companies can't afford to see this hot emerging market and major growth driver for the long term slip away. For companies already under fire like AstraZeneca, any serious setback in China would be devastating to both the company's financial and stock outlook. While this situation's still evolving, it's one that investors can't afford to ignore for the sake of their portfolios. China -- and setbacks in the country -- means more than ever.

Looking for long-term riches
China's pharmaceutical industry might be under fire, but there's a reason this market is so desirable: It's the key market for the industry's long-term growth prospects. For investors, that long-term outlook is the best way to maximize any portfolio's potential. The Motley Fool's special free report "3 Stocks That Will Help You Retire Rich" names specific investment opportunities that could help you build long-term wealth and help you retire well. The Fool also outlines critical wealth-building strategies that every investor should know. Click here to keep reading.

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9/23/2016 4:03 PM
AZN $33.97 Down -0.31 -0.90%
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LLY $81.16 Down -0.13 -0.16%
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SNY $38.35 Down -0.22 -0.57%
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