Will China's Price Gouging Accusations Have Any Impact on Johnson & Johnson and Other Eye Care Companies?

Eye care is the latest in a growing list of industries accused of fixing prices.

Jun 3, 2014 at 10:26AM

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Source: Wikimedia Commons

Yet another industry has run afoul of China's antitrust laws, this time seven companies in eye care that were accused of fixing prices. 

According to the National Development and Reform Commission, the eye care companies -- including Johnson & Johnson (NYSE:JNJ)Valeant Pharmaceuticals' (NYSE:VRX) Bausch & Lomb, and Nikon -- exerted too much control over dealer pricing policies, going so far as to control terms of product promotions. If dealers didn't comply, they faced financial penalties from the manufacturers, including even seeing their supplies halted. The agency fined the seven firms a total of $3.1 million, with the largest fine of $1.4 million assessed against the French eye care firm Essilor. J&J was fined $577,000 while Bausch & Lomb received a $596,000 levy. Nikon's fine was under $300,000.

Only the latest 

This latest episode follows last year's major price-fixing scandal involving infant formula that saw the NDRC impose more than $100 million in fines against international suppliers including Nestle, DanoneAbbott Labs, and Mead Johnson Nutrition. It was alleged the formula makers took advantage of mothers leery of domestic suppliers after instances of tainted milk and formula caused the death of hundreds of infants and children and sickened thousands more. Mothers were willing to pay triple the cost of domestic formula by having relatives in foreign countries buy up local stocks and ship them back to China.

Before that, the NDRC accused six LCD panel makers of fixing prices, imposing fines that totaled $56 million against the likes of Samsung, LG Electronics, and four Taiwanese manufacturers. Late last summer it was collecting data from foreign automakers on the price they charge for cars under the suspicion they were setting minimum prices. Jewelry firms were also fined.

Eyecare, however, has come under particular scrutiny following allegations made last summer by a Chinese daily newspaper that Alcon, the eye care unit of Novartis (NYSE:NVS), was bribing doctors to promote its medications, which itself was preceded by bribery allegations for the promotion of Alcon's lens implants.

The paper apparently has a history of alleging bribery and price fixing against international companies, also leveling charges against Eli Lilly, Sanofi, GlaxoSmithKline, and AstraZeneca. Whether true or not -- nothing has been found to date -- China's State Administration for Industry & Commerce said it was going to launch a probe of the pharmaceutical and medical device industries, investigating the higher prices Chinese consumers were paying for health care products. It might very well be the latest price-fixing allegations and fines were an outgrowth of this query.

Riding the growth

China, of course, remains a rapidly growing emerging market and even though that pace of growth has scaled back dramatically over the past few years, it remains far ahead of most other economies. The economy expanded at a 7.7% clip last year, well ahead of the 1.9% growth experienced in the U.S., let alone the euro region, which remained negative. Even the darling of the EU, Germany, barely inched forward 0.4% last year.

That's creating situations where income levels are rising. As the middle class expands they're looking to tap into global consumer trends. The companies themselves have sought to expend greater amounts of money in China to take advantage of the opportunity. Although emerging markets remain just a small part of Johnson & Johnson's overall business, within those countries China and Brazil drive the majority of the growth. Earlier this month J&J said it planned to introduce more than 30 major products in China by the end of 2016 in its medical devices and diagnostics divisions.

Other companies have similarly bold plans, and while it might seem they're trying to take advantage of the situation in China, the country's rapid market expansion likely plays a larger role in the rapidly rising price environment. The government is fearful of upsetting its growth, which explains the massive cash infusions it's made into its economy to keep it moving. Higher prices would be a reflection of such distortions.

Apparently, though, it's easier to accuse companies of gouging consumers than to admit what impact its own policies might play. Thus, antitrust fines might simply soon become a cost of doing business in China.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Valeant Pharmaceuticals. The Motley Fool owns shares of Johnson & Johnson and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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