KPMG’s opinion on China market

KPMG, Watson Pharmaceuticals, Tui, Dunkin' Brands: Intellectual Property Bloomberg- Jun 9, 2011 China's drug market is primed for "explosive growth," making its pharmaceutical companies attractive takeover targets for drugmakers about to lose patents on their most popular medicines, according to KPMG LLP. Products worth more than $30 billion will lose patent protection this year, leading more drugmakers to consider buying or joining with companies in China, the world's third-biggest drug market, according to a KPMG report released yesterday. The report said that large pharmaceutical companies are turning away from traditional mergers that boost margins and reduce costs, and are looking for unconventional acquisitions such as firms that have unique uses for drugs, according to the report. "The pharmaceutical market will experience explosive growth in the coming years," KPMG said, adding that the expansion would be fueled by rapid environmental, economic and social changes that follow urbanization. "The industry now feels there is a better business model in zeroing in on the end customer rather than on bulk manufacturers of generics." As an example, KPMG mentioned Nasdaq-listed SciClone Pharmaceuticals' purchase of NovaMed Pharmaceuticals Inc., a China-based specialty company, in April. NovaMed has a portfolio of 18 drug products spanning major therapeutic areas including oncology, cardiovascular disease and central nervous system disorders. China's pharmaceutical market is predicted to grow at least 25 percent this year, according to U.S.-based research firm IMS Health. Pfizer Inc. (PFE) on June 3 unveiled plans for a potential joint venture with Zhejiang Hisun Pharmaceutical Co. to produce branded and low-cost generics, as it seeks revenue sources before it loses U.S. patent protection in November for Lipitor, the cholesterol medication. Lipitor was the world's best-selling drug last year with $10.7 billion in sales. KPMG also said foreign companies investing in China risk running afoul of new Chinese laws, such as the 2008 PRC Anti- Monopoly Law, as well as other laws such as the U.S. Foreign Corrupt Practices Act and the recently enacted U.K. Bribery Act. Compliance can be difficult due to China's lack of transparency in transactions and less-than-complete business records to support corporate payments, KPMG said. "It becomes even more murky and ambiguous in the health- care, medical device, and pharmaceutical sectors given the significant use of distributors, agents, and other third- parties," the report said. The law may see those groups as part of the company, but they don't typically "have the internal controls in place to adequately maintain their own books and records," KPMG said. Pay-for-Delay Drug Deals Said to Be Target for Rule at FTC The U.S. Federal Trade Commission is considering using its rule-making power to stop so-called pay-for-delay deals between brand-drug manufacturers and makers of generic medicines after failing to get judges or Congress to act, three people familiar with the process said. FTC Chairman Jon Leibowitz, pushing to abolish these deals, is studying how the agency could prohibit brand-name manufacturers such as Cephalon Inc. (CEPH) and Sanofi Aventis SA from paying generic-drug makers such as Watson Pharmaceuticals Inc. (WPI) to drop patent lawsuits that might get generics to market faster, the people said. The people declined to be identified because the decision-making process isn't public. Leibowitz estimated in an interview May 3 that the deals cost consumers about $3.5 billion a year in higher prescription drug prices by slowing the introduction of generics. A rule to block certain patent settlements would be unusual for the FTC because it would involve antitrust rather than consumer protection and it could be made on the agency's own initiative under its basic statutory authority rather than at Congress's specific direction, said Bert Foer, president of the American Antitrust Institute in Washington. Efforts by the FTC to challenge the settlements in federal courts have failed and Congress hasn't moved to outlaw them. The settlement amounts are confidential, Peter Kaplan, an FTC spokesman, said by e-mail. Generic drugs account for 78 percent of all retail prescriptions in the $307.4 billion-a-year U.S. pharmaceuticals market, according to the IMS Institute for Healthcare Informatics. Consumer spending on generic drugs is growing as patents expire and patients choose lower-cost options, IMS said on its website. The FTC may try to issue the rule under an expedited procedure it hasn't often used, the people said. One precedent was in 1971, when the FTC passed a rule that required labeling octane content at the gas pump. "Any potential attempt by the FTC to move forward unilaterally with such a rulemaking would be unprecedented," said Sean Heather, executive director of the global regulatory cooperation project at the U.S. Chamber of Commerce. "The 'if you don't at first succeed try, try, and try again' approach to policy making by an independent agency isn't appropriate." In recent years, the FTC has slowed its rule-making, partly as a result of procedures, set up under a 1975 law, that Liebowitz has described as "cumbersome." Final rules under this process take almost seven years on average to implement, said Jeffrey Lubbers, a professor of administrative law at American University in Washington. The FTC hasn't initiated any new rules under this system since 1980, he added. Drug company lobbyists say the settlements can benefit consumers when brand-name drugmakers allow generic equivalents to get to market before patents expire. "Patent settlements have never prevented competition beyond the patent expiry, and generally have resulted in making lower-cost generics available months and even years before patents have expired," said David Belian, a spokesman for the Generic Pharmaceutical Association, a Washington-based trade group whose members include Mylan Inc. and Anchen Pharmaceuticals Inc.