Pfizer's China Exposure Could Dampen Its Reshuffle Hopes

 | Jul 11, 2018 | 5:54 PM EDT
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The success of Pfizer Inc.'s (PFE) reshuffle could depend on a country that has fueled its growth thus far: China.

Pfizer Inc. declined 0.4% to $37.21 per share on Wednesday on news the pharmaceutical giant had announced a reorganization that would focus a new major unit on innovative drugs.

"As a leading pharmaceutical company in Asia and particularly in China, Pfizer believes it is well positioned to be a leader in this significant and rapidly growing market," the company said on Wednesday. "Urbanization and the rise of the middle class in emerging markets, particularly in Asia, are providing additional access opportunities and generating significant demand for branded and generic established medicines."

China is Pfizer's third largest market for drug sales, making up 6.8% of Pfizer Inc's $57.2 billion in 2017 revenue, according FactSet data.

In the first quarter, China led Pfizer's emerging markets growth. The company's so-called Essential Business expanded 12% in the first quarter, with China growing 26% operationally, according to company results.

The company has also used China as a launchpad for certain products. Pfizer signed an agreement with Basilea Pharmaceutica Ltd. In December 2017 to develop and distribute Cresemba, an antifungal drug, in China and Asia Pacific countries. It later expanded to Europe.

The reorganization plans announced on Wednesday would separate the company into three units, positioning the company for faster growth and innovation.

Still, Pfizer Inc.'s aspirations for Chinese expansion could be thwarted by the current political standoff over tariffs.

On Wednesday President Donald Trump identified another potential $200 billion in Chinese imports for tariffs, but did not include pharmaceuticals.

Regulatory opacity

In the company's Form 10-K filing from February 2017, Pfizer said it expected to see China streamline and simplify the process of approving the marketing of new drugs.

In an effort to spur drug innovation and approve new drugs more quickly, China's food and drug regulator has redefined how it categorizes drugs for approval.

The regulatory change is expected to spur domestic Chinese drug manufacturers to produce their own generic version of foreign drugs, because imported drugs never marketed in China are no longer considered "new drugs," according to the filing.

"The new rules furthermore do not clarify whether foreign regulatory approval is still required for imported drugs to have final approval in China," the filing said.

If the U.S.-China trade standoff escalates and all weapons are on the table, it could add further pressure on Pfizer and other U.S. pharmaceuticals with significant China exposure.

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