SHANGHAI – The world’s third largest maker of generics, Actavis plc, has backed out of China, citing risks and a difficult business environment.

It is selling Actavis (Foshan) Pharmaceuticals Co. Ltd., located in China’s southern Guangdong province. The new owner, Zhejiang Chiral Medicine Chemicals Co. (Chiral) of Nanyang, Zhejiang, will take over Actavis’ stake for an undisclosed amount. Chiral is one of China’s 4,000 generic makers.

“Our operations in Foshan were limited in scope and we believe that their value will be better capitalized on by Chiral,” Sigurdur Oli Olafsson, president of Actavis Pharma, said in a statement. “[Chiral] will add manufacturing and marketing capabilities allowing them to expand their portfolio and strengthen their position in the Chinese market.”

But it was frank comments made by CEO Paul Bisaro during the 32nd annual J.P. Morgan Healthcare Conference that has tongues wagging. He is on the record calling China out for having an unfair business environment and being too risky.

It would seem that Actavis, with its small China footprint, was able to do what more heavily invested companies are not able to consider: walk away from the risks and challenge of capitalizing on China’s growth opportunity.

For some the luster of China’s growing market has dimmed. One drug company after another has seen their names attached to bribery scandals in Chinese media, since the announcement this summer of the investigation into corrupt sales practices at Glaxosmithkline plc (GSK).

The latest whistleblower claims have caught Abbott Laboratories, of Abbott Park, Ill., just last week with charges that sales staff at Abbott Nutrition offered doctors kickbacks of 8 percent to 10 percent of sales revenue to induce sales.

In some cases these could trigger wider headaches if breaches in the Foreign Corrupt Practices Act (FCPA) are found. The GSK China case could lead to the first FCPA actions triggered by an investigation instigated outside the U.S.

Drug pricing also has faced numerous downward pressures, squeezing margins. The shifting rules of the provincial tender reforms have made volume business a much harder game to win. (See BioWorld Asia, Dec. 13, 2013.)

“Foreign generic manufacturers trying to crack China have always been in a tricky spot. For a short moment in time, they benefited from being early into high growth opportunities in China,” Benjamin Shobert, managing director of Rubicon Consulting and co-founder of Health Intel Asia, told BioWorld Asia. “But ultimately the twin pressures of lower cost and a desire by the central government to see the generic industry become dominated by Chinese companies, were going to make long-term success problematic.”

While Actavis had stayed clear of any allegations of corruption, this is not always easy for generics to stay above board given the operating environment here.

“A company like Actavis,” Shobert said, “that is perceived as having less innovation as another manufacturer, finds itself in a situation where it has to play a more on the ground game versus a domestic company, which is a very uncomfortable place to be.”

DIVESTITURE MADE SENSE

Actavis, of Dublin and Parsippany, N.J., is a speciality pharmaceutical company that markets generics, legacy brands and OTC products in more than 60 countries. Its portfolio includes five biosimilars in development for women’s health and oncology. The company is considered well poised to take advantage of the impending patent cliff with a bountiful pipeline.

With the sale of its second facility in China, Actavis closes the chapter on its China business after more than eight years, but is not fully denying itself a share of the China pie. In the statement Actavis said that it would “continue operations in China with preferred business partners” but declined to specify further.

Few completely walk away from China’s pharma market, forecasted to be the world’s second largest by 2020, with projected annual growth rate of 17 percent.

Yet, strategically Actavis’ divestiture makes sense; strengthening its position in markets where it has competitive advantage such as in the U.S. which accounts for 62 percent of sales.

Actavis also just announced the sale of a portion of its European operations to Aurobindo Pharma Ltd., of India, for €30 million (US$41 million).

The company’s strategy seems to be paying off. With the successful acquisition of Warner Chilcott in 2013, it has seen its revenue grow in the third quarter by 57 percent to hit the $2 billion mark.

In its recent year-end financial preview the company said it expects “to be modestly above the high end of its previous forecast” for non-GAAP earnings per diluted share. Full earnings are to be reported on Jan. 31.

INNOVATORS HAVE THE UPPER HAND

Companies that offer innovative drugs and have robust R&D operations are considered better protected from the challenges facing generics makers. They can sell on their differentiated product demanding a price premium, and stay away from competing with China’s generic fray on price alone.

Shobert warns of another rising trend facing multinationals: “Generics are going to really feel the Chinese government’s pressure to trade technology transfer for market access, which is in the grand scheme of things, even more troubling.”

The Foshan facility started as a local company and was first established in 1960 after transferring through U.S. and Australian hands before being acquired by Actavis in 2005. It has R&D, production and sales capabilities. It touts itself as makers of 30 products of “European quality, with Chinese prices” and works closely with a national distributor. It makes antibiotics, digestive and cardiovascular drugs.

The new owner, privately held Zhejiang Chiral, was founded in 1998 and focuses on generic APIs and intermediaries.

Both Chiral and Foshan were unavailable to comment due to the Chinese Spring Festival holiday.