PHARMACEUTICALS

Broker's View

China’s health care reforms set to benefit top domestic pharmas, report says

Domestic sector expected to grow to US$167bn by 2020 from US$108bn in 2015, according to the US’ International Trade Administration

PUBLISHED : Monday, 05 December, 2016, 7:16pm
UPDATED : Monday, 05 December, 2016, 10:57pm

China’s top pharmaceutical companies are expected to benefit from proposed national health care policy changes, aimed at addressing what has become a overly fragmented market, according to a new report.

The central government is working with provincial authorities on a new medical insurance payment scheme that would motivate hospitals to prescribe lower-priced drugs, in a plan set to be finalised this month, according to a JPMorgan report.

The blueprint will allow medical institutions to pocket the difference between the sales prices of drugs and medical insurance payments, JPMorgan analyst Isabella Zhao said.

Insurers currently provide reimbursement to medical institutions and pharmacies based on a payment scheme, but the new plan would alleviate pressure on hospital reimbursement budgets, she said.

The resulting budgetary constraints will [inevitably] produce further pricing pressures on drugs, particularly as frustrations over corruption, cost and access to health care continue to mount
International Trade Administration

The proposed shift is part of ongoing reforms of China’s health care system, which have included the recent merger of its rural cooperative medical scheme with the basic medical insurance scheme for urban residents.

China’s health care industry was worth US$108 billion in 2015, and is expected to grow to US$167 billion by 2020, according to a report by the International Trade Administration (ITA), the US agency which promotes fair trade.

But health care in China has been plagued by bribery scandals, involving underpaid doctors and hospitals largely reliant on drug sales as their main source of revenue, according to one analysis by the Cheung Kong Graduate School of Business (CKGWB).

The world’s second largest pharmaceuticals market has seen drug sales growth fall from 20 per cent in 2013 to 5 per cent in 2015, according to the CKGWB.

Pharmaceutical companies are also wary of the government’s focus on addressing drug affordability, the ITA report said.

“The resulting budgetary constraints will [inevitably] produce further pricing pressures on drugs, particularly as frustrations over corruption, cost and access to health care continue to mount,” it said.

In addition to pricing, China’s pharmaceutical industry continues to face regulatory headwinds, the government’s ongoing anticorruption campaign, and the effect of the much publicised case in 2013 of GlaxoSmithKline subsidiaries making improper payments, gifts, and other bribes to Chinese officials to boost sales in the country.

The Chinese pharmaceutical market is dominated by generic drugs, which account for 85 per cent of national sales, most of which have “a lower quality and efficacy than off-patent originators”, according to the Centre of Drug Evaluation.

A Fitch Ratings report claimed recently that drug innovation in China is “hindered by a prolonged, opaque drug approval process”.

There is also intensifying market competition and regulatory pressure, which Fitch expects to continue, and ongoing concern over state medical insurance coverage for drugs not listed in the state-controlled National Reimbursement Drug List.

[China is] hindered by a prolonged, opaque drug approval process
Fitch Ratings report

Despite the challenges, however, Zhao is optimistic on pharmaceutical companies with high-quality generic drugs – those able to get multiple international drug approvals – and those with domestically patented blockbuster products or first approval to import big-selling medicines.

That list includes both CSPC Pharmaceutical and Yichang HEC Changjiang Pharmaceutical, both of which are poised for sales volume growth, according to Zhao.

CSPC Pharma has shifted from being a bulk manufacturer to a provider of more innovative drugs, making it “one of the more compelling investment opportunities in the Chinese health care sector”, she said.

Its share price has a December 17 price target of HK$9.00, up from HK$8.22 at Monday’s close.

HEC is an “emerging player” with its anti-flu product “Kewei” a huge seller, which helped grow group sales 2.5 times between 2012 and 2015.

Zhao believes the company will continue to see Kewei gain market share, and it is set to account for over 60 per cent of the company’s sales over the next two years, driven in part by a “large and fast-growing anti-flu drug market in China”.

HEC currently has 11 products approved by the US and the European Medicines Agency, and ranks in the top three for international filings and approvals, the JPMorgan report said.

The company’s shares are targeted at HK$24.00 by December 17, up over 60 per cent from Monday’s close at HK$14.96.

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