Broker's View

Good times ahead for Chinese pharmaceutical firms as policy environment turns favourable

Country’s renewed focus on health sector reforms could prove beneficial for sector, say analysts

PUBLISHED : Tuesday, 28 February, 2017, 8:11pm
UPDATED : Tuesday, 28 February, 2017, 10:50pm

China’s renewed push to promote health sector reforms and back it with a slew of favourable policies is expected to boost the fortunes of the country’s major pharmaceutical companies that had been languishing due to the tough regulatory environment for the past two years, according to analysts.

“We anticipate a turnaround in health care stock prices this year after their weak performances in 2015 and 2016,” said Sean Wu, an analyst at Morgan Stanley, in a recent research note.

“Policy headwinds temper our enthusiasm, but we think the drug segment pressures are beginning to subside,” said Wu, adding that investors should focus on stocks of companies with strong research and development (R&D) capabilities and rich product pipelines.

The company identified Fosun Pharma and CSPC Pharmaceutical Group, as its top picks among Chinese pharmaceutical companies for this year.

An underappreciation of Fosun’s manufacturing assets and the healthy momentum of CSPC’s key products are major assets for the two companies, said Wu.

“Fosun has four drugs with potential annual combined sales of 1billion yuan (US$145.6 million) waiting for tender to gain market access. We expect sales to continue ramping up in 2017,” said Wu.

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Meanwhile, a 30 per cent year on year growth has been forecast for CSPC’s NBP soft capsule and injection medication mainly used for the treatment of acute ischemic stroke, the note said.

We do not expect sales to rebound to double digit levels this year, as half of the provinces still have not finished tenders
Sean Wu, analyst, Morgan Stanley

China’s rapidly ageing population has helped pharmaceutical companies to reap rich rewards from the country’s five year health care reform that started in 2009. Much of that arose from the central government goal to “build up a comprehensive health care service system that covers both rural and urban residents”, as well as the keenness of provincial authorities to start implementing tender processes for acquiring medications to reduce costs for patients.

General government policies during this period were largely gentle towards pharma companies, including a looser price regulation scheme, mainly because the expansion of China’s medical insurance fund was faster than that of medicine consumption at the time.

However, after the good times, Chinese pharmaceutical companies started to feel the pain after the tender price cuts and reimbursement controls implemented by the authorities in recent years, with the industry seeing a second year of single digit growth in 2016.

“We do not expect sales to rebound to double digit levels this year, as half of the provinces still have not finished tenders,” said Wu.

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Adding to the risk factors for the sector are the newly rolled out dual invoice system and a more rigorous drug approval process, the Morgan Stanley note said.

The dual invoice system aims at improving transparency in drug prices and eliminating excessive profit margins associated with multi-tier distribution models. It requires hospitals to obtain invoices from both drug manufacturers and distributors and could hamper sales of drugs that rely heavily on incentives to doctors.

Meanwhile, a more rigorous drug approval process is set to lengthen the product launch timetable and precipitate the exit of low-quality drugs, said Wu.

However, most of the key policies that could dent the sector’s near-term growth have already been rolled out and these are already factored in the share prices of companies, the note said.

But the country’s continued support for the development of private hospitals and R&D innovation would continue to give the sector a boost, Wu said.

CSPC shares rose 0.85 per cent to close at HK$9.5 after touching a 52 week high of HK$10.2 on February 24. Fosun shares on the other hand fell by 0.56 per cent to HK$26.70.

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