China drugmakers erase US$26b on price cuts

HONG KONG: A meltdown in Chinese pharmaceutical stocks intensified, erasing US$26bil in market value over two days on concerns the government is driving down generic drug prices through a new procurement programme.

The MSCI China Health Care Index headed for its biggest two-day drop since 2005. Sino Biopharmaceutical Ltd is poised for its largest two-day decline ever, after Citigroup said it would be among the worst hit and cut its target price and earnings forecasts.

The severe price cuts have arisen from a new government procure- ment programme that’s designed to control medical costs by getting 11 major cities, including Beijing and Shanghai, to combine their purchasing from drug companies.

The winner of the tender process for each of the 31 drugs will become the sole supplier for hospitals in all of those cities, but at a much reduced price from before.

The plan has been opposed by both domestic and foreign pharmaceuticals from the start because of its impact on prices, but also because reliance on one supplier for each drug could potentially cause quality and supply issues in the future.

While the government said that this was a pilot programme, analysts expect centralised drug procurement to be the new normal for the generics market in China.

“This is just the beginning” said Kay Mai, an analyst at Guotai Junan Securities Co.

“We expect the government to expand the catalog of the drug list and include more cities in order to lower the drug costs for citizens. This trend is negative for drugmakers and sales growth of generic drugs in China should slow down in the future.” — Bloomberg