China’s pharmaceutical sector got a booster this year as Beijing unveiled a US$124 billion health care reform plan. State media described the plan as being able to "lay a solid foundation for equitable and universal access to essential health care for all in China by 2020."
The plan targets the building of a clinic in each village and a hospital in each county by 2011, while medical insurance will be bulked up by subsidies. It also features an updated essential drug list (EDL) – identifying medicines to be distributed to patients at a discount – and a national drug reimbursement list (NDRL) of drugs covered by medical insurance.
The promised cash injection has considerably brightened the prospects for companies in the health care sector. The lists, too, while not representing direct investment, are likely to be a boon for large pharmaceutical firms.
"The launch of the basic medicine catalog is a near-term catalyst for inexpensive brand generics," Beijing Gao Hua Securities analyst Wei Du wrote in a note to investors. "We see gradual deployment of government funding as a long-term catalyst, fueling growth in 2010 and 2011."
Simcere Pharmaceutical Group (SCR.NYSE), which manufactures branded generic drugs, including stroke medication Bicun and anti-cancer drug Sinofuan, saw 42 of its drugs included on the EDL and another 105 products on the NDRL. Several of these drugs are "manufactured with significant sales or large market potential," the company said.
"Those on the lists are the drugs that become blockbusters," said Franc Kaiser, senior consultant at InterChina Consulting in Shanghai. "Getting onto those lists is crucial for success." However, he adds that growth depends on other factors, too: a strong portfolio of drugs, correct market penetration and reliable distribution.
Structural reform
Success may also come from riding a wave of health care industry consolidation.
According to InterChina, distributor markups are a major reason why patients are left paying high prices for what should be affordable treatment. Distributors might impose a 50%-plus markup on generic drugs before they reach hospitals; and hospitals often knock up prices on innovative drugs by as much as 35%. The increase in drug consumption and distribution volumes – at affordable prices – envisaged in Beijing’s reform plan is likely to result in larger distributors adding to their market share as many of the middlemen are frozen out.
Citi believes that Sinopharm (1099.HK) – one of the largest medicine distributors to hospitals and an operator of retail pharmacies – is a major potential beneficiary.
In a recent report, Citi analyst Richard Yeh, who has a "buy" rating on Sinopharm, said that China’s drug distribution system is quickly moving toward a more "comprehensive service model," in which distributors also focus on retail pharmacies, drug manufacturing and value-added services to ease the pressure on declining margins in the industry.
"Major players such as Sinopharm that are rapidly adopting this model can benefit from diversifying revenue, maximizing economies of scale and achieving operational and financial efficiencies," Yeh said.
Wei at Beijing Gao Hua is also upbeat on the distribution segment, based on changes in marketing and distribution likely to be brought about by structural reform. "We expect growth in the wholesale and distribution business to exceed the health care market average growth rate in the next five to 10 years," he said.
