HONG KONG – Chinese drugmakers' stocks hit their worst slump since 2008 last week on reports of a government pilot program aimed at lowering generic drug prices.

Hong Kong-listed Sino Biopharmaceutical Ltd. (HKG:1177) declined as much as 16 percent on Dec. 6 when the news broke, while shares in other major Chinese drug companies, including 3Sbio Inc. (HKG:1530), Shanghai Fosun Pharmaceutical (Group) Co. Ltd. (HKG:2196) and CSPC Pharmaceutical Group Ltd. (HKG:1093) also fell 10 percent to 15 percent intraday.

The plunge wiped out ¥106.3 billion (US$15.4 billion) from China's pharmaceutical industry and followed an official statement from the Central Drug Purchasing Office that said a new centralized procurement process for generic drugs has slashed prices by 52 percent on average from 2017, with the highest cut of 96 percent.

For instance, costs for lung cancer medicine gefitinib were reduced by 76 percent from last year. According to local reports, for drugs with three or more bidders, the lowest tender price was automatically chosen.

Pharmaceutical firms were invited to bid for contracts to supply 31 drugs, but regulators choose only one winner for each drug, according to a government statement. The victor would then become the sole supplier of the drug to hospitals in 11 Chinese cities that participated in the pilot exercise, but winning the bids was a mixed blessing as they were typically committed to providing drugs at much-reduced prices.

For example, Chia-tai Tianqing Pharmaceutical Group Co. Ltd. slashed prices by 90 percent to win a contract for the hepatitis B treatment entecavir, a generic to Bristol-Myers Squibb Co.'s Baraclude (entecavir).

The 11 trial cities where the pilot approach to procurement was held included the four main Chinese cities of Beijing, Tianjin, Shanghai and Chongqing, and seven other cities – Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu and Xi'an.

Among the 11 cities, Shanghai was the first city to test the new procurement process, while the rest of the cities are set to commence trials later in December.

A significant impact

For some companies, the impact of the price cuts was significant. The drugs mentioned by the statement accounted for around 35 percent of Sino Biopharmaceutical's total sales in the first half of this year, for example. CSPC Pharmaceutical Group also manufactured four out of the 31 drugs on the list under the new centralized procurement process, and the firm's combined sales took up 5 percent to 6 percent of its 2018 first-half sales.

"Chinese and Hong Kong health care stocks almost always fall whenever new information about the plan comes out," Chan Keen Lok, vice president at Target Capital Management, told BioWorld.

And in this case, the impact was exacerbated.

"The price cut was more than expected, and this is obviously bad news for most Chinese drugmakers. Going forward, even thinner profit margins might become the new normal for generic drug manufacturers," Chan noted.

China-listed Zhejiang Huahai Pharmaceutical Co. Ltd (SHA:600521) was widely considered the biggest winner for the tender process, as the company won six of the seven tenders with an average price cut level of only 45 percent.

Most domestic pharmaceutical firms reportedly opposed the new tender process. The majority of Chinese drugmakers have slim profit margins, and the new plan could have a significant impact on drug prices, driving revenues of those firms even lower.

End users also expressed concerns, believing that reliance on a single supplier for each drug could potentially lower quality and cause supply issues in the future.

Still, the new centralized procurement process is part of the Chinese government's plan to overhaul its health care system to provide better quality and cheaper drugs and services to Chinese citizens.

Earlier this year, China set new price restrictions on several pain, fever and respiratory drugs to make medicines more affordable.

Retail price cuts of up to 20 percent were implemented in February on 400 drugs used for respiratory diseases, pain relief and specialized medicines, said the National Development and Reform Commission, China's main economic planning agency.

Meanwhile, Shenzhen-listed Jiangsu Nhwa Pharmaceutical Co. Ltd. said during a Q&A section with its investors this week that "the pilot procurement will promote pharmaceutical companies to optimize their product structure, increase investment in R&D, lower production costs and increase product added value."

"Companies that have strong research teams and diversified product lines might not be affected as much from the centralized procurement process. The news of lowering generic drug prices are clear signals that pharmaceutical companies need to adjust their strategies to survive," said Chan.

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