Economic Information Daily (经济参考报), a business newspaper published by Xinhua News Agency, ran a story on November 17 reporting that the National Development and Reform Commission (NDRC) may soon release a list of drugs that must be sold at low prices in China with the aim of reducing the financial burden of medical care on citizens and hospitals. The list may have a significant impact on the pharmaceutical industry: some out-of-production low-cost drugs will be protected and return to the market, while the makers of high cost drugs on the list will have their profit margins squeezed. The article also predicts that the pharmaceutical industry may soon see another round of mergers and acquisitions.
“Low-cost drugs” refers to the cheaper of the drug options used to treat a particular medical condition. The article quotes an informed source as saying that NDRC is expected to set the standard for low-cost drugs at a daily average cost of three yuan for western drugs and five yuan for processed Traditional Chinese Medicine (中成药, sometimes called “Chinese patent medicine”). The criteria and the list will be reviewed and adjusted every two to four years.
Low margins have been the primary cause that discourages pharmaceutical companies from selling low-cost drugs. As a result, hospitals are sometimes unable to obtain low-cost drugs, leaving patients with no choice but to buy more expensive alternatives.
The NDRC policy is likely to be welcome to generic drug makers are concerned, but it is bound to hurt companies that focus on high-cost drugs. The Economic Information Daily reports that industry insiders believe that generic makers such as Shanxi Yabao Pharma, Beijing Tongrentang, North China Pharma, Baiyunshan Pharma , and Yunnan Baiyao will benefit while Johnson & Johnson, GlaxoSmithKline, Merck, and other producers of out-of-patent drugs will be negatively affected.
“Makers of insured drugs will hopefully see a change to their dismal state of affairs. Once companies see stable incomes, further market consolidation will follow. Some companies that are not in the industry or preparing to withdraw may merge to achieve economies of scale in production and distribution,” according to an “industry insider” quoted by the report.
The report also quotes Shi Lichen, general manager of the healthcare center of Alliance PKU Management Consultants saying that “the cap of three yuan and five yuan per day is essentially price insurance for pharmaceutical companies. As a result, many large low-cost companies may ramp up production.” Many small companies will have a very good chance to grow, and many will see their market cap increasing. And those smaller companies, previously overlooked in M&A, who hold production permits for generic drugs may become sought-after acquisition targets.
Companies and brands affected
Shanxi Yabao Pharma (SHA:600351)
Beijing Tongrentang (SHA:600085; HKG:8138)
North China Pharma (SHA:600812) (SHA:600085; HKG:8138)
Baiyunshan Pharma (SHA:600332; HKG 00874)
Yunnan Baiyao Group (SZ:000538)
Johnson & Johnson (NYSE:JNJ)
GlaxoSmithKline plc (NYSE:GSK)
Merck & Co. (NYSE:MRK)
Links and sources