Meanwhile, China’s healthcare stocks – dominated by drug makers (see Fig. 3) – only represent about 7.0% of China’s A-shares market.
This under-representation of China’s vast healthcare market, which only began privatising in the 1990s, suggests that there will be significant opportunities for investors as the market matures.
That said, changing regulations suggest that investors will need to tread carefully to identify potential winners and losers as industry dynamics shift.
A cloudy outlook for pharmaceuticals
Thanks to regulatory preferences, China’s top generic drug makers have enjoyed outsized profit margins of about 18.0%, almost double the global average of 9.5%5 .
This privileged position, however, is set to disappear following the launch of a bulk-purchase drug programme.
In an attempt to slash generic drug prices and free up funding for new drug reimbursements, the National Healthcare Security Administration (NHSA) embarked on the National Centralised Drug Procurement programme in December 2018.
Under this arrangement, more than 11 major cities (one-third of the national market), including Beijing, Guangzhou, Shanghai and Shenzhen6, will combine their purchases of 31 generic drugs (drugs whose patents have expired) and force drug makers to bid for contracts.
So far, this programme has succeeded in cutting drug prices by 52% on average (see Fig. 4).
As a result of the programme, the sales of novel medicines and “me-too” drugs – drugs produced by modifying existing ones for more effective therapies – are likely to account for an increasing share of drug sales in China going forward (see Fig. 5).
In fact, the sales of new drugs on the National Reimbursement Drug List (NDRL) – a list of preferred medicines covered by the government’s health insurance programme – grew 38% in 2018, higher than the general industry sales growth rate of 15%9.
To adapt to this shifting landscape, pharmaceutical companies must optimise their product structure, lower production costs, increase investment in research, and develop more new drugs to compensate for the fall in revenue from generics.
During this transition phase, smaller
pharmaceuticals will likely undergo consolidation.
Emerging opportunities in other healthcare sub-sectors
Pharmaceutical companies, are however, not
the only way to benefit from China’s growing
healthcare needs.
In late 2015, China Food and Drug
Administration (CFDA) undertook reforms to speed
up innovative drug approvals. The reforms have
since paid off and are now under the ambit of the
National Medical Products Administration (NMPA).
In 2017, 40 new NDRL drugs were approved,
followed by another 51 approvals in 201810. This
is a bigger number than the total approved by the
agency over the last decade.
With more ‘reimbursement quotas’ released
from the bulk-procurement programme and fasttrack approvals on the horizon, we expect to see
stronger motivation towards discovering new and
patented drugs. This is especially true for those
drugs with clinical benefits, and therefore, more
likely to get approval.