China Healthcare:A chilly Thanksgiving for drug companies

Impact: more pricing pressure incoming

    We interviewed more executives and industry experts for this proposal, who largely concurred this would be negative for drug manufacturers and distributors as more pricing pressure is expected. However there are too many uncertainties, focusing on how MOLSS will determine reimbursement prices. Experts believe the impact for exclusive chemical entities would be quite limited due to lack of competition, however, they see large impact for drugs with exclusive pricing/or premium pricing with multiple competitors. At the end, manufacturers would have to justify its premium pricing in front of the market and the payor, not with any government agencies anymore. Among HK listed names, the experts suggested that Maitongna from Lvye Pharma fits this criterion based on searches from NDRC database.

    What’s new? NDRC circulating a draft proposal

    While we could not find this document from NDRC website or any official government channels, executives we interviewed confirmed the existence of this draft document dated November 25, which was also sent to eight industry agencies on Tuesday seeking feedback with a deadline on November 27. The draft proposed to remove HSRP (highest suggested retail price) for all drugs starting Jan 1, 2015, including 1) for drugs under NRDL or local RDL, MOLSS is responsible to set a standard for reimbursement; 2) for drugs with patents (outside of RDL coverage) or exclusive TCM drugs, multiple parties shall participate to negotiate prices; 3) for blood-related products outside RDL coverage, preventive immune-therapeutics and contraceptives, prices shall be determined by drug tender or negotiation; 4) CNS drugs are excluded from this draft.

    DB view: very limited impact in near term but negative for mid/long term

    We believe it is highly unlikely that P&L for listed names would be impacted by this policy in the next 4-6 quarters. Additionally, it would be time-consuming for MOLSS to set the reimbursement prices for all 2,200 drugs on NDRL. In the meantime, drugs prices would still be determined by the ongoing tender process. However we anticipate more headwinds for drug pricing as 27 provinces face deficit on reimbursement funding. Therefore we prefer service sector over drug names since hospitals would not be impact by policies like this. We highlight PHG (1515.HK) as one of our top picks.