Pharmaceutical & Healthcare:Increased tender price risks

What’s New.

    We investigate the impact of the recent Hunan and Zhejiang tenderprice shock on the pharmaceutical sector.

    Our View.

    Negative headwinds of Zhejiang and Hunan tender price cut.

    The Hunan tender registered a larger than expected 20% price cutin general. Though the tender arrangement in Zhejiang has not yetbeen finalized, a 10% plus tender price reduction looks very likely.

    Market worries that these tender results sent a negative signal tothe remaining 10 plus provincial tender scheduled tobe completed before June this year.

    Reaction to Hunan tender is overshot. In view of veryunfavorable tender prices, many pharmaceutical companiesdecided not to participate in the Hunan tender. Given likely shortageof drugs as a result of unreasonable tender prices, we arguepharmaceutical companies have bargaining power to negotiate for abetter price in the possible supplementary tender that follows.

    Moreover, Hunan is not a major drug province and the tenderarrangement will not be very indicative. We believe other provincesare working on a more reasonable tender arrangement.

    Lower tender price to trigger sector correction. Nonetheless, wethink lowered tender price is an inevitable trend on the back ofgovernment mandate to control medical reimbursement expenses,especially after the industry has achieved solid growth in thepast couple of years. Compared with the sector correction in 2011,when it was also hampered by lowered tender price, the magnitudeand length of the current consolidation does not seem enough.

    Downgrade to EQUALWEIGHT on tender price uncertainty. Wesuggest investors to wait for better medium term bottom fishingopportunity. The sector has retreated 17% from its peak in late 2014and is trading at a more reasonable 20x FY15F PER. We do notthink the sector will de-rate back to mid-teens PER in 2011 as theindustry players have strengthened drug portfolio and R&D pipelinesince then. We believe (i) pending announcement of FY14 results,and (ii) comprise in the Hunan and Zhejiang tenderarrangements can stabilize near term sector performance.