31-10-2018

The Bureau of National Medical Insurance held a symposium in regard to bulk procurement in Shanghai on September 11, introducing the key points and details of joint procurement and announcing the first batch of selected 33 drugs. The procurement will account for 70% of total annual drug use of all public medical institutions in 11 pilot cities in exchange for the lowest tender price. Pharmaceutical stocks plunged after the announcement, concerning the price cut would affect the future earnings of all market players. However, we believe the joint procurement mainly targets the generic drug market, and has minimal impact to innovative drugs with patents.

The targets of the bulk procurement are generic drugs which passed the efficacy reassessment. It is expected that the tender price will drop by approximately 40% if more than three or more manufacturers bid for the tender. Those manufacturers who bid the tender must have sufficient production capacity for supplying 70% of the market. This implies that even small pharmaceutical companies may not be able to participate in the tender even though they passed the efficacy reassessment. They can only compete with the original drugs for the remaining 30% market share.

The sales of 33 drugs in those pilot cities account for approximately 1.9% of the market, which is expected to have a minor impact on industry earnings in the short term. The policy, if implementing nationally in the future, will hurt the profitability of those leading manufacturers focusing on generic drugs, as these manufacturers must lower its tender pricing in order to maintain its market share; however, those focusing on innovative drugs should have little impact. We recommend investors to accumulate pharmaceutical manufacturers with strong research and development capabilities for long-term investment.

Source:
Bloomberg
Citi research
The Bureau of National Medical Insurance

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