Stimulus Package vs. Drug Price Negotiation, Impacts on China's Health Sector?
Since mid-September, the Chinese government issued a relucent financial support package to revitalize the struggling economy, in a bid to bolster it to finish the year to achieve the previously set 5% growth target. While the largest share of the policy, from lowering borrowing rates to reducing down payment to mortgage rates are targeted to rescue the property market, there were also small shares of stimulus aimed to support the biopharma sector.
Inside the potentially one of the largest stimulus packages, many policies were aimed to ease the monetary liquidity reduce borrowing costs, and provide central bank funding to help listed companies buy back shares, stabilize the falling stock market valuations, and restore investor confidence.
The health sector, however, is largely not part of the package. The rationale seems to have everything to do with a large share of GDP contribution from the country’s property market, not much from pharmaceutical manufacturing and health services.
However, stock market-target booster shots also lift health sector companies. Shanghai Health Sector ETF (515960), a broad index ETF fund tracking the performance of both pharma and medical device companies jumped from 0.63 to 0.84, from the end of September to early October. But it has since dropped to 0.74.
The top ten holdings in the ETF include major companies such as Jiangsu Hengrui, WuXi Apptec, Kelun, and MedTech major Mindray. The initial soaring and then fall indicates that the stimulus package, like a stimulant shot, delivered a strong reaction but the long-term results is still in doubt, at least for the health sector.
One policy that has a bigger overhang impact on the sector is drug pricing negotiations. The annual practice to cut drug prices has just kicked off. On September 14, the National Healthcare Security Administration sent new inclusion for this round of drugs qualified for the price negotiations to the companies, giving them two weeks to respond.
The new drug pricing negotiations could be more significant than previous rounds. First, it’s the first time that the drug price cut could be less severe, in the six years since the pricing-cutting mechanism was initiated in 2018.
In China, to be covered by a single public payer, a drug maker must go through the drug price negotiation process.
During the process, drug makers send their representatives to a discreet hotel in Beijing, where they face off with a panel of tough negotiators who had their sole KPI of cutting drug prices. The painstaking process, usually ended with the recessions from the companies. The only certainty facing the drug makers on the other side of the negotiation table is how much wiggle room regarding the depth of the cut.
However, relying on a low-and-lower strategy has its downside. Certain drugs were cut so low that the bid-winning drug makers, after grappling with the reality, had chosen to walk away, resulting in drug shortages.
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The supply of some products was so chaotic that it prompted the regulators to rethink their strategy. Some notable changes, not only this year that the agency NHSA moved the start of the annual exercise to July, from September, but it also emphasized its goal of maintaining stability.
“The thinking is to focus on stability and progress based on stability condition.” The Agency said. “More monitoring on drug supply and improve access to reimbursed drug.”
If a benign, more innovation-friendlier drug pricing policy is materialized, that could provide a meaningful stimulus booster to a bruised sector, depressed by a slow uptake in new drug sales, hit by capital winter, essential halt in domestic IPOs, and dry-up in US investment.
One notable and potentially bigger benefit is, that if a drug price is already deeply cut, there won’t be further reductions for the second year. And, it can be covered by the NRDL list without the hassles of renegotiations.
That could provide assurance, a breath room, and policy predictability to a wary and weary group of investors, and be more meaningful to the biopharma and Medtech sector than the stimulus packages.
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