Moody's: Ongoing medical reforms will benefit large Chinese pharmaceuticals

Hong Kong, April 16, 2015 -- Moody's Investors Service says that continued strong growth in China's (Aa3 stable) pharmaceutical sector will mainly benefit those pharmaceutical companies that can meet heightened industry standards and market practices under the ongoing medical reform.

"To rationalize China's healthcare system, control public healthcare costs and promote the upgrading of the country's pharmaceutical sector, the Chinese government launched a series of medical and healthcare reforms, which are credit positive for large pharmaceutical companies," says Ivan Chung, a Moody's senior vice-president.

For example, the expansion of the National Essential Drug List (EDL) in 2012 and the introduction of a drug tendering system at provincial level have helped divert fragmented medicine consumption to the institutional market and standardize medicine procurement by medical institutions.

"As public medical institutions will consider non-price factors like quality and the ability to supply in bulk, large pharmaceutical companies are usually in more favorable positions than smaller companies that mainly compete on price," adds Michelle Zhang, a Moody's vice-president and co-author of the report.

Chung and Zhang were speaking about Moody's' sector-in-depth report on China's pharmaceutical sector ("Ongoing medical reforms benefit large Chinese pharmaceutical companies"), which has just been released.

The report examines the ongoing medical reforms and tightening compliance regulations that are changing the operating environment of the sector.

In particular, the continuous price depression for drugs in provincial drug tenders as well as heightened Good Manufacturing Practice (GMP) requirements acutely affect small companies that mainly compete on price for generic products and lack the financial strength to support R&D and the upgrading of production practices.

However, Moody's expects the impact to be positive for large pharmaceutical companies as R&D capacity, product strength and economies of scale are their key benefits amid the ongoing medical reforms. Leading groups with sizable distribution businesses are also likely to benefit.

Furthermore, some Chinese pharmaceutical companies, which produce blockbuster Traditional Chinese Medicines, generate lucrative margins due to exclusively owned patents.

That said, China's pharmaceutical companies face various challenges as they generally lack operating scale compared to their large rated peers in developed countries.

Currently there is no dominant player and the top 100 pharmaceutical companies only account for about 45% of total market share. R&D capacity and patent strength are limited and, as a result, most rely on generic drugs and active pharmaceutical ingredients.

The industry has grown rapidly over the past decade. It was the world's third largest in 2013 in terms of sales revenue, registering an 18% compound annual growth rate from 2006 to 2013, or an annual growth rate at roughly twice China's GDP growth. China's large aging population, rising income and an expanding public health scheme have boosted demand for pharmaceutical products.

China's medical and healthcare reforms include: (1) Establishing and expanding the EDL; (2) Extending basic medical Insurance coverage; (3) Lowering the regulated price cap for drugs in the EDL; (4) Introducing a provincial drug tendering system and centralizing the procurement/distribution process; (5) Deepening public hospital reforms.

Subscribers can access the report at

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1002195

Moody's has previously published research related to the China Reform and Rebalancing theme. April publications include: "China's New Deposit Insurance Scheme Is Credit Negative for Small Banks", "Chinese Property Developers Will Benefit from Relaxed Mortgage Lending Terms and Housing Tax Rules", "Chinese Banks' 2014 Results Warn of Further Adjustment Pressure Ahead" and "China Insurance Industry: Motor Pricing Liberalization Will Challenge Underwriting Profitability And Disadvantage Smaller Players".

These reports are available on http://www.moodys.com/chinarebalancing

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ivan Chung
Senior Vice President
Greater China Credit Research
Moody's Investors Service Hong Kong Ltd.
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88 Queensway
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China (Hong Kong S.A.R.)
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Michelle Zhang
VP - Senior Analyst
Greater China Credit Research and Analysis
JOURNALISTS: +86-10 6319 6500
SUBSCRIBERS: + 86-10 6319 6500
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
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