June 11, 2019 / 3:22 AM / 5 days ago

BREAKINGVIEWS - China’s pharma shake-up wins healthy endorsement

A technician inspects anti-cancer drugs in vials at a lab of a pharmaceutical company in Lianyungang, Jiangsu province, China March 13, 2019. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT. - RC1941AC3380

HONG KONG (Reuters Breakingviews) - China’s pharma shake-up has won a healthy endorsement. Drugmaker Hansoh Pharmaceutical (3692.HK) will go public this week after raising funds at a $10.3 billion valuation in its Hong Kong initial public offering. That suggests that Beijing’s radical price reforms will produce some big winners. 

The People’s Republic is reshaping its $220 billion pharmaceutical market to meet the demands of a rapidly aging population. Last year, 11 major cities including Beijing and Shanghai piloted a group-buying scheme for roughly 30 drugs. Companies that offered the lowest price could sell a guaranteed amount to public hospitals in those cities. The winning bids were on average more than half the prevailing market price.

The idea is that bigger market shares can help offset lower prices and cushion bottom lines for larger companies. At the same time, the price cuts should root out thousands of low-quality rivals. An estimated two-thirds of the China’s 4,000-plus drugmakers will exit the market in a matter of years, analysts at Nomura reckon.

Hansoh, which has raised $1 billion, looks like a clear beneficiary. The Jiangsu-based company founded by Zhong Huijuan is an established leader in generics; it won two out of 31 contracts in last year’s group tender. Hansoh’s diversified portfolio means it can weather further price cuts. Last year, 13 drugs covering central nervous system diseases, cancer, diabetes and other areas accounted for the bulk of the company’s 7.7 billion yuan ($1.1 billion) in revenue. Hansoh is also developing innovative drugs itself with six products in clinical trial stages, according to its prospectus. 

    Shares of the company are not cheap. It is valued at nearly 28 times forecast 2019 earnings, according to estimates of Refinitiv’s IFR, making it more expensive than Hong-Kong-listed peers like CSPC Pharmaceutical (1093.HK), which trades at 16 times. A roster of high profile cornerstone investors, including private equity firms Boyu Captial and Hillhouse Capital Group, as well as Singapore’s sovereign wealth fund GIC, lend Hansoh considerable weight as China’s drugmakers face a brave new world. 

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