Simcere Suffers Side Effects of Health Care Reform
I’ve generally been quite bullish on China’s ongoing overhaul of its healthcare system and the huge potential it offers drug makers, but Simcere Pharmaceutical’s (NYSE: SCR) latest results show that like everything else, health care reform also has its downside. Simcere reported its revenue was nearly flat in the second quarter this year versus a year earlier, even as profit from operations grew a more respectable 27 percent. (company announcement) It attributed the anemic top line growth to changes in government pricing policies, a not-so-subtle reference to the fact that Beijing is asking for big price concessions from drug suppliers in exchange for including their products in its new system to provide affordable basic health care throughout the country. Such price squeezing will affect everyone, from Simcere to larger firms like Hisun Pharmaceutical (Shanghai: 600267) and Sinopharm (HKEx:1099), which shouldn’t come as a surprise to anyone but could cool revenue growth for many of these firms over the next 1-2 years as reform is implemented. Once that pricing pressure is factored in, I would expect to see top line growth for Simcere and its peers return to healthier levels. To combat low margins from drugs sold in the reform program, I also like Simcere’s initiative to focus on developing its own new drugs, which typically command a much better profit margin than the generic drugs that use formulas whose patents have expired and therefore are available for anyone to manufacture. Simcere’s new joint venture with Merck (NYSE: MRK) (previous post) should help in its new drug development efforts, though again, don’t look for any major contributions on that front for at least the next 2-3 years, which is typically the shortest possible period for new drug development.
Bottom line: Simcere and other Chinese drugmakers will see slow top-line growth in the next 1-2 years, as China squeezes them for price concessions.
Related postings 相关文章:
◙ Merck Finds Potent China Partner in Simcere 默克牵手先声药业
◙ Pfizer Pairs With China Partner to Tap Health Care Reform 辉瑞与海正合作开拓中国医药市场
◙ Shanghai Pharma IPO Looks Like Good Medicine 上海医药IPO似为一剂良药
