HYDERABAD: The USD $160 billion Chinese pharmaceutical market, which is on a significant reforms overhaul, is expected to benefit Indian and global generics players, according to Jefferies India.
Over last three years, China has been undertaking structural reforms across areas including approval process, quality standards, genericisation, pricing and distribution, and central procurement, besides initiating programmes like Made-in-China.
“We believe China will implement national tenders for procurement much more aggressively than investor expectations, with the second round in 2019. We expect stringent price pressure in the second round. The other reforms are streamlining approvals (pace below expectation with local trials still required) and focus on Made-in-China,” noted Piyush Nahar, Equity Analyst, Jefferies India.
He added that China was moving towards a EU model - floating tenders, taking high volumes and low margin — vs industry/investor expectations of a US model involving free pricing and high margin. Indian companies are playing catch-up due to local manufacturing preferences and R&D, while benefits will accrue only after FY22, with scale, integration and partnership being key. “We expect returns to be below expectations for most,” he said.
While Aurobindo Pharma appears to be a key beneficiary, for Dr Reddy’s, which is the first mover, success will require significant restructuring in business model, which will take time. Natco too is better place in mid-caps, though Cipla’s respiratory drugs will face hurdles of R&D and distribution, according to Jefferies.
Historically, the Chinese market resembled India’s, with high branded generics share, and low regulatory requirements. But following reforms, China could resemble EU. “We believe the opportunity and market is similar to EU with public insurance, national and regional tenders with winner assured 50-60 per cent volumes, pricing regulated and lower than EU, and low margins,” he noted.
Meanwhile, though several Indian firms have been investing in China in last one year, returns could be below expectations and take more than two years to materialise. Tenders imply cost focus and integration, which is a challenge companies are facing in the US. Also, Made-in-China implies companies are replicating the manufacturing in China, which limits utilisation gains and local trial requirements are delaying approvals, it observed.