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Chinese Pharma Looks Healthy as Price Controls Ease, Consumers Spend More

Stocks in this article: NVS GSK VRX

BEIJING (TheStreet) -- Long lines of patients snaking through China's overcrowded hospitals offer living proof of the huge potential for health care companies on the mainland.

Much of that potential could be realized over the next few years as consumers grow wealthier and the government eases market controls, according to analysts who follow China's pharmaceutical and medical supply sectors.

A milestone for the nation's health care market will be reached in June if government regulators introduce what market watchers expect will be a new, looser price control regime for drugs, according to separate reports released this week by Bank of China International, Essence Securities and Guangzheng Hang Seng Securities.

Moreover, observers say the government is wrapping up a year-long anti-corruption sweep of the pharmaceutical sector. The crackdown led to bribery charges last year against Chinese subsidiaries of multinational drug makers Novartis (NVS) and GlaxoSmithKline (GSK).

Health care companies are seeing their businesses improve as government watchdogs back off, analysts say. A report by the China division of Goldman Sachs described the changing environment this way: "Most companies expect sequential recovery from the anti-corruption campaign, with accelerated top-line growth in 1H 2014."

Companies are also adjusting as the government encourages market forces to play a larger role in setting prices.

Regulators have apparently decided to give pharmaceutical companies more room to raise prices after "recognizing deficiencies in the existing mechanisms for drug pricing," the Essence report said. The firm based its conclusions on recent "actions and statements" by the government's economic planner, the National Development and Reform Commission.

The commission's "drug price management policy ideas have significantly changed," the report said, adding that "benchmark pricing" for drugs could be introduced by the government.

Bank of China analysts agreed that "a softer policy stance is expected in 2014 on the back of the government's thorough reviews of (its) previous, stringent policies."

A wide range of medical services, drugs and supplies have been tightly controlled for decades under China's partially socialized health care system. Price caps, however, have been blamed for all kinds of off-the-books activity, such as cash "gifts" handed to surgeons by patients who want to butt in line and bribes paid to hospital staffers by pharmaceutical salesmen.

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