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

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.

Chinese consumers are increasingly able to bear market prices for drugs and let private insurance cover surgical costs, analysts say. The country's growing ranks of retirees can also afford higher costs since their adult children, who in China traditionally care for aging parents, are richer than ever.

The Bank of China report entitled China Healthcare Sector: Time To Buy In predicted "rapid and sustained growth" for China's medical industry "driven by the aging population and urbanization, rising incomes and broader insurance coverage" as well as "changing lifestyles due to rapid economic development and a rising health consciousness" among consumers.

As China's living standards have risen, so have health challenges tied to cigarette smoking, air pollution, car driving and sexually active teenagers. Health care companies stand to benefit from these changes as well as the government's recent loosening of the one-child policy.

Stocks on Guangzheng's buy list include drug makers Tasly Group and Heng Rui Medicine, which trade on the Shanghai exchange, and Shenzhen-listed Yunnan Baiyao, which sells products domestically as well as via exports to the United States and Canada. The securities firm is also recommending Aier Ophthalmology, a Shenzhen-listed chain of eye hospitals that works with big international suppliers including the Valeant Pharmaceuticals (VRX) division Bausch & Lomb.

Goldman Sachs is recommending stock in two Hong Kong-listed companies: ShangPharma, a drug research and testing contractor for global pharmaceutical companies, and China Medical System, a holding company for drug makers.

Bank of China said it's bullish on pharmaceutical companies with products for treating chronic diseases, and health care groups that focus on medical devices and services.

"We are optimistic about investment opportunities in medical services over the long term due to the under-supply of medical services and mounting policy support," the bank's report said.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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