China Widens Drug Insurance Coverage, Boosting Pharma Stocks

  • Central government adds 339 drugs to list covered by insurance
  • Coverage by the public insurance system can help boost sales

China expanded the list of medicines covered nationwide by government insurance for the first time since 2009, a move that sent the shares of local drugmakers soaring.

The central government decided to add 339 drugs to a list of medicines covered by the country’s basic medical insurance, the Ministry of Human Resources and Social Security said in a statement on Thursday. The updated list represents a 15 percent increase from a previous version released in 2009, the ministry said.

Public insurance schemes cover the vast majority of China’s 1.4 billion people, and gaining coverage can be crucial for drug sales. The nation’s aging population faces rising incidence of chronic diseases such as cancer and diabetes and the country is now the world’s second largest pharmaceutical market.

The list mainly identified chemical molecules rather than specific brands and local governments will be able to remove and add drugs on a small scale and adjust payment limits. Still, there were some notable additions involving multinational pharmaceutical companies. Gilead Sciences Inc.’s Viread, marketed by GlaxoSmithKline Plc in China for HIV and Hepatitis B, and AstraZeneca Plc’s lung cancer drug Iressa, were included along with their respective generic versions, Laura Nelson Carney, an analyst at Sanford C. Bernstein Ltd. wrote in a note.

"It depends on how many provinces the drug is already reimbursed in, but it has the potential to increase sales volumes by a lot," Carney said by phone. "For drugs that are included in no or very few provincial lists, it can be several-fold increase in sales."

The shares of Chinese drugmakers climbed. Hangzhou-based Betta Pharmaceuticals gained as much as 6.2 percent after its main cancer drug was added to the new list. Sunflower Pharmaceutical Group, Teyi Pharmaceutical Group, and Guizhou Yibai Pharmaceutical Co. rose as much as 10 percent, the daily limit, in afternoon trading. Hong Kong-listed 3S Bio Inc. surged as much as 20 percent.

Price Negotiations

While drugs on the list will likely be used more widely, they also face greater pressure on pricing from the government.

Along with the revised list, the ministry announced that 45 drugs considered "relatively expensive" were identified for potential price negotiations with drugmakers, although it didn’t name those drugs.

Such negotiations have had substantial impact on prices for local and foreign drugmakers alike. Last May, prices of several drugs, including Viread and Iressa were driven down in bargaining with the central government.

"We think it would be a trade-off for multinational companies, as well as other innovative local pharmas, a choice between price and volume," Zhang Jialin, an ICBC International Research Hong Kong analyst, said in e-mailed comments.

— With assistance by Hui Li, and Amanda Wang

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