Chinese drug manufacturer Sino Biopharmaceutical Ltd. Hong Kong fell 14 percent after its third-quarter earnings fell short of expectations, partly due to the impact of a centralized drug purchase program on prices.
According to Bloomberg, this will be the worst reaction to quarterly earnings reports since March 2010. The stock halted its decline to 11.5% as of 11:26 a.m. local time, its biggest decline since December 2018 on an intraday basis.
"The drop in results was caused by the double whammy of centralized procurement, which lowered drug prices, and the pandemic, which led to weak hospital traffic and hurt drug sales”" says Carol Dow, analyst at UOB Kay Hian Investment Co. " I expect that headwinds will continue in the first quarter of next year.”
Since the end of 2018, China has been driving down generic drug prices through a fierce bidding process for public hospital supply contracts. This exercise, which covers everything from chemotherapy drugs to medications for hypertension and erectile dysfunction , has in some cases led to price drops of more than 90%.
Beijing wants to cut spending on generic drugs by tens of billions of dollars to refocus funds on new, high-tech treatments for life-threatening diseases such as cancer. This process has reduced the profits of global companies in China for their traditional medicines, which are no longer under patent protection, resulting in a significant reduction in revenue.
Sino Biopharm said in its earnings report that it expected the effects of China's latest round of centralized drug purchases, which cut prices by an average of 53%, to materialize in the latest quarter.
In a research note, Daiwa analysts led by Dennis Yip noted that the company's revenue for the first nine months fell by 6% year-on-year. Without taking into account the impact of the procurement program, the company would have recorded a 13% increase in revenue, the note says.
Sino Biopharm was among the top performers on the Hang Seng index in the first half of the year, rising 34%. The stock has lost more than a third of its value since its all-time high in late July.