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Nikkei Markets

Pharma Shares Drop After Beijing Says It Will Audit 77 Drugmakers 

Selection procedure was supervised by the Ministry of Finance

HONG KONG (Nikkei Markets) -- Chinese pharmaceutical shares fell on Tuesday after the Chinese government said it will audit 77 pharmaceutical companies to improve the nation’s “medical security” systems.

The Ministry of Finance said on Tuesday that 77 pharmaceutical companies were selected randomly on May 14 to be audited in June and July.

The selection procedure was supervised by the Ministry of Finance, the Ministry of Commerce’s Department of Treaty and Law, and several departments in the National Healthcare Security Administration, including its general office, medicine management, procurement, regulation and personnel departments.

The list includes both domestic drug companies and the local arms of international drugmakers. Subsidiaries of Hong Kong-listed CSPC Pharmaceutical Group, Sino Biopharmaceutical, China Resources Pharmaceutical Group and Shanghai Fosun Pharmaceutical Group were on the list, together with the local arms of multinational drugmakers such as Eli Lilly, Bristol-Myers Squibb and Sanofi.

Shares of CSPC Pharma were down 4.3%, while those of CR Pharma, Fosun Pharma and Sino Biopharm were off 2.1%, 4.1% and 2.8%, respectively, as of 3:05 p.m. in Hong Kong. The city’s benchmark Hang Seng Index declined 0.7%.

“The market is afraid that the gross profit margin of these drug companies will be squeezed further,” said Frankie Chan, an analyst at Emperor Securities in Hong Kong.

The government is likely checking on prices throughout the supply chain to understand companies’ sales costs, and to evaluate if there is room for further price cuts, Chan said. He added that the audit may also be a result of Shanghai-listed Kangmei Pharmaceutical’s admission recently that the company had overstated cash position in its financial reports by 29.9 billion yuan ($4.3 billion).

The government’s guidance suggests “they won’t allow sectors such as healthcare and education to be industries with huge profits,” Chan said.

Li Zhao, director of healthcare research at Bocom International, said the policy has added more pressure on already-volatile shares in the sector, but in the long run, the performance will depend on individual companies’ audited results. 

-- Carrie Chen

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