Chinese health-care stocks took another battering last week in the worst start to the year since 2016, as selling resumed amid worries over Beijing’s plans to cut medical costs and set out stricter drug development rules.
The CSI 300 Health Care Index plunged 5.5% in the first week of trading, more than double the broader mainland benchmark, driven by biotech and pharmaceutical names. Losses were led by Asymchem Laboratories Co. Ltd., which fell 19% last week, its biggest decline on record.
A year-long sweeping regulatory crackdown on private enterprise ranging from technology giants to property developers has also hit health-care firms. They are contending with unexpected shifts in research and development policies as well as drags on profit from drug price cuts. The sector now trades at 33 times 12-month forward price-to-earnings ratio, from nearly 55 times in February last year.
The decline also tracks the S&P 500 Health Care Index, which tumbled 4.7% last week as rising bond yields weighed on demand for companies yet to make a profit.
“Beijing’s policy uncertainty remains an overhang for the sector,” said Mia He, an analyst at Bloomberg Intelligence. New regulatory measures including oncology drug development guidances have put some pressure on biotech companies and firms providing contract services to drug makers since the second half of 2021. That’s made investors “sensitive to unexpected policy updates,” she added.
Those draft guidelines released last year have worried investors because of the potential to slow down drug approvals and set a higher bar on innovative drugs.
The sector was also caught in the crossfire of an escalation in Sino-US tensions last month. Shares tanked as investors speculated that the firms may be added to the US’s list of sanctioned entities, and they haven’t fully recovered even though they weren’t included in the list in the end.
Investors should expect continued short-term volatility from potential major policies in the first quarter shaping clinical trial practices, Citigroup Inc. analysts including John Yung wrote in a January 5 note. However, pharmaceutical names may have “bottomed out” and could see a recovery in their valuations on the back of new product launches, clinical developments and potential mergers and acquisitions, they said.
A rare bright spot is the traditional Chinese medicine sector led by Beijing Tongrentang Co., after those firms’ drugs were included in the nation’s medical insurance. That’s a reflection of the industry being a source of national pride that counts Xi among its supporters.
But whether the rally can be sustained remains questionable, says Citigroup, as the sector may see a growth slowdown in the future due to the lack of new products.