Shanghai, October 15, 2008 - Xinhua Finance Limited (“XFL”, TSE Mothers: 9399 and OTC: XHFNY), China’s premier financial information provider, releases today its report on “Future Credit Trends in China’s Pharmaceutical Industry”. The report notes that domestic market factors are the primary drivers of rapid growth in China’s pharmaceutical industry. The government’s considerable efforts over the last several years to strengthen investment in healthcare and improve the healthcare insurance system have helped speed the unleashing of domestic demand for the pharmaceutical industry. This trend will be further solidified by measures such as the new healthcare system reform plan announced yesterday. At the same time, implementation of reforms and multi-faceted incremental system evolution will bring greater uncertainty and complexity to the domestic pharmaceutical market and competitive landscape. Although the pharmaceutical industry is seeing a gradual increase in profitability, preservation of the industry’s creditworthiness will continue to depend primarily on an ability to effectively avoid competition between homogeneous products and to maintain relatively stable competitive advantages.
Xinhua Finance notes that China’s pharmaceutical industry profitability cycles have been governed by competition between homogeneous products and resultant cyclical changes in supply and demand. In recent years, intense price competition and restructuring of the regulatory environment has led to industry adjustment and stabilization. This has strengthened the pharmaceutical industry’s bargaining power with medical institutions, gradually reversing a deteriorating trend in trade conditions and leading to a progressive improvement in industry profitability beginning in 2007. That said, a tightening of the regulatory environment and higher regulatory standards will over the short term reduce the pharmaceutical industry’s flexibility in controlling costs and expenses and stimulate an increase in capital outlays, speeding expansion of production capacity and leading to overcapacity. This will constrain the ongoing return to higher profitability, perhaps even serving in the end as a catalyst for disruptions in the return to higher profitability. However, strengthened government oversight and control will over the medium to long term contribute to ensuring drug quality and safety, eliminating market distortions, and increasing industry access to other markets. This will have a strong positive influence on the industry’s creditworthiness.
With regards to the recently released “Proposal for Deepening Health Care System Reform (Draft for Comment)”, Xinhua Finance feels that it lays out the intended direction and overall structure of health care system reform, and at the same time further confirms and clarifies the series of policy measures put in place over the last several years. The consequence will be a more rapid unleashing of domestic demand for drugs, and a continuation of the process of transformation of drug markets and competition. However, the dispersed pilot programs and distributed implementation which are characteristic of deepening healthcare reform will result in a buildup of additional factors of uncertainty in the creditworthiness of the pharmaceutical industry. Among them, the incremental and experimental nature of the evolution of the healthcare insurance program, the stratification and differentiation of medical services as a part of reform, and government control of drug supply security through both direct intervention and widespread encroachment, will be long-term factors of uncertainty for the industry’s creditworthiness. Industry leaders with relatively stable competitive advantages and relatively strong finances will have greater flexibility in meeting these challenges and can be expected to be the primary beneficiaries.
Concerning the new medical system reform plan announced yesterday, Dr. Chung-Hsing Chen, vice president and head of ratings and research for Xinhua Finance, commented that “this is not simply a case of perfecting social insurance and solving a people’s livelihood need, it is also the foundation for promoting the unleashing of citizens’ defensive savings. It is of major significance in the current boosting of internal demand to counter the effects of the worldwide financial crisis. While meeting the reform’s goals depends on effective implementation of concrete policy measures, the positive effect of deepening healthcare system reform on the pharmaceutical industry’s creditworthiness merits affirmation and anticipation. We have complete confidence that China’s pharmaceutical industry will in the future maintain rapid growth. However, realizing the goals of good healthcare insurance, good medical treatment, and guaranteed drug quality will be a long-term process. Recent drug quality issues are in particular yet another reflection of the serious widespread challenges facing China’s pharmaceutical industry and regulators. The issues also clearly demonstrate that drug quality regulation should garner even greater attention in healthcare system reform.”
This report is one of a series of reports on the healthcare industry from Xinhua Finance. In the future Xinhua Finance will periodically issue related credit risk reports. Xinhua Finance will monitor closely major policy changes, market developments, etc., assess associated industry credit risk implications, and release our findings to investors in a timely fashion.
To read the full report, please contact us at: xfe@xinhuafinance.com.
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Xinhua Finance Limited (“XFL”) is China’s premier financial information provider and is listed on the Mothers Board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China’s financial markets and the world, Xinhua Finance’s proprietary content platform, comprising Indices, Ratings, Financial News, and Investor Relations, serves financial institutions, corporations and re-distributors worldwide. Through its subsidiary Xinhua Finance Media Limited (NASDAQ: XFML), XFL leverages its content across multiple distribution channels in China including television, radio, newspaper, magazine and outdoor media. Founded in November 1999, XFL is headquartered in Shanghai, with offices and news bureaus spanning 11 countries worldwide.
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