Chinese healthcare stocks hit by stepped up anti-graft crackdown

SHANGHAI (Reuters) – A year-long slump in China’s healthcare stocks has accelerated this week as an anti-corruption campaign gathers pace, threatening the sales of some drug makers and medical equipment producers.

The CSI Medical Services Index has lost more than 2% this month, taking losses for the year to 19% and heavily underperforming the benchmark CSI300 Index, which has risen 2% in 2023. Healthcare comprises 6.5% of the main index.

Selling in healthcare stocks such as Pharma giant Hengrui and medical equipment company Shenzhen Mindray Bio-Medical Electronics Co picked up over the past week, amid signs China is doubling down on efforts to eradicate rampant graft and bribery in sales practices.

Ten government bodies including the National Health Commission and the Ministry of Public Security kicked off a year-long anti-corruption campaign in the medical system in late July.

It represents a sharp escalation of a medical anti-corruption campaign that started years ago, while the sector had already been under pressure from a bulk-buying programme aimed at lowering drug prices.

“Campaigns against medical corruption have been going on for years … but this round of crackdown is more forceful than previously,” said Zhao Heng, founder of consultancy Latitude Health.

“The crackdown on corruption would have an obvious impact on drug sales, at least in the short term,” he said, adding that pharmaceutical firms with unique or highly competitive products were less vulnerable.

Shares of Apichope Pharma , Allist Pharma, and Olymvax Biopharma have slumped between 20% and 30% since July 28, when China’s top graft buster vowed “shock and awe” in the crackdown.

The companies’ sales expenses were more than half of their revenue for the past two years, raising questions about sales practices.

China has cracked down on other sectors in the past, including tutoring, fintech, and property, wiping out trillions of dollars in the companies’ market value.

“The anti-graft campaign is similar to crackdowns in the finance sector and internet platforms,” said Zhang Kexing, fund manager at Beijing Gelei Asset Management.

“It will dent market sentiment, more or less,” he said. “But in the long run, only by deepening reform can we solve the hidden problems.”

At least 168 hospital chiefs have been investigated on suspicion of violating laws and regulations, double the number in 2022, healthcare information provider Saibailan reported.

At least 10 academic conferences were postponed in August.

The health commission said in May it would target sales activities such as using academic events as a channel to bribe doctors.

Pharma giant Hengrui is down 18% since July 28, losing almost 50 billion yuan ($6.94 billion) in market value in less than two weeks.

Anxious investors have been fielding questions to Hengrui over the impact of the anti-corruption campaign, and the company, whose sales expense is as high as a third of revenue, said it has always been compliant with regulations.

($1 = 7.2077 renminbi)