Biopharma, healthcare stocks set for Q3 bounce

Shares in companies in the supply chain of biopharma and healthcare services surged in Shanghai and Shenzhen last week.

The biggest gain was made by Er-Kang Pharmaceutical Ltd, which rose 10 percent. Analysts expect further rises in such stocks in the July-September quarter.

According to Shanghai-based Wind Information Co Ltd, a financial information provider, more than 180 companies listed in Shanghai and Shenzhen, out of the more than 220 that are focused on biopharma and healthcare sectors, gained last week. Their overall performance rose some 2 percent.

In the long run, as supply-side reforms deepen, more profit-making opportunities will arise in stocks of companies engaged in technology innovation, analysts said.

For example, makers of blockbuster drugs will likely increase their market shares as general drug prices fall.

The trend marks a turnaround for the sector that underperformed for most part of the first half of this year. For instance, these shares gained only 0.6 percent in June against A shares' overall gain of more than 2 percent.

A research note from Fuzhou-based Industrial Securities Co Ltd attributed their not-so-robust performance to regulators' adjustment of prices of drugs.

Also, some companies whose valuations were high over the past few months, particularly those whose stocks rose more than their profitability, saw their share prices correcting in June.

Challenges remain as drug prices fall due to regulators' efforts to make them affordable for the masses. Some concept-driven, capital-intensive technologies, which have been valued highly but have not yet produced any proven research results yet, are causing concern to investors, analysts said.

So, firms with blockbuster drugs in their offerings and those with high-caliber research and development teams are more likely to increase their market share in the long run, they said.

A research note from Guangfa Securities said declining drug prices make competition fiercer. If many drugmakers focus on the same category of drugs, or even similar drugs under different brands, the smaller players may risk losing market share to bigger ones when the market consolidates.

The pharmaceutical and healthcare research team of Haitong Securities said they believe as supply-side reforms deepen, more drugs, health check-ups and tests will likely be covered under the public healthcare system and the social security system.

And medical appliance makers, raw material suppliers to drugmakers and healthcare service providers will likely see higher sales as demand from those with diabetes, blood diseases and tumors is expected to rise.

Game-changing drugs and technologies such as those to combat tumors, DNA sequencing for anti-cancer drug development, and providers of exclusive healthcare and examination services, may benefit the most from a fast-changing market, the Haitong research note said.

Data of the first two quarters of 2016 showed sales of prescribed drugs, particularly those for medical treatment, surpassed expectations. Demand for contract research organizations, excipients, and drug import and export trading solutions remains robust, it said.

According to Northeast Securities Co Ltd, retailers that enable online purchases of over-the-counter drugs and online-to-offline purchases of prescribed drugs, will see higher growth than physical drugstores in the long run.