Starbucks might not be in the lofty position it is today were it not for the return of Howard Schultz as CEO in 2008 after an eight-year hiatus. “By 2007 Starbucks had begun to fail itself. Obsessed with growth, we took our eye off operations and became distracted from the core of our business,” he wrote in his memoir Onward. During Schultz’s second stint, he reined in costs and invested in rebuilding the Starbucks brand and its digital strategy. Its Nasdaq-listed shares have multiplied nearly 24 times since 2009.
Founders sometimes come back to their creations when their firms have underperformed under new managements and investors need reassurance (think, most famously, of Steve Jobs). The same could be said of pharmaceutical major Jiangsu Hengrui Medicine, which reinstated its founder Sun Piaoyang as chairman of the board in July (see WiC299). Sun’s return was not widely anticipated as it was only a year and a half ago that he handed over the company to Zhou Yunshu, a long-time general manager at Hengrui. Zhou was supposed to stay in the top job for a minimum of three years, although health issues were cited for his premature resignation.
The 63 year-old Sun takes the helm with Hengrui undergoing a transition from making generic drugs to coming up with innovative blockbusters of its own. Since the beginning of the year, Hengrui’s Shanghai-listed shares have tumbled 60% amid speculation over staff layoffs. Profit growth almost stalled during the first half too: net profit ticked up just 0.2% to Rmb2.7 billion ($420 million), the slowest rate of increase in 18 years.
The biggest headwinds stem from China’s centralised drug procurement programme, which sees pharmaceutical companies compete – chiefly through price – for vast contracts to supply generic drugs to public hospitals. The bidding system, designed to make drugs more affordable (see WiC418), has clear benefits for patients. But it presents a dilemma for drugmakers. Conducted on ‘winner-takes-all’ rules, it forces drugs firms to cut their pricing in pursuit of a sizable chunk of the market. The programme, which has been broadening in scope since 2018, has admitted 218 drugs into its nationwide catalogue. That has helped the government achieve Rmb150 billion in savings on the prices of the selected drugs, which have been shaved by 50% on average, according to the People’s Daily.
“Since 2018, 18 of our 28 candidates for the country’s centralised generic drugs procurement programme have been selected. Their average price cuts were 72.6%, putting much pressure on our performance,” Hengrui acknowledged in its half-year report. In spite of 44% growth in first-half sales of its ‘innovative’ drugs to Rmb5.2 billion, Hengrui still derives 60% of its income from its generics business.
Founded in 1970, Hengrui was originally a manufacturer of topical antiseptics for minor cuts and scrapes. It was Sun, who joined in 1990, that advanced its ambitions into a host of generic drugs. Anticipating margin pressure from the centralised drug procurement programme, Hengrui then shifted more of its focus to developing proprietary, next-generation therapies. Despite some early successes (eight products approved in China so far), there are challenges to overcome. First, intense competition has already driven up costs. Secondly, more of the so-called innovative products are going to be covered by the country’s basic medical insurance scheme too – driving down profits. A Hengrui immunotherapy treatment for cancer that targets the PD-1 protein has already seen price cuts of as much as 85% due to the programme, for instance.
The firm’s strategy had been to grow its profitability by expanding in international markets. However, with its profits crimped at home, Hengrui has lacked the resources to execute this overseas push. Now that its founder Sun has returned – his personal net worth is $11.4 billion, according to Bloomberg – this will be one of the many challenges he will need to address.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.