(Bloomberg) -- A meltdown in Chinese pharmaceutical stocks intensified, erasing $26 billion in market value over two days on concerns the government is driving down generic drug prices through a new procurement program.

The MSCI China Health Care Index headed for its biggest two-day drop since 2005. Sino Biopharmaceutical Ltd. is poised for its largest two-day decline ever, after Citigroup said it would be among the worst hit and cut its target price and earnings forecasts.

The severe price cuts have arisen from a new government procurement program that’s designed to control medical costs by getting 11 major cities, including Beijing and Shanghai, to combine their purchasing from drug companies. The winner of the tender process for each of the 31 drugs will become the sole supplier for hospitals in all of those cities, but at a much reduced price from before.

The plan has been opposed by both domestic and foreign pharmaceuticals from the start because of its impact on prices, but also because reliance on one supplier for each drug could potentially cause quality and supply issues in the future.

Pilot Program

While the government said that this was a pilot program, analysts expect centralized drug procurement to be the new normal for the generics market in China.

“This is just the beginning” said Kay Mai, an analyst at Guotai Junan Securities Co. “We expect the government to expand the catalog of the drug list and include more cities in order to lower the drug costs for citizens. This trend is negative for drugmakers and sales growth of generic drugs in China should slow down in the future.”

Official results from the tender process haven’t been announced yet. Calls to China’s National Health Commission and Shanghai’s drug-procurement website, which had details of the program, went unanswered. Still, estimates that the bidding cut prices by as much as over 90 percent is rattling investors.

Some analysts said the market is over-reacting to the news. Cyrus Ng and Lois Zhou at Jefferies Hong Kong Ltd. said a 90 percent price cut is only for the extreme cases. “As a whole, we expect the overall price cut level to stay in line with previous market expectations of 40 to 50 percent," they wrote in a note.

Successful Tenders

CSPC Pharmaceutical Group Ltd. plummeted as much as 13 percent Friday, on top of a 14 percent drop the previous day. Even companies that said they were among the winners in the tender process fell. Zhejiang Jingxin Pharmaceutical Co., which said its three drugs won bids, dropped as much as 10 percent. The MSCI China Health Care Index dropped as much as 6.8 percent, after falling 8.6 percent on Thursday.

Sino Biopharmaceutical, which successfully bid to provide two drugs to Chinese cities in the program, tumbled as much as 13 percent Friday. Citigroup cut its target price to HK$13.2 from HK$16, and sales and earnings forecasts for the next two years.

Zhejiang Huahai Pharmaceutical Co., which won six of the seven tenders with an average price cut of 45 percent, is the biggest winner for the tender process, according to Jefferies. AstraZeneca Plc and Bristol-Myers Squibb Co. are the only two multi-national companies that won one tender each, slashing prices by 76 percent and 62 percent, respectively, Jefferies said.

AstraZeneca and Bristol-Myers didn’t immediately respond to requests for comment. Zhejiang Huahai said the growth opportunities under the government’s plan will help outweigh the lower prices.

“The company will be able to expand sales of the products and raise market share,” it said in a statement to the Shanghai stock exchange Thursday night. “This will raise the company’s brand profile, and bring about a positive effect for the company’s future earnings."

--With assistance from Jeanny Yu and Ryan Lovdahl.

To contact Bloomberg News staff for this story: Daniela Wei in Hong Kong at jwei74@bloomberg.net;Rachel Chang in Shanghai at wchang98@bloomberg.net

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Jeff Sutherland

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