Healthy Skepticism Library item: 5463

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

Coster H.
A Billion Pill Poppers
Forbes.com 2006 Jul 24
http://www.forbes.com/forbes/2006/0724/170.html

Full text:

The Chinese pharmaceutical industry is fragmented and low on
innovation. For
a bottom-fisher there is no better time to invest.
Only one in ten chinese citizens has health insurance. Latest figures
show
annual spending on drugs in China comes to only $10 per capita versus
$623
in the U.S. Yet analysts from Boston Consulting Group expect China to
have
the world’s fifth-largest pharmaceutical market, at $24 billion, by
2010 and
the largest by 2050. Combine a population of 1.3 billion with a 9.9%
economic growth rate and you have the potential for a robust medical
market.

Multinational and Chinese drugmakers stand to profit. Foreign companies
such
as Johnson & Johnson, Pfizer and GlaxoSmithkline have brought their
strong
marketing skills and large sales budgets to more than 600 joint
ventures in
China as that country’s 2001 entry into the World Trade Organization
has
opened domestic markets.

These companies still face obstacles. Weak patent protection means that
Chinese companies are reluctant to invest in research and development.
Most
locally produced drugs are generics, and new patented drugs are mainly
imported and thus more expensive.

And yet Chinese pharmaceutical companies still offer the prospect of
fast
growth. Today 6,000 such companies compete in a fragmented market in
which
the top ten firms hold a 15% share. Among the biggest outfits: Shanghai
Pharmaceutical and Harbin Pharmaceutical. The Chinese government has
stakes
in these companies, and many have publicly traded shares.

Most drugs in China are sold through hospitals, which favor locally
produced
generics. These drugs are often up to four times cheaper than
foreign-made
alternatives, notes Benjamin Ye, a partner at PricewaterhouseCoopers,
who
works on M&A deals in China.

One such beneficiary is China Shineway Pharmaceutical, which makes
traditional Chinese medicines. China Shineway’s chairman, Li Zhenjiang,
ranks 80th on the FORBES CHINA rich list. The company went public in
Hong
Kong in 2004 and counts Dreyfus, Merrill Lynch, Fidelity and Wells
Fargo
among its investors. Among the reasons that Adrian Au, manager of
Dreyfus’
Greater China Fund, likes China Shineway is its prospects for long-term
growth. It also has a debt-free balance sheet. China Shineway is still
a
pip-squeak, with revenue of $102 million last year versus $22 billion
for
Merck in the U.S. Its shares sell for 14 times their 2006 consensus
earnings
forecast.

Hua Han Bio-Pharmaceutical is another of Au’s picks. Headquartered in
Hong
Kong, Hua Han specializes in traditional antiaging and antitumor
Chinese
drugs for women, which it sells under the Yeosure brand. Hong
Kong-listed
Hua Han shares sell for ten times their consensus 2006 earnings
forecast and
have an estimated multiple of just eight for 2007.

None of these small Chinese drug companies is currently available in
the
form of an American Depositary Receipt. If you aren’t equipped for the
hassle of buying locally traded shares (this can be done at a big
brokerage
firm), consider the Dreyfus Premier Greater China Fund or the Fidelity
China
Focus Fund, which have stakes in many of these companies.