The Straits Times / The Business Times News on AsiaPharm

AsiaPharm attracts the smart money

Strong product line, R&D boost growth prospects, says TEH HOOI LING

By Teh Hooi Ling - Jun 29, 2004
The Business Times

Consider two pharmaceutical/biotech companies: GeneMedix and AsiaPharm. Both were established around the same time, about 10 years ago.

Today, GeneMedix has accumulated losses of some $21 million and no revenue to show for all its research and development. China-based AsiaPharm, on the other hand, chalked up respectable sales of $49 million and a net profit of $8.8 million last year.

For the three months to March 31, 2004, AsiaPharm's net profit surged 171 per cent to $2.1 million on revenue growth of 36 per cent. Meanwhile, its product pipeline looks healthy.

No wonder Singapore investment company Temasek Holdings and some fund managers were eager for a slice of the group.

If you believe in following the smart money, then AsiaPharm has to be worth a look.

Based in Yantai, Shandong province, the group's core activity is the research and development and production and sale of natural and chemical drugs with new formulations.

Currently, its star product is sodium aescinate, an anti-inflammatory and anti-swelling prescription injection used mainly in orthopaedics and neurology. Launched in 1995, the drug - marketed under the trademark Maitongna - has a 77 per cent market share in China and accounted for 42 per cent of AsiaPharm's group sales last year.

At the moment, AsiaPharm appears capable of defending its turf when it comes to Maitongna. It's the only company in China that has obtained Good Manufacturing Practice (GMP) certification for the manufacture of the natural active ingredient, sodium aescinate. Under Chinese law, companies that don't obtain GMP certification by the end of this year will have to stop production.

AsiaPharm also has the patent for the composition of Sodium Aescinate for Injection in China and the US for 20 years from 1999.

Its other drugs, launched later, are also beginning to pull their weight in the market place. Nuosen, a prescription injection drug for the treatment of duodenal and gastric ulcers among other ailments, has grown its China market share - to 18 per cent in 2003 from just 4 per cent in 2001.

Besides Maitongna and Nuosen, other products include Lutingnuo, Olai and Okai.

Among these, Lutingnuo, which is used for liver ailments, recorded the highest sales growth of 35 times in the first quarter of this year, though this was due to a low base a year ago, as it was launched in early 2003. Meanwhile, over-the-counter pain-reliever and anti-inflammation gel Olai chalked 207 per cent sales growth.

Of AsiaPharm's current products, Maitongna and Olai were developed in house, while Nuosen and Lutingnuo were acquired from unrelated third parties.

AsiaPharm's 100-strong R&D team - which collaborates with universities and research centres in China and Singapore - is now working on 28 new drugs, at least five of which are expected to hit the market in the next couple of years. Among these are products aimed at menopausal women and people suffering from Alzheimer's.

At the macro level, China's ageing population and the promotion of health insurance are favouring the continued growth of the industry.

Besides selling its own products, AsiaPharm distributes third-party pharmaceutical products. It also processes and sells active ingredients, mainly chondroitin sulphate. Another revenue stream is the sale of its R&D results and/or patents of new drugs, and the provision of research services on a contract basis.

Currently, 93 per cent of AsiaPharm's sales are in China.

From its accounts, it appears that AsiaPharm is beginning to reap economies of scale from its operations. Operating profit more than doubled to 24.3 per cent in 2003, from just 10.4 per cent in 2001. Cash flow generated by operations is also coming in nicely.

Having built the company up from scratch 10 years ago, AsiaPharm executive chairman Liu Dianbo, 38, isn't about to call it a day.

Ten years ago, he worked hard to pay off the 30 per cent a year two million renminbi (S$413,000) loan raised to fund the start-up. Today, he is striving to build AsiaPharm into a 'drug kingpin' that can take on the Glaxos and Pfizers of the world.

Asked if he would sell AsiaPharm if approached by one of the world's drug giants, Mr Liu - who has an effective 43 per cent stake in the company – said no. 'I don't need the money, nobody needs that much money,' he said. 'Besides, I believe I can still create a lot more value, and this gives more meaning to my life.'

But pharmaceuticals are a risky business. There's no guarantee that new products will be as successful or that the regulatory environment won't change.

And then, there is also a price risk. At 54 cents, AsiaPharm is trading at 17.6 times its forecast 2004 earnings, and 14 times those for 2005. According to a DBS Vickers report on June 14, AsiaPharm's regional peers are trading at an FY05 PE of about 12.4.

But DBS Vickers says that given its growth prospects, AsiaPharm should trade higher than its peers, so it is pegging the stock's fair value at 60 cents or 15 times forecast 2005 earnings.

As for the smart money, investors would do well to note that Temasek got in during the IPO at 28 cents. And by now, it has almost doubled its money.