The Straits Times / The Business Times News on AsiaPharm

Will AsiaPharm keep up stellar showing?

It plans to expand in China by extending its reach from 1,500 hospitals to 2,000, and in overseas markets.

By Jean Chua - Nov 16, 2004
The Business Times

After AsiaPharm Group said last Monday that its net profit jumped 226 per cent for the September quarter, its stock fell from 66 cents to 63 cents over two days. Daiwa Institute of Research, DBS Vickers and BNP Paribas Peregrine lifted their price targets to 77 cents, 78 cents and 85 cents respectively and said there is room for the stock to rise even though it trades at close to 19 times this year's earnings.

Mr Liu : Fifty-six new drugs are at various stages of research and trials at the company's research lab in Yantai, China

AsiaPharm is one of those companies that most people seem to like. Temasek Holdings owns 4.9 per cent, IPC recently trimmed its stake to 4.8 per cent from 6.1 per cent when the stock was trading near its peak, and if you had bought into the company's IPO in May, you would have more than doubled your money.

It has been a rosy picture. But now, some observers are starting to wonder whether the Yantai-based drug-maker can keep up its stellar performance.

It's certainly not easy to run a pharmaceutical company. Besides the usual cost issues to worry about, the drug business is fraught with regulatory and, of course, health concerns. For starters, it takes about one to two years to research, produce, test, get official approval, market and sell a new medicine to hospitals and clinics. Then it takes another year before the company knows for sure if the medicine is a success or a dud. It's a long and sometimes painful process.

'Out of 10 products we push out, about five will be successful,' said AsiaPharm chairman, Liu Dianbo. That means it runs up 50 million renminbi (S$10 million) in sales a year.

Maitongna is its best seller. It's essentially sodium aescinate, an anti-inflammatory and anti-swelling prescription injection used mainly in orthopaedics and neurology.

Launched in 1995, the drug has about 77 per cent market share in China and accounted for just over half of AsiaPharm's sales in the most recent quarter. The fastest-growing drug is Lutingnuo, sales of which jumped eight times to 41 million renminbi. It's for liver ailments. Together with Nuosen, for gastroenterological ailments and Olai, for pain relief and anti-inflammatory purposes, the two drugs will continue to drive sales in the near term.

This explains why Mr Liu is putting so much effort into coming up with new drugs. Fifty-six of them are currently at all stages of research and trials at the company's research lab in Yantai, where it also has a pharmaceutical college with Yantai University. Mr Liu said that during the next year AsiaPharm plans to launch Yuantuo, Vinpocetine for injection and Yuanjie, meglumine adenosine cyclophosphate for injection. The first is used for sequela of brain blockage, bleeding and hardening of nerves, and the latter is for the treatment of mainly heart diseases. And at least five more products will be launched over the next three years.

AsiaPharm also intends to extend its reach from 1,500 hospitals to 2,000 - mainly in second-tier Chinese cities - by the end of next year. 'Margins will be pressed in the short term as our distribution costs goes up,' Mr Liu said. 'But in the long run, there is no doubt it will help us sustain sales and growth.'

For now, operating and pre-tax margins stand at 24.39 per cent and 21.46 per cent.

Overseas markets remain an attractive option for AsiaPharm. It is looking at distributing its medicines in Malaysia and Indonesia and will likely have a presence in these countries in a year. The company is also looking to buy other Chinese drug makers that have been forced to close down because of the recent move by the government to make pharmaceutical companies get Good Manufacturing Practices (GMP) certification.

'It's inevitable that many will be forced to shut down or seek to be bought,' Mr Liu said. 'The entire quality control process in the drug business is extremely rigorous. Every step has to be certified by some regulatory body, either domestic or international.'

Every six months to a year, provincial officials also make their rounds of AsiaPharm's labs and factories to ensure that standards are maintained.

Mr Liu said he is generally not afraid of falling drug prices. Last month, British drugmakers agreed to cut prices 7 per cent under a government push to shave 500 million (S$1.5 billion) off the state-run National Health Service budget.

'Prices of generic drugs will definitely come down because the government will make sure people get access to necessary medicines,' Mr Liu said of the situation in China. 'However, prices of patented drugs, such as ours, will likely be more stable.'