The Straits Times / The Business Times News on AsiaPharm

AsiaPharm's growing fan base

Its strong first quarter results has analysts raving about the drug firm's growth prospects

For a relatively small company, mainboard-listed pharmaceutical group AsiaPharm enjoys a following among analysts that many bigger companies would be envious of.

With a market capitalisation of around $240 million, China-based AsiaPharm just about makes the cut as a mid-cap. The share price has not been performing well of late; so far this year the stock is down 3.2 per cent, closing yesterday at 59.5 cents. But over a 12-month period, AsiaPharm shares are up some 29 per cent.

Earlier this month, AsiaPharm reported that net profit in the first quarter increased by 54.8 per cent to 15.56 million renminbi ($3.09 million) from the previous period. Group revenue grew by 20.4 per cent from 58.8 million renminbi in the first quarter of last year to 70.8 million in the first three months of this year, which it attributed to higher sales of pharmaceutical drugs and R&D results.

Drug boom

Sales of key products - Lutingnuo, Maitongna, Nuosen and Elcatonin - increased by 116 per cent, 31.1 per cent, 76.2 per cent and 21.2 per cent, respectively. Income for the group's R&D division was up 25 per cent. AsiaPharm said its gross profit margin improved by 15.3 percentage points to 75.2 per cent. 'We will continue to modify our sales mix to yield better margins,' executive chairman Liu Dianbo said.

The group said it was committed to introducing at least two new pharmaceutical drugs per year and to further expand its distribution network and usage of the drugs in hospitals.

'Besides looking at organic growth, we will also continue to explore opportunities for possible acquisition of products and/or merger and acquisition of companies for our long-term growth,' Mr Liu said.

The first quarter results have reinforced the positive view analysts have of the group. AsiaPharm is engaged primarily in the research, development, production and sale of natural and chemical drugs for use in the orthopaedics, neurology, gastroenterology and hepatology fields. The group makes prescription drugs for treating ailments affecting the skeletal system,the nervous system, the digestive system and the liver. It also processes and sells active ingredients (mainly chondroitin sulphate) for use in the drug manufacture, and distributes other companies' drugs, sells R&D results and patents to third parties, and provides research services on a contract basis. Its key market is China. Reuters data showed four 'buy' or 'outperform' calls on AsiaPharm, while Bloomberg's showed five.

'We reiterate our 'one' (buy) rating on AsiaPharm in anticipation of continual strong earnings growth,' said Daiwa. 'The solid 1Q05 result reinforces our belief that AsiaPharm is capable of generating strong earnings growth over the medium term, and that the continual strong growth will drive share-price outperformance over the longer term.'

Daiwa nevertheless lowered its six-month target price for AsiaPharm to 78 cents from 83 cents in view of the current weak sentiment toward smaller companies. It added that it expected fundamentally sound, well-managed small companies to be re-rated eventually by the market.

Said DBS Vickers Securities: 'We continue to like AsiaPharm for its strong fundamentals and dynamic management team. Maintain 'buy'.

'What is noteworthy is the healthy 52 per cent growth in own drug sales, masked by lower active ingredients sales as AsiaPharm reduced sales effort on this low margin business. Besides a steady rollout of new drugs, strategic alliances and expanding distribution, we believe AsiaPharm could also surprise on the acquisition front this year.' Analysts also highlighted AsiaPharm's well thought-out growth strategy. 'Since its listing, and in less than one year, Asiapharm has not only delivered on generating growth for the group but has also laid the foundation for medium-term growth,' said GK Goh in a report.

The research house said this included having its key drugs Nuosen and Elcatonin entering the national health insurance list, which will spur sales growth from next year, widening its hospital distribution network from 1,500 to 2,000 hospitals by the end of the year, lining up new products to drive future growth, strategic tie-ups with leading overseas pharmaceutical firms, as well as mergers and acquisitions.

GK Goh is maintaining its 'buy' call on AsiaPharm with a target price of 86 cents, saying: 'The stock trades at 12.3 times FY05 P/E, declining to 9.5 times in FY06 against a three-year CAGR (compounded annualised growth rate) of 33 per cent. We like it for its exposure to the fast-growing pharmaceutical industry in China, enviable operating margins of 24 per cent, strong R&D, and interesting pipeline of new products led by a group of young and dynamic entrepreneurs.'