The Straits Times / The Business Times News on AsiaPharm

Chinese pharmas ride rising tide

China's demand for pharmaceuticals is driven by an ageing population, writes MATTHEW PHAN

CHINA'S growing appetite for drugs is boosting the earnings and stock prices of most Chinese pharmaceutical companies listed here.

Of the five listed in Singapore - Asiapharm Group, Star Pharmaceutical, Reyoung Pharmaceutical, C&O Pharmaceutical Technology and Pharmesis International - only one, Pharmesis, has underperformed against its initial public offering (IPO) price. The others are trading at prices substantially higher.

Since its listing in May 2004, Asiapharm has seen its stock price more than doubled to 77.5 cents from the issue price of 28 cents a share to 77.5 cents. And analysts see it as having further upside potential.

'We continue to like Asiapharm for its strong margins and earnings growth, consistent ROE (return on earnings) and dependable track record of successful new products,' wrote OCBC analyst Suan Teck Kin on Feb 28. Mr Suan, who has a 'buy' call on the stock, believes it is worth 85 cents a share.

Since Asiapharm's listing here, four other drug companies have followed suit. Judging by the share performance of three of them so far, its looks like investors could look forward to another Asiapharm.

Star, which went public at 35 cents apiece on Feb 15, is trading around 56.5 cents these days. That's up 61 per cent in slightly over a month since its IPO. The stock, too, appears to be well-liked by analysts. Its 'strategy of moving into proprietary specialised drugs' means it will see 'continued strong growth in the medium to long term', wrote BNP analyst Vincent Yek, who has a target price of 76 cents for Star, on Feb 24.

Reyoung, which was listed in September 2005, is trading around 48.5 cents, compared to its IPO price of 31 cents. C&O, which was listed in October 2005, is trading around 47 cents compared to its IPO price of 25 cents.

However, in contrast, Pharmesis, which was listed in September 2004, has underperformed against its IPO price. The stock is trading at 14 cents, compared to its IPO price of 25 cents. Last year, while its rivals enjoyed both top and bottom-line growth, Pharmesis saw revenues fall by 14.3 per cent to about $20.5 million, and net profit plunge 87.6 per cent to about $750,000.

Sales decline due to wholesalers

Pharmesis attributed the decline in sales in 2005 to falling volume of wholesalers who 'were affected by the macro policies imposed by the central government' and thus 'experienced tighter credit'. The company said the Chinese government had introduced a system under which sellers must bid for the rights to sell pharmaceutical products to hospitals, leading to downward pressure on prices.

On the whole, driven by an ageing population and the expanding availability of health insurance, China's demand for pharmaceuticals is projected to grow at a compound annual rate of between 13 and 16 per cent, compared to 6 to 9 per cent for global demand, according to IMS Health.

In terms of numbers alone, China's population above 60 years of age has increased from about 42 million in 1950 to 129 million in 2000 and the numbers are rapidly rising.

A BNP report also says the number with national healthcare insurance had risen from 17.9 million in 1997 to 133 million in 2000, and may have reached some 200 million at the end of 2005.

It seems Pharmesis is the only one of the five that has failed to ride the rising tide. On closer look, while the companies may have similar business models, they target different segments.

Asiapharm makes a mix of Western pharmaceutical and traditional Chinese drugs. Star makes and sells antibiotics. C&O's products are either antibiotics or those catering to ageing patients, while Reyoung sells antibiotics and personal hygiene products. Pharmesis' products cater to liver or gall bladder-related diseases.