Why Investors Can Feel Good About China’s Generic Drugs

Demand for generic drugs is expected to grow in coming years as Chinese patents expire for global brands

Investors recently joined Chinese men with special needs in cheering the introduction of the country’s first, generic version of Pfizer’s (PFE) erectile dysfunction drug Viagra.

Why Investors Can Feel Good about China’s Generic DrugsNot only is the new generic product made by the domestic drugmaker Guangzhou Baiyunshan Pharmaceutical Holdings Co (GZPHY) easier on a man’s wallet than the famous blue pill, which has been sold in China since 2007, but its successful rollout this month raised investor confidence in the future of Chinese pharmaceutical companies with generics on the market or in the pipeline.

Baiyunshan is in a club of Chinese pharmaceutical companies with shares trading in China, Hong Kong and over the counter that’s poised to profit from growth in what’s already a $45 billion market for generics in China. Demand is expected to grow in coming years as Chinese patents expire for global brands of drugs such as Viagra.

Western retail stock investors can access only a limited number of China’s estimated 6,000 pharmaceutical companies. Non-Chinese investors are barred from trading on the Shenzhen Stock Exchange, for example, and some of these companies are unlisted or fully state-controlled.

But some Shanghai-listed drugmaker stocks are available through the recently launched Shanghai-Hong Kong Stock Connect program. And a handful of listed multinationals have joint ventures with Chinese companies that make generics.

Cancer generics is one of the growth areas. A report in the official Securities Times newspaper said that, as of June, several Chinese drug companies were seeking regulatory approval for at least 12 cancer-treatment generics. Some could be on the market by 2016 to compete with branded drugs made by foreign companies whose exclusive rights to key ingredients will expire over the next few years.

The number of people diagnosed with cancer in China every year is about 3 million and growing.

For example, Securities Times said, China’s biggest drug company Sinopharm Group Co L (SHTDF), has developed a generic for treating prostrate cancer based on the ingredient abiraterone acetate. The privately held U.S. company Janssen Pharmaceuticals, Inc. controls the soon-to-expire China patent on the drug, which it sells under the brand name Zytiga.

Hong Kong-listed Shandong Luoxin Pharmaceutical (SLUXF) and CSPC Pharmaceutical Group Ltd (CHPTY) are also preparing new cancer treatment generics to the Chinese market.

The market for erectile dysfunction generics has attracted several companies, with Baiyunshan the first to win regulatory approval for a drug based on Viagra’s active ingredient sildenafil. Pfizer’s China patent expired in July. Other companies with generics in the pipeline include Shanghai-listed Lianhua Pharmaceutical , Shenzhen-listed Hebei Changshan Biochemical Pharmaceutical, and the unlisted drugmaker Shandong Luxi Pharmaceutical Co.

China’s Generic Drugs: Export Plans

Some of these companies are setting sights on foreign markets, too, notably the United States.

Chinese generic drug makers are unlikely to catch up anytime soon, if ever, with the Canadian and Indian companies that now dominate the U.S. market. There’s also a cloud of distrust hanging over Chinese pharmaceuticals: Officials at the U.S. Food and Drug Administration are still talking about the tainted supplies of Chinese-made heparin — a blood-clot treatment — that reached the U.S. market in 2007.

But inspecting generic drug manufacturing is now a key task for an FDA team working in China, the agency’s China office director Christopher Hickey told the U.S.-China Economic and Security Review Commission at an April hearing in Washington. At the same hearing, he asked for more money to beef up China inspections.

“The majority of the drug inspections FDA conducts in China focus on manufacturers of active pharmaceutical ingredients intended for use in generic drugs and on sites that produce over-the-counter drugs.”

Companies that make generic drugs also enjoy support from the Chinese government, which for the past decade has been dishing out tax breaks and subsidizing new research parks. Moreover, the government has helped domestic companies by basically closing China’s borders to generic drugs made in India, despite pleas from the Indian government for a more open pharmaceuticals market.

China’s expanding market for generic drugs is also giving investors good reason to back multinational drugmakers in the game. Since cutting a deal for an undisclosed amount in 2011, for example, AstraZeneca plc (AZN) has partnered with a Chinese maker of generic anti-infection drugs, Guangdong BeiKang Pharmaceutical Company.

And in May, Pfizer and the Shanghai-listed Chinese company called Zhejiang Hisun Pharmaceutical Co., Ltd. started producing three generic drugs — one heart medication and two antibiotics — for the Chinese market at a new plant in the east-central city of Fuyang. Hisun owns 51% and Pfizer 49% of the venture, which reportedly plans to add four more generic drugs to its production line next year.

As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/investors-can-feel-good-about-chinas-generic-drugs-viagra/.

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