China accounts for about one-fifth of the world’s population but less than 2% of the global drug market. But the times they are a-changing.
The Chinese government is in the midst of extending basic health insurance to a larger portion of the population and expanding access to individual products and services. Combine this with a more favorable regulatory environment, a massive aging population and increased urbanization and you have a huge opportunity. How big? China is expected to become the world’s third-largest drug market this year and the market could double by 2013.
Does that mean the investment potential lies with the big established multinational drug companies? It doesn’t appear so. Most of the world’s biggest drug makers are already in China, having established operations during the past decade, yet their market shares remain small.
In fact, none of the big firms owns more than 2.5% of the total market. Furthermore, China is just a minor contributor to their sales. On the other hand, sales at the top-tier Chinese companies are growing faster than at Western ones, according to IMS Health.
These local firms control about 70% of the market. And there are plenty of them: some 3,500, although that’s down from 5,000 a few years ago. As the number of competitors winnows during the next several years, many of the top names will emerge. Investors who pick the winners and ride the tide of this explosive market have the chance to profit handsomely.
One company to take a look at is American Oriental Bioengineering (NYSE:AOB) Its shares traded as high as $6.24 in August 2009 but are now within a few cents of its 52-week low of $2.14. The company researches, develops and markets prescription as well as over-the-counter products. It concentrates on traditional Chinese medicines from plants. AOB has suffered from some bad acquisitions, but it appears to be on the road to recovery and may be oversold.
In the third quarter of 2010, the company’s revenue grew 16.1% year over year to $91.5 while gross profit increased 7.1% to $47.3 million. Gross margins also improved slightly, another positive trend. Moreover, AOB had $92.5 million in cash and cash equivalents at the end of September 2010.
Another company to keep an eye on is Tiens Biotech (AMEX:TBV). It specializes in nutritional supplements, including dietary supplemental products and wellness products. Trading just above its 52-week low of $1.43, TBV conducts its main business operations through its 80%-owned subsidiary Tianjin Tianshi Biological Development, which is based in Tianjin.
Also worth following is Sinovac Biotech (Nasdaq:SVA) a biopharmaceutical company concentrating on vaccines. This company stands to prosper because of the vaccines it already markets for the hepatitis A, hepatitis B, and influenza viruses. Hepatitis is a huge problem in China, affecting some 10% of the population so as health care coverage expands, so should the company’s vaccine business. With $60 million in annual sales, SVA sells at a higher P/E than the others mentioned here, but still looks like a good bet.
