China faces an invasion that even its Great Wall can’t keep out…
Western pharmaceutical companies want a piece of the huge Chinese medicine market. And they won’t take no for an answer.
In fact, so many have set up offices in Shanghai’s science park in the past few years, they even have a local business named in their honor – the Pharma Valley Restaurant.
Many drug company executives see China as key to the future health of their industry.
And they don’t want to be left behind in the mad dash for growth and profits.
China pharmaceutical market
The healthcare consultancy IMS estimates that China will overtake Germany and France as the world’s third-largest prescription medicines market next year, trailing only the U.S. and Japan.
Part of that stems from China’s sheer size. But that kind of industry-specific growth also comes from a rising middle class and an aging population with out-of-pocket money to treat themselves with.
Long-standing medicines especially have done well there while their sales stagnate in developed countries. Astra ZenecaADR (NYSE: AZN, Stock Forum) alone is making over $1 billion annually on such items in China.
The demand behind such figures should only continue under China’s new healthcare reform. As it expands its state healthcare insurance plan to fund costs, both urban and rural regions should be able to afford more prescriptions.
Back and forth
China has also authorized “western prices” for innovative drugs, making it easier for outside companies to get in. Set on stimulating technology transfer, it is encouraging companies to match commercial expansion with local manufacturing.
Those efforts seem to be working too. Last year, GlaxoSmithKlineADR (NYSE: GSK, Stock Forum) put up $42 million in a joint venture with Jiangsu Walvax Biotech for pediatric vaccines, and nearly $33 million for flu vaccines with Shenzhen Neptunus.
Western pharmaceutical companies have also invested in research and development there. Last year, NovartisADR (NYSE: NVS, Stock Forum) pledged $1 billion for its Shanghai research center by 2015.
Still, some industry insiders see that path getting rockier in the future. Pharmaceuticals should prepare for rising healthcare costs and intensifying competition.
Additionally, China’s healthcare reform includes restricting hospitals from marking-up drugs too high. Where-as before, such shady deals created more incentive to over-prescribe western medicines.
The government’s crackdown on expensive medicines means that traditional Chinese substitutes are becoming more popular. Since most of those come from plants, they’re often much cheaper than western drugs.
Traditional medicines comprise one-third of the Chinese government’s essential drugs list. Patients who purchase drugs listed there get significantly reimbursed.
That has led to an annual 20% growth for such treatments!
IMS says that traditional medicines have grown from 1% of the Chinese pharmaceutical market over the past decade to 11% now. It estimates annual sales exceed $2.5 billion.
Meanwhile, the Chinese Food and Drug Administration says that traditional Chinese medicines account for 36% of the total market. But one way or the other, they are doing very well.
Possible Chinese pharma investments
Investors can treat their portfolios with a few different pieces of China’s pharmaceutical market growth…
Of the western drug companies, those in Europe have the most aggressive approaches. Along with GlaxoSmithKline, Astra Zeneca and Novartis, RocheADR (OTO: RHHBY, Stock Forum) looks very good.
Unfortunately, buying traditional Chinese medicine companies on U.S. exchanges is a bit more difficult.
There is Tongjitang Chinese MedicinesADR (NYSE: TCM, Stock Forum). But it depends heavily on a single medicine, XLGB, its barrenwort treatment for osteoporosis.
Since the U.S. doesn’t understand traditional Chinese medicines very well, the stock has done poorly. And because of that, there is a current buyout offer for the company by its chairman and Hong Kong conglomerate Fosun Industrial, at $4.50 a share.
So for now, investors should settle for exposure to the Chinese pharmaceutical market through the European pharmaceutical companies.
Disclosure: The author does not own positions in any of the stocks mentioned