Survey Shows Strong Potential In Healthcare

Includes: KANG, MR, WX
by: Doug Young

A few news bits and data points are spotlighting the big potential in China's healthcare market over the next few years for companies that can tap into an overhaul of the national medical system. While that news looks good for healthcare companies overall, the limited universe of publicly traded firms available to western investors looks a bit spottier due to individual company issues. Regulatory issues could also be a risk, as highlighted by a new price fixing ruling against US drug giant Johnson & Johnson (NYSE:JNJ). Still, there could be some interesting buying opportunities for the right companies.

The most encouraging data point in the bigger medical picture comes from the newly released annual Business Confidence Survey from the European Chamber of Commerce in Beijing. The overall survey was actually rather gloomy due to China's recent economy slowdown, but healthcare was one of the few bright spots.

According to the survey, 88 percent of respondents from the healthcare space had a positive growth outlook for this year, making them the most optimistic sector (English article). A separate news item related to e-commerce in the space also spotlighted the sector's big growth potential. According to that headline, China's drug regulator has just issued new guidelines allowing online drug firms to sell prescription medicine over the Internet.

Both of these items are part of Beijing's aggressive efforts to provide a better healthcare safety net to all Chinese citizens, many of whom have little or no insurance as the country transitions from a socialist to market-oriented economy. But that said, the market does remain fraught with risk, both for regulatory reasons and also from the individual company perspective.

Among the 3 largest US-listed Chinese drug and medical device firms, 2 of those - drugmaker Wuxi Pharmatech (NYSE: WX) and medical device maker Mindray Medical (NYSE: MR) - have recently changed chief operating officers. That usually hints at operational problems, which are apparent in the companies' latest lackluster financial reports.

Both companies' revenues were up an unimpressive 10 percent in the fourth quarter, and each saw their profit actually drop. But both saw revenue growth accelerating to around 15 percent this year, indicating they are more optimistic about the future. The outlook is a bit brighter for newly listed clinic operator iKang (NYSE: KANG), whose profits and revenue are both currently growing in the 40-50 percent range. All 3 companies could have potential upside in their stocks, especially Wuxi Pharmatech and Mindray if they can turn their business around under new senior management.

Meantime, the Johnson & Johnson case is spotlighting the regulatory risk that companies face in the sector. According to the latest headlines, J&J, along with US rival Bausch & Lomb and several other companies, have been fined a collective 19 million yuan ($3 million) by one of China's anti-monopoly regulators for price fixing (English article).

The National Development and Reform Commission found the companies engaged in a number of practices that it deemed anti-competitive in order to maintain high prices. This particular probe relates to eyeglasses and contact lenses, and the amount of the fine is significant but doesn't seem too crippling.

The ruling comes as a much broader array of western drug makers are facing scrutiny for their aggressive marketing practices, which resulted in bribery charges recently being filed against several executives from British drug giant GlaxoSmithKline (NYSE:GSK). Taken collectively, all of these cases underscore both the risks and potential big rewards in the healthcare market for the next few years. That means that well-managed companies could reap some nice growth in the market if they can successfully avoid the risks.

Bottom line: China's healthcare market could provide strong growth potential over the next 2-5 years for well-managed companies that can avoid regulatory risk.

Disclosure: None.