US stock markets were quite successful in recent years at attracting a significant number of Chinese companies to list their shares in New York, particularly in the pharmaceuticals and biotech sector. This steady flow had now reduced to a trickle, and the ultra-high valuations fetched before Lehman Brothers collapse in 2008 are a thing of the past.
Today, Chinese pharmaceutical companies listed on the various exchanges in New York attract significantly lower valuations, yet many are still reporting robust growth in revenues, potentially offering medium to long term investors an window of opportunity in a sector that is currently out of favor.
IMS Health forecasts global sales of pharmaceuticals to maintain an annual growth rate of 5-8% and hit $1.1 trillion market in 2014, but China will continue to record stand out growth of +20% per year, with sales expected to hit $76 – 86 billion in 2013.
The Chinese market serves a growing population of 1.34 billion people, which is attracting Chinese Government investment into healthcare. This expenditure is driven by the need to care for a growing middle class, aging population and a large underserviced rural population.
However, not is all rosy in China. Competition is stiff, which is hitting margins across the industry. This will inevitably lead to consolidation in the sector, with several large players emerging with clear ability to protect market share and outcompete smaller rivals on economies of scale. The Chinese government also continue to play a crucial role in the sector, shaping it through policy, which doesn`t always necessarily see eye to eye with shareholders in companies listed on distant stock exchanges.
Optimistic IPO valuations for US listed, China focused over-the-counter retailers, drug manufacturers and related industries have now crashed back to near multi year lows, suggesting there may be bargains about for savvy investors. Below we highlight just six companies in the sector that may or may not produce returns for shareholders in the future…
China Nepstar Chain Drugstore (NYSE:NPD) is capitalized at $650 million. In late 2007 the stock traded briefly at $21 per share and has been sharply discounted to $3.10. NPD is the biggest drugstore chain in China with 2,582 stores, and got caught up in a price war with competitors caused by ongoing healthcare reform and government health policies, that have led to lower drug prices that are on the Essential Drug and Reimbursement lists. NPD has now expanded retail product offerings to include higher margin beverages, health food, household consumables, and personal care products. The continuing revamp has helped grow revenues and margins. Recent June quarter revenues increased by 5.8% to $83 million, gross margins increased to 50.1%, and operating profit reached $2 million. NPD has cash of $171 million and continues to pay a very healthy dividend of 8.7%.
China Jo-Jo Drugstores (NASDAQ:CJJD) is a very small and fast growing drugstore chain, selling both western and traditional Chinese medicine and is located in Zhejiang province. CJJD is a recent NASDAQ listing and is capitalized at $72 million. The company has expanded from 19 to 31 stores over the last twelve months and plans to expand quickly to 42 stores, financed from a cash balance of $13.9 million. June quarter revenues rose 30.2% to $15.2 million, gross profit increased 52.6% to $4.6 million, and gross margins held at 30.3%. CJJD plans to increase gross margins and sales of high margin nutritional supplements and personal care products and is looking for better wholesale pricing as volumes increase. The business has also established an on-line drugstore.
China Yongxin Pharmaceuticals (OTC:CYXN) is capitalized at $15.4 million. In 2004 the stock reached an astronomical $105 and currently trades around $2.95. CYXN is both a wholesale distributor and retailer of pharmaceuticals and health related products. The business is located in Jilin province in North East China with 110 drugstores and is well positioned to take advantage of growth in rural health services. The wholesale arm serves 3,800 medical institutions, community health centers, rural hospitals, drugstores regional sub-distributors. June quarter revenues were up 21.8% to $11.16 million, and gross profit increased 3.7% to $2.82 million. CYXN added 7 new stores to increase revenues and added vitamins and supplements for better gross margins.
Biostar Pharmaceuticals (NASDAQ:BSPM) is also a recent NASDAQ listing and is capitalized at US$69 million. BSPM sells a broad array of pharmaceuticals and nutrients that cover a wide variety of products for pain, flu, menstruation, bronchial and heart conditions. Headquarters and manufacturing operations are based in Xianyang, near the Quinling Mountains, where they have access to over 3,000 botanic plant varieties. These plants provide low cost raw materials, to manufacture current products, and develop new herbal medicines. BSPM is rapidly expanding sales to 7,000 retail locations and recently launched into the Beijing, Tianjing and Shanghai markets. In the last quarter, Xin Ao Xing Oleanic Acid capsules generated sales of $12.7 million, with a gross margin of 85% on sales. This medication is used as a treatment for hepatitis B which afflicts 130 million Chinese. June quarter revenues were up 46.4% to $19.4 million and non-GAAP adjusted net income increased by 50.9% to $5.8 million. Revenue guidance for 2010 is $80-82 million with net income of $18-20 million. BSPM has been heavily sold down from $5.50 and currently trades at $2.47 near yearly lows.
China Sky One Medical (OTC:CSKI) is capitalized at $115 million. CSKI is a fully integrated pharmaceutical company producing a wide variety of over the counter drugs sold throughout China, serviced by 30 long term agents and 4,500 retail outlets. CSKI exports to 20 countries and has a strong R&D pipeline and more products coming on stream from recent acquisitions. June quarter revenues were up 26.7% to $40.8 million, gross profit was up 20.9% to $29.5 million, with gross margin on sales at 72.5%. The company’s biggest selling products include a sumei slim patch, compound camphor cream for dermatitis, hemorrhoid ointment, pain relief patch, and diagnostic kits. The stock has been very volatile over the last twelve months with a high of $25 followed by a recent annual low $6.76.
One Bio Corp (OTC:ONBI) is capitalized at $189 million. ONBI is based in Miami but has facilities in China that manufacture and distribute Solanesol, CoQ10, Resveratrol, 5-HTP, organic fertilizers and organic health foods and beverages, and holds contracts over 6,635 acres of bamboo in Fujian province from which it manufactures a variety of products. ONBI holds a majority interest in Green Planet (OTCBB : GPLB) which is a high tech bioengineering business based in Sanming and Fuzhou China, capitalized at $14 million. GPLB was founded in 2005, and produces a range of high quality bio-ecological products and chemicals, fertilizers, pesticides and organic health products. ONBI distributes its products to Chinese supermarkets such as Walmart, Yonghui and Xinhua and pharmacy chains Jonghui and Huihao. Negotiations are currently underway with 14 new chains with 150 locations to expand distribution. June quarter revenues were up 484% to $12.68 million, net revenue increased 281% to $2.35 million, and gross margin was 38.9%.
Disclosure: no positions