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The World's Biggest Healthcare Boondoggle Isn't in the U.S.By Rob Fannon, editor Phase 1 InvestorFriday, July 31, 2009 In June 2006, a Chinese high court reinstated patent protection for Pfizer's erectile dysfunction drug, Viagra.
Soon after, the Chinese government committed $500 million to food and drug regulation – more than was spent in the previous seven years combined.
Then, in July 2007, Zheng Xiaoyu – China's former head of the State Food and Drug Administration – was executed for taking bribes.
These three events signaled China's drug market was finally open for business. And it's the fastest-growing drug market in the world. But here's the catch: It's easy to find drug companies working in China... but not so easy to find ones that will let you profit off the trend. Let me explain...
Fueled by a massive aging population, rapid economic development, and urbanization, the pace of China's medical spending over the past five years has been double its massive GDP growth rate. According to industry researcher IMS Health, China's medical spending is expected to grow 22% a year through 2013.
And the U.S. isn't the only country embarking on a colossal effort to give everyone free health care... The Chinese government is pledging more than $120 billion over three years to provide medical coverage to 90% of the country. It hopes to provide universal health care by 2020 for all 1.3 billion citizens. Here's where it gets really interesting...
At the forefront of the reform plan is an "Essential Drug" list. It's a national list of government-reimbursed drugs available to everyone. Even if the Chinese government demands super-low prices, sheer volume will trump any worries over smaller profit margins.
Most of the world's biggest drugmakers have anticipated this market shift for years. Pfizer, Merck, Novartis, and GlaxoSmithKline have all established Chinese operations within the last decade. British-based AstraZeneca and Germany's Bayer lead the multinational corporations in market share.
Yet for now, China and other emerging countries contribute only modestly to existing sales. AstraZeneca, for example, saw China-based sales skyrocket 35%. But total emerging-market revenues represented just 13% of AstraZeneca's revenues. (Chinese sales aren't broken out separately, but contributed an even smaller portion.)
In other words, if you want to invest in China's future growth, parking your money in some Big Pharma stock is a dead end. Plus, unlike in the developed world, the little guys dominate China's drug market.
Local companies control more than 70% of the country's $40 billion drug market. Multinational corporations account for 30%. Just 12 products out of thousands upon thousands of drugs managed to reach annual sales of $50 million last year. (By contrast, the U.S. market had 34 drugs cross the $1 billion mark.)
And building a sales and distribution network in China is no easy task. About 90% of drug sales are made through the country's more than 2,000 hospitals, scattered throughout China's various provinces. In addition, you need a healthy understanding of China's unique culture to navigate its budding intellectual-property and drug-oversight laws.
So your best bet is to pick up a local player. Here are a few Chinese drug companies listed on U.S. stock exchanges: American Oriental Bioengineering (AOB), Tongjitang Chinese Medicines (TCM), Tiens Biotech Group (TBV), and Sinovac Biotech (SVA).
If you're looking to play this trend with a "one-click" stock, I'd start your research there.
Good investing,
Rob Fannon
Further Reading:
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