Top 10: pharmaceuticals (includes profiles of Max India, Wuyi)

Asiamoney, April 2008

Indian and Chinese companies dominate this month’s top 10, which looks at the companies with the highest return on equity in the pharmaceuticals sector in Asia. Only two companies from other countries – both of them Korean – make the list.

This reflects the enormous potential for pharmaceutical and healthcare companies in markets with huge populations, growing wealth and increasing access to medical care. Two things drive the healthcare industry: GDP growth and life expectancy. Whereas manufacturing or consumer discretionary companies do best when a country’s population is dominated by people in their working life, pharmaceuticals tend to do best when more people pass the age of 65.

That’s not a demographic associated with China or India, but in fact in both countries that part of society is growing. China’s working age population should fall from 67.9% today to 64.6% by 2020, according to United Nations data; and while India’s population is heading in the other direction (a greater proportion of the population being of working age), the overall growth in the country’s population means that the number of over-65s will grow there too. While India’s current life expectancy is only 65, with just 5% of the national population aged above that level, that’s still more than 50 million people already.

It is a sector poised for growth. According to Credit Suisse, which published a major report on Asian healthcare in January, the Asian healthcare sector’s total market cap is less than US$200 billion, compared to US$1.7 trillion for the US. But things are changing: Credit Suisse argues that by 2015 incremental annual demand for healthcare will be worth more in Asia (US$693 billion for China, India, Japan, Korea and Singapore combined) than in the US (US$690 billion). China alone should account for US$483 billion of that.

One of the themes driving the growth of the Asian medical sector is what is known as medical tourism: people wishing to seek treatment abroad. The increase in this, says Credit Suisse, “has been driven primarily by inexpensive travel, a rise in the number of individuals with longer life expectancies, and excess income, coupled with expensive and long waiting periods for domestic treatment.” The internet, and the widespread availability of medical information, has played a role too. A data group called Abacus forecasts that Asian medical tourism should grow in value from US$500 million in 2006 to US$4 billion by 2012, a compound annual growth rate of 44%.

Other issues also have a role in these companies’ sectors. In China, says Credit Suisse, the government realised the importance of a robust public healthcare system after SARS in 2003 and increased government funding in healthcare. “As a result, medical devices companies became the first group of beneficiaries of the Chinese government’s healthcare reform, as central and local governments placed large orders to improve the conditions of the hospitals and upgrade their medical equipment,” says the broker. Western pharmaceutical and medical device companies increasingly look to China for contract manufacturing and R&D outsourcing.

In India, pharma companies have been growing ever since product patents were recognised after the signing of a 1994 agreement. Indian companies have focused in particular on exports, with some companies, like Dr Reddy’s Laboratories and Ranbaxy Laboratories, making a series of foreign acquisitions in recent years.

Harshad Arole, ABN Amro’s pharmaceuticals analyst for India, changed his outlook for the sector as a whole in February after noticing the premium of Indian generics companies to Europe and the US decline significantly in the previous 12 months (in fact, they now represent a discount to the European market). He sees potential for a PE re-rating of “about 10%”, although he expects a slowdown in the domestic formulations business which “has been the key differentiating factor between Indian generics companies and the global players.” Another interesting trend has been Indian generic companies hiving off their discovery research units, or announcing plans to do so. “The immediate impact of this should be seen in cost savings, which should boost earnings growth,” says Arole. “But, more importantly, the long-term goal to transform into specialty pharma companies would be impacted.”

Other countries – notably Korea, Malaysia and Singapore – do have investable healthcare industries of some size, but the combination of population size and wealth creation means India and China are likely to dominate attention paid to the region for many years yet.

Top 10 Thumbnails

1. Max India, 75.8%

Multi-business company founded by industrialist Analjit Singh in 1988. Includes life insurance, healthcare, clinical research, speciality packaging and health staffing; between those businesses, boasts two million customers, 10,000 employees, 30,000 agents and 1,250 doctors. Revenues have boomed, from US$177 million in the 2004-5 financial year to $702 million in the first nine months of 2007-8 alone.

2. Venus Remedies, India, 66.5%

Indian pharmaceutical manufacturing company with plants in India and Germany. Particularly strong in oncological (related to cancer) and cephalosporin (for bacterial infection) injectable products. Received Indian approval in March to launch its fourth R&D product, a therapy for cystic fibrosis patients, after the completion of clinical trials. Has filed patent applications in 50 countries for it already.

3. Simcere Pharma, Chinese but US listed, 65.8%

Chinese company, with an R&D centre in Nanjing, listed on the New York Stock Exchange. Manufactures and supplies branded generic pharmaceuticals, and produces the anti-cancer drug Endu in China. Focuses on diseases with high incidences or mortality rates where there is a clear need for better product; an example is its stroke management medication Bicun. Has five manufacturing bases and two sales and marketing subsidiaries alongside the R&D centre.

4. Wuyi International Pharmaceutical, Hong Kong, 58.3%

Pharmaceutical group active in manufacturing, marketing and sales; notable for offering both western pharmaceuticals and modern Chinese medicine products. Offers a core manufactured portfolio of 24 products for medical needs in China including respiratory, cardiovascular, gastrointestinal and infectious diseases, and cancer.

5. GlaxoSmithKline Pharmaceuticals, India, 54%

Indian arm of the global leader (Glaxo Group owns 35.99% today). Established in 1924 and now employs 3500 people. Portfolio includes prescription medicines and vaccines, with market leadership in therapeutics including anti-infectives, dermatology, gynaecology, diabetes, cardio and respiratory ailments. Aligned with Glaxo globally on clinical trials, raw materials and business analytics, among other areas.

6. Tongjitang Chinese Medicines, Chinese but US listed, 51.7%

Became the first traditional Chinese medicine company to complete an IPO on the New York Stock Exchange in March 2007. Develops, manufactures, markets and sells its products on the mainland. Its flagship product is for the treatment of osteoporosis but it also manufactures and markets 14 other Chinese medicine products, 38 western drugs and four healthcare or nutrition products.  Has alarmed some commentators by putting a portion of its money into Chinese IPOs.

7. Osstem Implant, Korea, 40.7%

Korean company specialising in dental implants, dental equipment, and dental related software. Has overseas companies in Taiwan, China, Singapore, Hong Kong, Germany, India, Russia, Japan and the US; established an Australian subsidiary in October 2007.

8. Astrazeneca Pharma, India, 38.7%

Another Indian subsidiary of a global major. Has R&D, manufacturing and marketing offices in Bangalore. The marketing part of the business is active in cardiovascular, respiratory, maternal healthcare, oncology, infection and pain control. Has an existing R&D facility, with 90 scientists, while a new one is being built to host a further 50.

9. Golden Meditech, HK, 37.4%

Chinese medical device company launched in 2000 and listed on Hong Kong’s GEM market the following year. Now a broader medical company with businesses in cord blood banking and Chinese herbal medicine, but medical devices – and in particular the company’s Autologous Blood Recovery System – is the flagship part of the business.

10. JVM, Korea, 37.3%

Korean company chiefly involved with the systems of the medical industry, such as its ATDPS system which links consultation, diagnosis, prescription, dispensing and supply.

Ones to watch

“What price for hospital of the future?” asks Macquarie Research analyst Tuck Yin Soong in a February report on Singapore-listed Parkway. Parkway’s share price has been hammered after being named the highest bidder for a hospital and medical centre site: a 350-bed hospital with a diagnostic and treatment bock as well as 240 medical suites. The fall has been enough for Macquarie to rate the stock “outperform”, saying: “Given the aging population in Singapore, growing number of medical tourists and a projected lack of hospital beds, the occupancy rate for Singapore hospitals is expected to rise from 65% in 2007 to circa 79% in 2010… We think Parkway is the best proxy to growth in healthcare and a play on medical tourism.”

Parkway is one of Credit Suisse’s top picks for the year too, alongside another Singapore company, Raffles Medical. Raffles owns and operates a central hospital and several outpatient clinics; it serves a 60,000-member corporate client base.

Two Thai companies make Macquarie’s list of recommendations:  Bangkok Chain Hospital and Bangkok Dusit Medical Services, which it describes as “an oasis of growth”. It also has an outperform rating on the Korean stock Yuhan.

ABN Amro has several buy recommendations in India.  It likes Ranbaxy; recently upgraded its recommendation on Lupin; and has a buy on Glenmark.

Max India profile

 Max India, says Neeraj Basur, is in businesses with a common thread: life. Basur is vice president for corporate finance at Max India, a conglomerate combining healthcare, life insurance and clinical research. “We’re in the business of protecting life, through our life insurance venture; caring for life, through healthcare; and improving life, through our medical research business.”

 Life also turns out to be lucrative: consolidated revenue for the nine months to December 31 more than doubled over the same period the previous year, to Rs27.7 billion, with operating cash profit also doubling to Rs8.54 billion.

Basur says the fundamentals of the business are exceptionally strong. A study conducted by Ernst & Young has suggested 15% annual growth rate through 2012 for the healthcare industry in India, to a total industry value of US$79 billion. “There is a huge shortage of high quality [medical] beds in India and the industry is expected to add one million by 2012,” says Basur. “The private sector is ready to contribute 90% of those beds.” Today, Max India has eight healthcare facilities with 770 beds; in a new phase of expansion it expects to have 12 facilities in and around Delhi by 2011, with about 1500 beds.

The industry has several drivers. “First and foremost it’s a shortage, and it exists because the Indian population has moved demographically from where it was five or 10 years ago,” Basur says. There is also a shift in society to what he calls “lifestyle-related diseases”, the growing middle class, the rise in individual wealth and changing spending habits. “People like to spend more and more on healthcare.” The penetration of health insurance is minimal today but is likely to grow, and as it does, it will push more spending into healthcare. And finally there’s the medical tourism issue: patients from elsewhere in the world flying to India for treatment.

Not long ago the prospect of flying to India for medical help would have struck fear into the western traveler, but Basur argues Max Healthcare has “best of class medical infrastructure which compares well with what’s available in western parts of the world.” It’s also one third of the price.

Another key part of the Max India business is life insurance, conducted through a 74:26 joint venture with New York Life. “India continues to be underpenetrated as far as the life industry goes,” says Basur (it’s at about 4%). With growing GDP and per capita income, the room for further growth is clearly exceptional. “Six years ago there was only one player, and awareness was restricted to the tax incentives these policies would get. That has changed dramatically in the last few years: private players have brought awareness, and improved distribution and service.”

Basur describes the New York Life venture as “based on the matching philosophy: a strong focus on quality and a high level of transparency.” Plans are in place to increase the venture’s distribution power five times over in the next three years. Max India has previously struck ventures with foreign groups including Hutchison Whampoa and Motorola, but Basur says no more are planned for the moment.

That might change if Max decides to get involved in health insurance, which would appear a natural fit. “It’s been evaluated by us,” Basur says. The company is waiting for greater regulatory clarity to emerge before making a decision.

Max did pull out of one area of the business, pharmaceuticals, five years ago, arguing it was not “fitting into the overall scheme of things.” But it does have other businesses: clinical research, and a speciality products division active in areas like flexible packaging.

Basur says the company’s remarkable recent numbers are “very much sustainable. Growth rates are likely to taper off because sustaining a 100% growth rate on a larger base is not going to be practically possible, but we can expect high double digit numbers. We expect a very strong financial position to continue.”

Wuyi profile

Wuyi International Pharmaceutical spans two worlds of modern medicine, western and Chinese.  It manufactures, markets and sells both styles of medicine, with a core portfolio of 24 products: 19 of them western, five of them modern Chinese.

So how do they differ? “The sales models are basically the same for both western and traditional Chinese pharmaceutical products,” says Lin Ou Wen, chairman and chief executive officer. “However their sales growth depends on the market potential. In our case, the growing potential of our traditional Chinese pharmaceutical products are stronger.”

That’s chiefly because of Wuyi’s high hopes for a new product, the Perilla Oil Capsule, a novel prescription capsule for the management of hyperlipidemia, designed to reduce blood clots and thrombosis. This capsule, launched in March, is considered a Chinese medicine, and has been given an 18-year protection period by the Chinese state; “we have the right on price determination, [so] we can have a better gross profit margin from this product,” says Lin. “Therefore we expect the contribution from Chinese pharmaceutical products will be more than our western pharmaceutical products.”

It’s already the case that the traditional Chinese products are the ones recording the higher growth rates. The biggest rate of growth in any product in 2007 was Xiangdan Injectibles, a Chinese product, which hit RMB95.9 million of revenues after enjoying 35% growth that year. The closest equivalent among western products was a sodium treatment which hit RMB55 million after a 27.6% rise in 2006.

Numbers like these suggest that while growing wealth and awareness in China makes it an outstanding time to be active in Chinese pharmaceuticals, medications must still be carefully targeted to local tastes. For those who can achieve that, it’s a great market: it has experienced double digit growth every year since 2000, Lin says. The National Bureau of Statistics in China says the total output of the country’s pharmaceutical industry was RMB530 billion in 2006, the last available data, an 18% year on year growth rate, and it is expected to grow by 20% this year. “The rapid growth rate is far higher than GDP growth in China,” says Lin. “With the rapid economic growth in China, the increase in personal income and medical expenses, this will in turn lead to an increase in the number of medical insurance policy holders.” That, in turn, is good news for developers and manufacturers, as is the trend in government policy to commit greater resources to the medical sector.

Based in Fuzhou, in Fujian province, Wuyi distributes through 17 representative offices and 49 distributors nationwide; all told it covers 15 provinces and four municipalities, marketing to large and medium hospitals. Wuyi has two subsidiaries, Fujian Sanai and Fuzhou Sanai, with the legal capacity to sell products, but the bulk of pharmaceutical representatives are instead third party sales agents hired as independent contractors. “Outsourcing the services [for] the distribution of our products through the pharmaceutical representatives reduces our sales and marketing expenses and administrative expenses,” Lin says. This “provides us with a larger and more cost effective sales presence in China than we would otherwise have achieved if the pharmaceutical representatives were hired as our direct employees.”

Besides the Perilla capsule, Wuyi plans two western pharmaceutical products this year, the Pazufloxacin Mesilate Injectible (a prescription antibiotic) and Omeprazole Enteric-Coated Capsules (for peptic ulcers). “In view of market demand, we believe there is a strong demand towards the medicines for chronic diseases,” says Wen.

Many outside China wonder what sort of intellectual property protection is afforded to pharmaceuticals on the mainland; Wen says the State Food and Drug Administration is “straighter now” in approving licences, meaning that the process is more clear than it used to be. SFDA has also amended its drug registration rules, increasing the level of regulation over drug manufacturing companies. This, Wen argues, is good; “Intellectual property will be better protected, and patents of specific drugs will not be easily inferred.” In July, Wuyi signed an agreement to launch a laboratory with Peking University, with the R&D results shared between the two enterprises.

Underpinning the growth of the industry, aside from wealth, is an unarguable truth: there are a lot of Chinese people and they are living longer. The proportion of the national population aged 65 and over was below 6% in 1990; it’s around 8% today, and it is climbing. Treating the ailments of this ageing group is going to make for some very wealthy enterprises.