The Prognosis May Be Favorable For China's Ailing Drug Sector (China)

Executive Summary

Some analysts are saying this might be a good time to invest in select Chinese pharmaceutical firms, whose share prices have been hit by government efforts to rein in doctors and hospitals that routinely prescribe unnecessary drugs to patients simply to turn a profit. Drug companies have feared their sales could suffer if the government truly puts an end to overprescription, but some observers don't expect drastic action. "China's pharmaceutical sector has been underperforming the market because there's a lot of perceived risk...so people don't like pharmaceutical stocks," says Jinsong Du, a health-care analyst in Hong Kong with Credit Suisse. But "the perceived risk is actually higher than the actual risk," Du contends. "The government, yes, they're going to do the reform, but they're going to do it gradually. There isn't going to be huge disruption of the whole system. In the second half of the year, most of the pharmaceutical companies will surprise people on the upside." Du thinks Tongjitang Chinese Medicines, which listed on the New York Stock Exchange in March, will be a standout, fueled by its marquee product, Xianling Gubao, which translates loosely as Magical Bone Treasure. The item has about 70% of the traditional Chinese medicine segment of the osteoporosis market. Vicky Chen, a UBS health-care analyst in Shanghai, also thinks investors are missing out on Tongjitang. She acknowledges the company's portfolio relies heavily on the osteoporosis medicine but adds that Western investors haven't warmed much to the traditional Chinese medicine company and may be overlooking a bargain. "This is a small company, and there are pros and cons, but it's definitely undervalued," Chen says. (Click here for more - May Require Paid Subscription