Sinopharm, Biostar, Lilly Rise on Medical Modernization in China

BEIJING (TheStreet) -- It's still popular in China to soak one's weary feet in warm ginger tea, but western-style pharmaceuticals are increasingly the remedies of choice in a country that's getting older and more urbanized.

That shift to modern medicine is accelerating, based on second-quarter and first-half financial reports released over the past week by Chinese drug companies.

Investing in this trend via U.S.-listed stocks in Chinese and non-Chinese drug companies can be tricky. Consider, for example, the legal challenges confronting GlaxoSmithKline (GSK) as Chinese authorities pursue bribery charges against the drugmaker, one of several multinationals on the mainland.

Moreover, shares in three among the handful of Chinese drug companies listed in New York -- Biostar Pharmaceuticals (BSPM) , China Pharma Holdings (CPHI) and Sinovac Biotech (SVA) -- have a habit of falling off cliffs. Biostar's price started sliding after hitting $15 a share in early 2010. Things looked better in March when shares rose sharply to $3, but since then the stock has returned to its November 2013 level of around $1.50.

China Pharma's performance has been dismal. The stock declined from an early 2010 peak of around $4 to just 30 cents a share today. Sinovac's stock price has fallen about 30% since hitting an all-time peak of $8 a share in mid-March.

But the second quarter may have marked a turnaround for Biostar, also called Aoxing in Chinese, thanks to its new over-the-counter drug for chronic hepatitis B, which afflicts 10% of China's 1.3 billion people. The company's net income increased to $1.6 million compared to a $730,000 loss in the second quarter last year.

Another standout is Hong Kong-listed and over-the-counter accessible Sinopharm (SHTDF) , whose shares have risen 26% over the past year. State-controlled Sinopharm, the country's biggest drugmaker, reported Monday first-half net profits climbed 25% from the same period 2013 to nearly $53 million. The company also reported revenues at its Shenzhen-listed subsidiary China National Accord Medicines jumped 14% to $1.8 billion.

Underscoring the rapid changes for health care in China is Sinopharm's rise. The company is only 11 years old but already has a network of 300 subsidiaries. Some of that growth can be linked to its mainland partnerships with global concerns including Baxter (BAX) , Pfizer (PFE) , Bayer (BAYRY) and Ipsen (IPSEF) .

Eli Lilly (LLY) has had a strong presence in China since 1993. Today, it offers most of its major drugs. Its Chinese Web site says the company has achieved "double-digit growth for more than 10 years in a row" on the mainland.

One or more of these multinationals might get a chance to benefit from a Chinese government plan to let outside investors buy parts or all of some businesses now under the Sinopharm umbrella . Officials haven't said which businesses might be spun off, how or when. But the government has said it's eager to privatize certain state holdings.

But some smaller, domestic drug companies including many not accessible to western stock investors have been growing even faster than Big Pharma players. Shenzhen-listed Yatai, for example, on Monday reported first-half profits rose 312% to $4.3 million on $31 million in revenues, up 30% over same-period 2013.

Yatai specializes in drugs for ulcers, an ailment linked to stressful living in urban China. Meanwhile, the domestic firm Yabao recently said it's teamed up with Lilly to develop an early-stage diabetes drug.

Sanofi (SNY) is poised to profit from a tie-up announced last week with Sequoia Capital-backed, Shanghai-based ZAI Lab to develop two, potential treatments for chronic respiratory diseases. Smoking and air pollution are primary causes of the disease, which health authorities say afflicts 40 million Chinese over age 40.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates LILLY (ELI) & CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate LILLY (ELI) & CO (LLY) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, increase in stock price during the past year and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • LLY's debt-to-equity ratio is very low at 0.30 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.20, which illustrates the ability to avoid short-term cash problems.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The gross profit margin for LILLY (ELI) & CO is currently very high, coming in at 82.95%. Regardless of LLY's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 14.86% trails the industry average.
  • LLY, with its decline in revenue, underperformed when compared the industry average of 4.5%. Since the same quarter one year prior, revenues fell by 16.8%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

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