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No bitter pill for pharmaceutical shares

By Ma Zhenhuan and Tang Zhihao (China Daily)
Updated: 2009-08-19 08:04

At a time of market volatility, pharmaceuticals companies' shares are riding high due to strong investor confidence and bright market prospects boosted by the nation's massive investment in healthcare reform.

The healthcare sector has shown strong resistance to the sluggish market movement since early August, with most listed pharmaceutical firms predicted to report a big jump in their half-year business revenues.

Statistics from financial service provider Wind Info showed that among the 54 pharmaceutical firms that had released their half-year performance forecasts, about 56 percent said they would register a revenue rise.

Pharmaceutical firms have yet to release their interim reports, but most of them have predicted positive growth for the first half year, with some, such as the Guangzhou-based Livzon Group even estimating a 100 percent growth year-on-year. For the second half, the performance of the overall sector is expected to be even higher.

"This reflects the nature of the healthcare sector; pharma shares will not increase dramatically when the market is booming, and will not drop as drastically either in a bearish market," said Yuan Jianbo, an analyst at Donghai Securities.

Yuan explained in the first eight months, while the market was booming, pharma shares did not get the required attention from investors. He said, in general, such shares were undervalued by at least 20 percent.

China announced in January it would invest 850 billion yuan ($124.40 billion) over the next three years in the healthcare sector. It is widely expected more new medicines will be listed in the catalogue that is covered by medical insurance. This news has come as a booster shot for the pharmaceutical sector, said analysts.

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"More citizens will be covered under the new catalogue, and the new list will include more drugs, this is good news for the industry (as the sales of medicines are expected to increase), especially for firms with cutting-edge products and patents," said Song Han, an analyst at Northeast Securities.

However, Donghai Securities' Yuan did not sound so optimistic about the expanded drug list, saying the new list would only benefit a select batch of firms, and that the impact would be limited.

Northeast Securities' Song said he expected sales of medicines would go up in the fourth quarter, hinting that pharma shares still had ample room to rise further.

"Historical data suggests that medicine sales will increase significantly in the fourth quarter, as more people fall ill due to cold and extreme weather, and profits generated from that period may account for at least one-third of the year-long total," said Song.

"The medical industry is different from certain manufacturing sectors as it does not have a strong cyclical effect. Pharma firms' financial performance will be easier to predict, so it will catch investors' eye when the market is not performing very well," added Yuan.