Sihuan And Other Leading Chinese Drug Firms Could Get Boost From Current Meeting Of National People's Congress In Beijing

BEIJING - Sihuan Pharmaceutical Holdings Group, based on the tropical Chinese island of Hainan, could see a sharp upward trajectory in earnings over the next three years as it continues to expand its product portfolio through acquisitions fueled by proceeds raised during its initial public offering and a government push to consolidate the Chinese pharmaceutical industry.

The pharmaceutical firm, which now has a portfolio of more than 80 drugs, including innovative drugs, first-to-market products and generics, with a focus on cardio-cerebral vascular treatments, could also benefit from a boost projected for China's strongest listed healthcare outfits as a result of positive statements being issued by the premier and members of the National People's Congress during the just-launched session of the legislature.

Sihuan Pharmaceutical already has "the largest cardio-cerebral vascular franchise in China," notes UBS analyst Ding Ding in a recent commentary. "Its No. 1 product, Kelinao/Anjieli (for treating strokes), has been the best-selling prescription drug in China since 2007."

The firm's top-selling cardio-cerebral vascular drugs, Kelinao, Anjieli and Chuanqing, account for roughly 17% of the cerebral and peripheral vascular therapies market, the largest sub-segment of the cardio-cerebral vascular market in China, according to the company.

In a Jan. 14 note to investors, SWS Research also highlighted Sihuan Pharmaceuticals' "unique sales model," which relies on a network of more than 2,000 distributors that cover roughly 10,000 Chinese hospitals. The company itself has less than 300 in-house sales and product managers, which means its distribution costs are only 7% of revenue, SWS said.

IPO Fuels Acquisitions

Sihuan Pharmaceutical raised $732 million in an IPO last year in Hong Kong, and has said it is on the prowl for acquisitions that would allow for "synergistic growth." The company is not alone in this respect, as the China IPO market has been booming compared to the market in the U.S. and many Chinese pharmas are flush with cash (Also see "China Biopharma IPOs Skyrocket In 2010 After Freeze Is Lifted" - Scrip, 20 Jan, 2011.).

In November 2010, Sihuan Pharmaceutical said it would take out a smaller rival in the CCV sector, Dupromise Pharma, in a deal worth up to RMB 2.4 billion (about $358 million). The deal hinged on the acquisition of three exclusive injectable products, Aodimei (cerebroside-kinin injection), Yuanzhijiu (troxerutin and cerebroprptein hydrolysate injection) and Fufangsanwei (compound tri-vitamin B2 injection), which are listed for reimbursement in 20, 16 and 14 provinces, respectively.

"With the benefit of our strong marketing capability, coupled with their market exclusivity in [China], Dupromise's three exclusive products could soon become as well recognized as other flagship products of Sihuan Pharmaceutical," Sihuan Chairman and CEO Che Fengsheng said upon announcing the deal.

In January, Sihuan Pharmaceutical inked another deal, saying it would acquire an 80% equity stake in Changchun Xiantong Pharmaceutical for RMB 140 million (about $21 million). Changchun Xiantong manufactures 32 medicines for cerebrovascular diseases, digestive problems and anti-inflammation. In announcing the deal, Sihuan Pharmaceutical highlighted Changchun Xiantong's production of raw materials for cerebrovascular diseases, noting that it would help secure a stable supply and reduce production costs.

And industry analysts predict that more acquisitions are on the way as larger industry players like Sihuan Pharmaceutical look to gobble up smaller rivals. The Chinese government is pushing the pharma industry - which has more than 4,000 manufacturers - to consolidate by increasing standards like good manufacturing practices, which are too costly for smaller manufacturers to implement (Also see "China Releases New Drug GMPs; Domestic Consolidation Expected To Accelerate" - Scrip, 18 Feb, 2011.).

Boost From Premier And Legislators

Meanwhile, two other UBS analysts forecast in a separate report that leading Chinese firms in the life sciences and health insurance industry would benefit from the renewed support being pledged by Chinese Premier Wen Jiabao and leaders of the National People's Congress, which is now meeting for a two-week session in the Chinese capital.

On the eve of the session, Premier Wen vowed during a rare online chat to strengthen the country's social safety net, with upgraded medical services and insurance, while stating "every citizen should share the fruits of the reform and opening up drive" (Also see "Chinese Premier, In Rare Online Chat, Pledges Higher Levels Of State Reimbursement For Medical Care And Insurance" - Scrip, 3 Mar, 2011.).

Premier Wen has been a major force in ensuring that China's new Five-Year Plan for development, which is set to be launched this year, will include a push for the development of innovative biopharmaceuticals and biosimilars (Also see "China's Pro-science Leaders To Make Biotech Drugs A Central Plank In New Five Year Plan" - Scrip, 13 Oct, 2010.).

During the cyber-chat, the premier said the leadership ultimately aims to provide universal medical coverage for the country's 1.4 billion citizens; the government has pledged to hit that target by the year 2020 as part of sweeping health system reforms (Also see "Will China Healthcare Reform Drive Higher Rewards For Innovative Drugs?" - Scrip, 19 Nov, 2010.).

"Premier Wen Jiabao revealed some key policy targets for the National People's Congress during an Internet online discussion session," stated UBS analysts John Tang and Jocelyn Chen, who are also based in Hong Kong. One of those key policy targets, they added, involved stepped-up government contributions to healthcare insurance and medical care.

Myriad firms in the sector could benefit as a result.

Meanwhile, Sihuan Pharmaceutical could see high double-digit growth in revenues and profits over the next several years due to "a deep No. 1 CCV franchise value; a strong track record of developing and acquiring high-growth/high-margin products; and [combining] productive and committed in-house R&D with one of the largest innovative new drug development efforts in China," explained UBS' Ding Ding.

Risks To Sihuan And Other Drug Firms From Listing In National Medicine Catalogue

Yet Sihuan Pharmaceutical also faces pricing risks, particularly with its top product Kelinao, which was added to the National Medicine Catalogue last year (Also see "Sihuan Pharma Trades At 28 Percent Above IPO Target; Analysts Point To Risks" - Scrip, 3 Nov, 2010.).

"As Kelinao is the single largest selling prescription drug in China with RMB 1.49 billion of hospital purchases in 2009, one of the biggest uncertainties for Kelinao's future growth is the potential cap on the NMC budget allocation for cinepazide at the provincial level (which is aimed at preventing any single drug from consuming too much of the national insurance resources), even though some provinces have removed the insurance budget cap," Ding Ding explained.

Listing in the National Medicine Catalogue could make the drug "subject to government price intervention in the form of a retail ceiling price (or reference price)," she said, adding that it could also "put more pressure on pricing and competition in the CCV category, in our opinion."

Although Kelinao is not included in the latest round of China price cuts, issued March 7, Sihuan Pharmaceutical did see cuts on two drugs, Chuanqing and Kaishi (Also see "Big Pharma Takes Another Haircut As China Slashes Drug Prices In Two Largest Therapy Fields" - Scrip, 8 Mar, 2011.).

Chuanqing saw a cut of 47% to its reference price and Kaishi saw a 15% cut; Chuanqing represented 9.6% of 2010 revenues, while Sihuan started selling Kaishi only in December. However, the provincial tender prices for both drugs are still below the new reference prices, Ding Ding noted, so the impact is likely to be minimal, with distributors coming off the sidelines to purchase more products now that price cuts, which had been widely expected, are official.

Looking ahead, however, more China price cuts are likely, although Ding Ding predicts "minimum pricing downside" on Kelinao.

- Kevin Holden ([email protected])