US based CRO Parexel International Corp. (Nasdaq:PRXL) announced that it has acquired Taiwan-based Apex International Clinical Research Co. Ltd., an Asian-focused contract research organization (CRO) for US$ 50.9 million. The company acquired a 93.9% stake in Apex, having held a minority stake in the company for four years.

 

“The Asia-Pacific region is becoming increasingly important and attractive for a wide range of clinical development activities,” stated Josef von Rickenbach, Chairman and Chief Executive Officer of PAREXEL International.   “Several factors are driving client demand for clinical research services in the Asia-Pacific region including established and sophisticated healthcare systems in many countries, the availability of highly trained professionals, and attractive end markets for biopharmaceutical products. We believe that the acquisition of APEX is of great strategic value, and combined with PAREXEL’s existing presence in Japan, India, and Australia, will make PAREXEL a formidable competitor and one of the leading providers of biopharmaceutical services in the Asia-Pacific region.”

 

Goldman Sachs is reporting that, based on the acquisition price, Parexel paid 3.0 to 3.6x forward revenue. The current industry average multiple is 2.4x for CROs, reflecting in part the rich valuations that have recently been placed on Asian contract research companies.

 

PRXL closed Friday at US$41.27, up 4.3% from Wednesday’s close.

http://www.apex-cro.com/events.htm

Henry Ford said “Competition is the keen cutting edge of business,” and it looks like the major exchanges are getting into a global knife fight. On one side is the LSE, which boasts 14 Hong Kong and six Mainland companies including Sinopec, and 61 Chinese firms on the AIM.
 
On the other side is NYSE Euronext, which according to critics has been lagging in new listings. The proposed reasons for this have been multitude, including NYSE IPO and Euronext merger distractions, shaky capital markets due to subprime lending, declining interest in the weak dollar, and regulatory concerns including Sarbanes-Oxley and Democratic control of Congress.
 
But if NYSE Euronext goes down, it plans to go down fighting. "NYSE Euronext intends to be the partner of choice for [Chinese] companies looking for a world listing," NYSE Euronext deputy chief executive Jean-Francois Theodore told a forum in Hong Kong yesterday.
 
Regardless which exchange prevails, it will be investors in Chinese stocks that are likely to come out on top. US investors will benefit as this competition will continue the trend toward increased market integration and declining fees. In particular, the application of electronic trading platforms to globally merged exchanges will allow investors to make direct investments in foreign markets.
Second, there is increasing sophistication of Asian markets and increased access to those markets by Chinese investors. "China must find an alternative way to recycle its trade dollars. If the experiment to allow individual mainland investors to buy Hong Kong stocks succeeds, I expect the government to extend this to international stocks within two to three years," said Qu Hongbin, the chief China economist at HSBC. Both trends should be favorable for Chinese equity investments.

http://www.institutionalinvestor.com/article.aspx?articleID=1436353

Founded in 1995 in Shenzhen, Guangdong Province, Nepstar has benefited from the rapid economic development of southern China. Government healthcare reform efforts have also helped, as the Ministry of Health tries to introduce retail competition into a pharmaceutical market dominated by hospital pharmacies. For the past 2 years management has opened ~200 outlets per year, located in fast growing southern and eastern cities such as Shenzhen, Guangzhou, Kunming, Chengdu, Shanghai, Hangzhou, Suzhou, Ningbo, Dalian, Weifang, Tianjin, Qingdao.

Rapid expansion has fueled strong revenue growth. For 2006 the company reports revenues of CNY 2.18 billion (US$291 billion, and the company plans to expand to 10,000 stores over the next five years. The expansion has been fueled by a reported US$40 million invest by Goldman Sachs (NYSE: GS).

http://www.thenewsroom.com/details/771716

The Chinese pharma outsourcing story continues to attract attention, more now due to the explosive performance of the Wuxi Pharmatech (NYSE:WX). The Economist has its doubts.

The analysis looks at three main points:

Valuation – from our view it is what it is. As of Thursday’s close share price is up 106% from IPO, giving the company a PE of 100 on a TTM basis. Industry leaders Covance (NYSE:CVD) and Charles Rivers Laboratories (NYSE:CRL) trade at PE’s of 32 and 27.5 respectively.

Wuxi’s market cap of US$1.7 billion exceeds the $1.2 billion of competitor Parexel (Nasdaq:PRXL) despite the latter’s 10-fold greater revenues in 2006. With revenues up 99% over the past year, WX is growing significantly faster than its competitors. With a forward PE of 42 and 5 year PEG of ~1.5 the current valuation is elevated but has not reached the extremes seen in more speculative China stocks.

 Expenses – this is a reasonable concern for Chinese companies. The Chinese National Bureau of Statistics reports that labor costs in Shanghai are up 24.8% over the past year. Costs for personnel in high tech and non state owned companies are up even more.

The key for a high growth company like Wuxi is to show sustained revenue growth while maintaining margins and keeping headcount costs under control. Currently, the company’s revenue per employee is ~US $65,000, up over 14% from last year. Operating expenses rose 41.6% while revenues grew 99%. The company appears to be controlling costs without limiting revenue growth, implying that the company’s margins should remain solid.

Sustainability – WX has shown consistent revenue growth rates of ~100% per year, with no indication of slowing demand. Although Chinese quality issues have become very prominent lately, we feel that quality represents a significant barrier to entry in this industry. Previously, China’s pharma industry has been characterized by lower quality generic and TCM producers. As pharma development moves up the value chain companies that are able to maintain high standards of quality and IP protection, as Wuxi has demonstrated, should be in a position to take business.

A greater concern is rising competition from other new CROs. The success of the Wuxi IPO is likely to lure other domestic CROs to tap the international capital markets. Hutchison China Meditech has also built on its successful IPO, and there is speculation that private CROs including Shanghai ChemPartner are considering a public listing. This may fuel competition on the ground in China, as well as compete for speculator’s attention on Wall Street.

The concerns raised by the Economist are worth considering, but there is no evidence yet of faltering performance by the company. Valuation is another matter, but speculators on Chinese stocks continue to show an unquenchable appetite for risk.

At a time of growing concern over the pipelines of big pharma companies, IMS Health is reporting this week that the global vaccines market is expected to double from US$13.7 billion to over US$25 billion by 2012.

 

 

The report indicates that one likely outcome of such growth will be consolidation as exemplified by Novartis’ acquisition of Chiron and AstraZeneca’s takeover of Medimmune.

 

Analyst Projections for Several Key New Vaccines
Vaccine	Company	Projections ($m)
Gardasil	sanofi/Merck	1,400
Cervarix	GSK	2,339
RotaTeq	sanofi/Merck	940
Flu	sanofi pasteur	1,221
Zostavax	sanofi/Merck	840
ProQuad	sanofi/Merck	790
Infanrix (DTP)	GSK	1,531
Menactra	sanofi/Merck	497
Rotarix	GSK	426

 

Also on the vaccine front, the international nonprofit PATH has announced the signing of a joint development agreement with the Wuhan Institute of Biological Products (WIBP). Under the agreement WIBP, a subsidiary of China National Biotec Group (CNBG), will produce an oral rotavirus vaccine with components licensed from the US National Institutes of Health.

 

The new rotavirus vaccine to be developed by PATH and WIBP will cover up to six rotavirus strains, and is intended to wider protection than current vaccines including Rotateq and Rotarix. It is expected to reach the market by 2012.

 

According to the company, CNBG is China’s largest producer of vaccines and blood derivatives, with market share exceeding 80% and 30% respectively. A state-owned company, CNBG consists of 6 research institutes and 13 principal manufacturing sites. In 2006 the company reports production of over 1 billion doses of vaccines and revenues of US$421 million.

 

The competition between India and China for foreign direct investment and outsourcing business from multinational pharma companies is heating up. Sushmi Dey looks at some of the factors leading MNC’s to invest in China in a recent issue of Express Pharma.

 

 

The article covers some familiar ground from an Indian perspective, particularly in regards to the ongoing development of IP protection. Dey’s sources also add some details to big pharma’s investment in China to date:

 

 

Dey considers the possibility that China’s growth in pharma may come at the expense of China. Meanwhile, over at BusinessWeek Asia they mull the possibility of a formidable two-country tech “ChinIndia.”

(http://www.businessweek.com/globalbiz/asia/special_reports/20070917techtitans.htm)

 

In this scenario, “Indian firms bring to the table world-class software expertise and leadership in global markets. Chinese partners have legions of capable, low-cost employees and greater know-how with clients in Japan, Korea, and other Asian countries where English is less prevalent.”

A report out this past week from the Times of London that Astra Zeneca (NYSE:AZN) plans to outsource all of its drug manufacturing within the next 10 years.

(http://business.timesonline.co.uk/tol/business/industry_sectors/health/article2468741.ece)

David Smith, AstraZeneca’s executive vice-president of operations, said that the company aimed to become a pure research, development and marketing organisation.

 

“Manufacturing for AstraZeneca is not a core activity,” Mr Smith said. “AstraZeneca is about innovation and brand-building . . . There are lots of people and organisations that can manufacture better than we can…We are looking to access China and India in a much more meaningful way,” he said.

 

Astra Zeneca has been active in its development efforts in China. In May of 2006 the company announced a three year, US$100 million plan to build the AstraZeneca Innovation Centre China (ICC). Located in the Shanghai Zhangjiang Hi-Tech Park, the center will focus on translational medicine in oncology through the development of knowledge about Chinese patients, biomarkers and genetics.

 

According to company reports, the center’s researchers will work on the identification, development, and validation of new biomarkers. Activities at the ICC will include analysis of human biological samples from clinical and experimental settings. The ICC will feature state-of-the-art biomedical informatics capabilities and advanced IS/IT support. The Centre will employ pre-clinical scientists and physicians who will progress both early and later-stage drug research projects.”

 

As of March of this year, AstraZeneca had 2900 employees in China with 20 marketing and sales offices. The company has also partnered with Wuxi Pharmatech (NYSE:WX) for Compound Collection Synthesis, and also is collaborating with Shanghai Jiao Tong University on the genetics of schizophrenia.

 

Thanks to Bionews.com.cn for the initial link

 

Shares of 3SBio (Nasdaq:SSRX) rose over 23% today on 6x average volume following the release of favorable analyst comments. Eliot Wilbur of CIBC World Markets forecast a quadrupling of 3SBio’s earnings based on improving sales of its injectable anemia treatment EPIAO.

 

"An under-penetrated oncology market, coupled with limited competition, offers ample room for future share gain," he said. Wilbur kept an "Outperform" rating and $17 price target on the stock. He expects the company's profit to grow to $1.13 per share in 2009, and said it earned 27 cents per share in 2006. The stock began trading in February.

 

As reported by the company, 3SBio Inc. is a biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. The Company's protein-based products and product candidates are designed to address markets with medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases.

 

The Company's diversified product pipeline includes a number of protein-based therapeutics, including NuPIAO, its second-generation EPIAO product candidate; NuLeusin, its next-generation Inleusin product candidate; TPIAO for the treatment of idiopathic thrombocytopenic purpura (ITP), a human papilloma virus (HPV) vaccine for the prevention of cervical cancer, and an anti-tumor necrosis factor humanized monoclonal antibody product candidate for the treatment of rheumatoid arthritis and other autoimmune diseases.

 

In September 2006, 3SBio Inc. acquired Collected Mind Limited, which owns Shenyang Sunshine Pharmaceutical Company Limited.

 

In its unaudited 2^nd quarter results ended 6/30, the company reported net revenues of US$5.7 million for the quarter, up 49.2% over Q2 2006. Sales of EPIAO and TPIAO increased 31.7% and 63.4%, respectively, for the same period. The company attributes its sales gains to the establishment of its specialized oncology sales force to service the growing Chinese oncology market.

 

At present, exports account for less than 5% of total revenues for the company. However, the company reports that manufacturing upgrades and construction of its new manufacturing facility in Shenyang are on schedule. The company intends for its facility to be compliant with European Medicines Agency (EMEA) standards. EMEA is responsible for the scientific evaluation of applications for European marketing authorization for medicinal products.

An update from the Chinese central government via Xinhua and China Biotech News on Chinese R&D investment leads to some interesting tidbits of data.

 

(http://www.bionews.com.cn/English/News/content/view/245/39/)

 

The update speaks for itself, with Chinese R&D investment reaching RMB 300.3 billion or 1.42% of GDP, an increase of 22.6% from 2005. A look at the source report on the MOST website shows where the money is being spent. Most of the spending goes to the usual spots, with Beijing, Shanghai & Guangdong taking the lead:

 

 

Of note is that Shanghai and its neighboring provinces of Jiangsu and Zhejiang account for nearly 19% of total R&D spending.

 

In regards to R&D spending as a % of GDP, Shaanxi province stands out:

 

	% of GDP	% of National Avg. GDP Spending
北 京Beijing	5.50%	387.32%
上 海Shanghai	2.50%	176.06%
陕 西Shaanxi	2.24%	157.75%
天 津Tianjin	2.18%	153.52%
江 苏Jiangsu	1.60%	112.68%
辽 宁Liaoning	1.47%	103.52%
全 国 National	1.42%	100.00%
浙 江Zhejiang	1.42%	100.00%
四 川Sichuan	1.25%	88.03%
湖 北Hubei	1.25%	88.03%
广 东Guangdong	1.19%	83.80%

 

Although known as one of the poorer provinces in China, Shaanxi has abundant natural resources including coal, petroleum and natural gas. The province has over 2,000 research institutes, mostly based in the ancient former capital city of Xian. Xian is also the base for numerous life science companies, most notably Xian Janssen Pharmaceuticals. A subsidiary of Johnson & Johnson, Xian Janssen is one of the largest and oldest pharmaceutical joint ventures in China.

 

The MOST reports indicates that its goal is to increase R&D spending to 2% of GDP by 2010. With Chinese GDP forecast to average 10% over this period, GDP could exceed US$ 4 trillion in 2010, equating to a potential doubling of R&D spending to US $80 billion. This is consistent with OECD reports tagging China’s as the number 2 R&D investor in the world, second only to the US.

This week’s Economist has a fascinating special report on the world financial markets, with an in depth look at exchanges around the world. This is a “must read” series for anyone interested in international investing.  A key topic of discussion here at LSC is the continued erosion of global investing boundaries, and this is covered well in “Marketplaces on the Move”.

 Some key points:

These forces should ultimately result in improved transparency and choice for investors globally. Examples abound, including the NYSE merger with Euronext and the new opportunity for Chinese investors to invest in Hong Kong.

 

It is for this reason that we at LSC are following companies traded in Shanghai and Shenzhen. Although they aren’t freely traded now, it is only a matter of time before the best companies become available to investors. In investing too, the early bird often catches the worm.

A recent survey detailed in China Daily (via Beijing Review) found that Shanghai’s babies are getting bigger, kids are growing more obese, and the city’s incidence of hypertension in nearly twice the national average.

(http://www.bjreview.com/health/txt/2007-09/13/content_76043.htm)

The survey found that 12.5% of Shanghai’s kids between 7 and 17 are obese, with an additional 16% being overweight. 30% of Shanghainese have hypertension, as compared to a national average of 18%.

 

The primary culprits for these effects are reported to be a decline in activity and dietary changes, including increases in dietary fat and meat consumption.

 

This is merely further confirmation of a long term trend in China. As its economy and lifestyles become more similar to those in developed countries, its diseases and causes of death are also matching developed country patterns:

Speaking at the the Bear Stearns healthcare conference, Medtronic (NYSE: MDT) CEO William Hawkins calls China the world's hottest medical market

 

The numbers back Mr. Hawkins up. According to Burrill & Co. the Chinese medical device market is growing at a CAGR of nearly 18% annually, twice the growth rate of GDP. Frost & Sullivan estimates that the total Chinese medical device market in 2006 exceeded US$10 billion.

 

The majority of device sales are in the medical equipment category as shown below.

Imports account for up to 90% of the market, with purchasing dominated by Class III hospitals. These hospitals have typically been located in the large metropolises such as Beijing, Shanghai, and Guangzhou. However, continued economic development in medium and small cities has resulted in increased investment in hospital infrastructure in these cities as well.

 

Kalorama Information reports that 75% of medical devices in China were manufactured in the 1970’s and 19780’s. Growing sales to these facilities in these cities has contributed to the success of domestic manufacturers such as Mindray Medical (NYSE: MR).

 

For Medtronic, international sales are becoming increasingly important. The company reports international sales of US$ 4.4 billion in FY 2007, up 32% from 2005. Asia Pacific sales were US$ 1.2 billion or 10% of total sales, up 21% from 2005.

The Wall Street Journal takes a hard look at China's pharma sector, and sees both risks and opportunities. In some ways a perfect storm has hit Chinese pharma companies.

 

Corruption investigations have resulted in multiple arrests and the execution of the former head of the SFDA. Numerous companies have been shuttered by the government for the production of illegal, contaminated, or counterfeit goods. Drug price controls have been imposed, leading to price cuts of up to 60%, and the central government is continuing its efforts to restrict hospital drug sales. Imbalances in the healthcare system have become so acute that patients are reported to be attacking their doctors! (http://www.guardian.co.uk/china/story/0,,2078004,00.html)

 

In the US, investors have been bashing some China pharma stocks. Medical device and CRO IPOs, including China Medical Technologies (NASDAQ: CMED), Mindray Medical (NYSE: MR), and Wuxi Pharmatech (NYSE: WX) have thrived. In the meantime, companies such as Simcere (NYSE: SCR) and Tongjitang Chinese Medicines (NYSE: TCM) have sputtered.

 

In many ways this is a rational response by investors. With healthcare spending in China growing at an 18% rate and the Chinese markets soaring, investors naturally want to get in. In contrast to medical device and pharma research industries, the Chinese pharma manufacturing industry is often perceived to be dominated by lower margin generic and TCM drugs, lacking innovation and plagued by too many manufacturers and excessive capacity.

 

Of late, SCR’s shares have been hampered by concerns over sales of its older generics, phase IV results on its ENDU (recombinant human endostatin) treatment for non small cell lung cancer, and industry-related worries noted above. 2^nd quarter earnings reported on Aug. 6 showed flat revenues for its older lines, but sales of ENDU and its generic BICUN (Endaravone) showed solid growth. As of Friday’s close, SCR trades at US$13.09, off 18% from its June 12^th closing price.

 

Similar worries continue to hamper TCM. With roughly 75% of its sales coming from its Xianling Gubao osteoporosis product the company is seen as being overly reliant on the highly competitive Chinese traditional medicine market. In addition there are ongoing concerns about price increases and supply availability of its herbal raw materials. At US$ 9.54 the shares are off slightly from their March IPO, but have rebounded somewhat from their mid-August low of $7.50.

 

Longer term, the instability in the domestic Chinese pharma market will create opportunities for the right companies. The Chinese government is attempting to squeeze out marginal players through price cuts, increased regulatory oversight and increased competition in distribution channels. This should foster necessary consolidation in the industry. Profitable companies trading on public exchanges will be ideally situated to grow through acquisition, enabling them to diversify product lines and geographic distribution. Of particular interest are will be the generic manufacturers that are able to transition to the production of patent and biologic products. Of the two, SCR looks to be more attractive.

Following on our discussion of relative IP protection and life sciences development in India and China comes this thought provoking article in Genetic Engineering and Biotechnology News

 

Written by Susan Fentress, a patent attorney with Butler Snow, the article presents a good overview of Chinese biopharma IP protection. In particular she addresses the well-covered patent dispute regarding Pfizer’s Viagra. Importantly, she highlights technical deficiencies with Pfizer’s patent application that contributed to the controversy.

 

This shows how controversial issues can appear diffently depending on which side of the Pacific you are on. The initial rejection of Pfizer’s patent has often been cited as evidence of weak Chinese IP protection. Although clear deficiencies in patent enforcement persist in China, it is incumbent on Western biopharma companies to demonstrate due diligence in protecting their IP.

 

With Chinese healthcare spending growing at almost 20% annually, the Chinese market is becoming the most attractive pharma market in the world. These types of controversies are likely to persist.