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The Week in Review: Economic Troubles

publication date: Oct 11, 2008
 | 
author/source: Richard Daverman, PhD

It was a tumultuous week in the markets, with US indexes losing between 15% and 18%. Shanghai was also negative, after its week of vacation, dropping 15%. By comparison, the CBT Index, an index composed of 15 China biopharmas that are listed on US exchanges, was down a relatively mild 11%. That could be reason for some pride, albeit muted and only relative. But looking long term, the results really are not so positive. So far this year, the CBT Index has lost 46% of its value, while Nasdaq is down just 37%, wiping out any claims of relative outperformance for China biopharma companies.

Putting aside the question of bragging rights, the more significant upshot of the stock market meltdown is the damage done to IPOs, to reverse-merger transactions, and to share prices, which publicly traded companies would like to use for acquisitions,. Risk is currently out of fashion, and it probably will be for some time. Many of the US-listed China biopharmas have superior fundamentals, though their strong financial performance hasn’t been rewarded with high valuations. WuXi PharmaTech (NYSE: WX) closed the week at $6.67, down from its 52-week high of $45.65. That’s an 85% loss, even though WuXi continues to perform admirably and its prospects remain very positive. There was a fair amount of speculative premium in WuXi’s stock at $45, but now, at a P/E ratio of just 12, there is a considerable risk-avoidance discount in its share price – and much the same is true of other China biopharmas as well.

Another upshot of the financial implosion was felt yesterday, when China Medicine (OTCBB: CHME) became the first company in the sector to blame the worldwide economic crisis as a reason for lowering guidance (see story). The shortfall is not, apparently, severe: China Medicines said revenues would not reach its target of a 25% to 35% increase (it did not issue a new target), but net income will nevertheless beat the previously expected 20% to 22%. The economic crisis is causing cash flow problems among China Medicine’s customers, who are unable to get loans to fund operations. For itself, China Medicine said that its cash flow remains strong. Other problems outside of the company’s control are also slowing the approval process for recombinant aflatoxin-detoxifizyme (rADTZ), an animal food additive. China Medicine expects rADTZ to begin producing revenues in Q1 of 2009, with a potential market for the product of over $1 billion.

Despite the worldwide economic turmoil, one major deal was inked last week. China Medical Technologies (NSDQ: CMED) will pay a considerable amount – $345 million to be exact – for the rights to a human papillomavirus (HPV) diagnostic test from Molecular Diagnostics Technologies Limited (see story). China Medical will buy the HPV-DNA Biosensor Chip and Surface Plasmon Resonance-based Analysis System, which can detect the virus that causes cervical cancer and sexually transmitted disorders. This is not the first in vitro technology that China Medical has purchased. A few years ago it acquired the FISH (Fluorescent in situ Hybridization) system, a purchase that is proving to be very profitable. The SPR System will become part of the company’s FISH offerings. A few years ago, China Medical’s main revenue driver was its High-Intensity Focused Ultrasound (HIFU) machine, which treats solid tumors by raising their temperature to 70 degrees Celsius. Revenues for the HIFU machines have leveled off, and China Medical’s growth now comes from the FISH products and its ECLIA (Enhanced Chemiluminescence Immunoassay) in vitro diagnostic tests.

Huifeng Bio-Pharmaceutical Technology (OTCBB: HFGB) has now come to definitive terms in its deal to gain operational control of Xi'an Qinba Xintong Medical Ltd, a medical device company (see story). In exchange for providing management services, Huifeng will receive 70% of Qinba’s profits. Huifeng, which currently produces plant extracts and pharmaceutical raw materials, intends to turn itself into a vertically integrated producer of finished pharmaceuticals. Huifeng is interested in Qinba because of its relationships with potential clients. Huifeng promised that the Qinba arrangement will be followed by other deals, which it characterized as “several larger strategic partnerships.” 

Beike Biotechnology Co. Ltd. announced that it has signed eight mutual cooperation agreements with other stem cell organizations, most of them universities or hospitals in China and the US (see story). Beike is also establishing a Stem Cell Expert Advisory Committee and a Data and Safety Monitoring Board, which will oversee Beike-sponsored research. Beike positioned the agreements as a way of rapidly incorporating the latest up-to-the minute research into its clinical practice. Unlike most researchers, Beike is already treating patients with stem cells, using cells that are derived from umbilical cords and from the patients themselves. It claims that about 70% of their patients find the treatments beneficial.

Pharsight Corporation (NSDQ: PHST) has signed a deal with InforSense under which InforSense will distribute Pharsight’s early stage clinical development management software in China (see story). InforSense will be responsible for marketing and distribution, as well as end-user training, maintenance and support services. InforSense is based in London, though it has established a Shanghai office. Pharsight's software provides pharmacokinetic and pharmacodynamic (PK/PD) analysis and trial simulation, including support for reporting, archiving, and data visualization. In September, Pharsight agreed to be acquired by Tripos, a private company that produces software for biopharma.

Shengtai Pharmaceutical (OTCBB: SGTI) received the China Good Manufacturing Practice (GMP) certificate for its new glucose manufacturing facility (see story). The new facility has an annual production capacity of 120,000 tons, which, when combined with existing capacity, now gives Shengtai the ability to produce 180,000 tons of glucose per year. The company’s major revenue driver is pharmaceutical grade glucose, and the lack of production capacity constrained earnings last year.

ProGenTech Limited, a medical device maker with offices in Shanghai, SuZhou and Silicon Valley, has in-licensed technology from Australia-based Human Genetic Signatures (see story). Under the terms of the agreement, Human Genetic Signatures will develop assays for the hospital-acquired diseases MRSA, MSSA, VRE and C. difficile. Human Genetic Signatures contributes its proprietary 3base™ technology to the deal. 3base is particularly useful for detecting pathogens with multiple subtypes or rapidly changing resistance traits. ProGenTech will incorporate the assays into its Entura platforms, which have been marketed in Asia since late 2007. Until now, the Entura machines have been used for DNA, RNA and protein purification, but now will be able to enter the clinical diagnosis market.

Traditional Chinese medicine remains a mainstay of China’s healthcare, according to a recent article in China International Business (see story). In fact, the article maintains the market for TCM is the highest it has been in a century, fueled by government support for TCM and new-found overseas markets. Although the article sheds light on recent trends in TCM, it also puts the size of the domestic TCM market at more than 100 billion RMB ($14.7 billion) per year. Exports of TCM products and ingredients bring in a relatively small $100 million, but they are growing at 20% per year.

Speaking of the size of markets, PricewaterhouseCoopers said China CROs booked $186 million in revenue during 2007. That figure was a 38% increase over the year before, and most of the work came from international firms rather than domestic biopharmas (see story). In the future, a CAGR estimated at 33% for the industry will bring the total China CRO market to $791 million in 2012, comprising 2.3% of the global CRO market.

Disclosure: none


 

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