China Pharmaceutical Stocks Rally on Growth Prospects

Chinese drugmakers rallied to a three-week high in Shanghai and Shenzhen trading on the prospect government spending and increased investment from overseas companies will boost earnings growth.

A measure tracking health-care stocks on the CSI 300 Index gained 1.9 percent to 5,738.26. The CSI 300 slid 0.3 percent. Today’s advance extended the group’s gain to 10 percent in 2010, the most among the 10 industries after rising 94 percent in 2009.

China’s pharmaceuticals market growth will accelerate to 20 percent to 25 percent this year, spurred by rising government spending and increased investment from multinational drugmakers, according to Katherine Lu, director of China equities at Oppenheimer & Co. The market grew between 16 percent and 18 percent last year, she said.

“Investment is long overdue,” Lu, who covers health-care companies for the New York brokerage, said in a phone interview. “China is expected to become the third-largest health-care market by next year according to the IMF, that’s ahead of projections that this would happen by 2013. The long-term growth outlook for the health-care market is very substantial.”

The Chinese government spends $125 billion to start a national health insurance system. China’s pharmaceuticals market, including nutritional products and consumer drugs, will more than double to $110 billion by 2015 from $44 billion in 2008, Credit Suisse AG estimated in a November 2009 report.

“The Chinese government is committed to health-care reform,” Lu said. “China’s savings rate is very high because people need to save for health. One way to stimulate spending and free up savings is by spending on health-care benefits.”

Merger Potential

In April, Charles River Laboratories International Inc. agreed to buy WuXi PharmaTech (Cayman) Inc. for about $1.6 billion to expand in China, where revenue from drug-testing services is growing as much as 30 percent a year.

The WuXi acquisition “shows China’s health-care market is going to be a global growth center over the next few years,” Lu said.

“We see more deals in the M&A space,” she said, adding the 3SBio Inc., a Chinese biotechnology company, has “good takeout potential.”

Jiangsu Hengrui Medicine Co. gained 2.5 percent to 46.70 yuan in Shanghai, while Tianjin Tasly Pharmaceutical Co. advanced 6.2 percent to 33.04 yuan.

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