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Pharmaceutical shares catch investor fancy

By Liu Jie (China Daily)
Updated: 2009-05-07 08:04

Traditional Chinese medicine products displayed at a trade fair in Nanjing, Jiangsu province. [CFP]

Reporters at the Health Ministry's press conference last month were amused when Minister Chen Zhu ventured the culinary advice that the common herb star anise would not only add flavor to pork, but also provide a strong protection against the deadly H1N1 flu.

That was not meant to be a joke, of course. The spread of the epidemic has created a strong demand for Tamiflu, an antiviral drug derived from shikimic acid, an extract from star anise.

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By bringing star anise to the table, Chen has helped inspire a rush in the Chinese stock market for drug companies that specialize in the production of herbal-based health supplements. At one time, investors' focus zeroed in on Guilin Layn Natural Ingredients Corp, a little-known producer of herbal extracts, listed on the Shenzhen bourse.

The price of the company's shares surged more than 60 percent in less than a week to 20.10 yuan per share on May 4. Subsequently it issued a statement stating that it did not expect the H1N1 flu epidemic to have any material effect on its business as it was yet to receive a single order for shikimic acid. That, however, did not prove to be a deterrent for investors and subsequently trading in the company's shares was suspended on May 5. The company later said it would review its business to ascertain if there were any disclosure oversights. Guilin Layn hasn't issued a public statement since then and trading in its shares continues to remain suspended.

Guilin Layn hasn't been the only drug maker targeted by investors addicted to "concept" stocks since the outbreak of the dreaded flu epidemic across the Pacific late last month.

The entire pharmaceutical sector of the Chinese stock market went on the boil when news of the disease broke in late April. For instance, the share prices of many drug makers, like Guilin Layn, Xinjiang Tecon, China Animal Husbandry Industry, Inner Mongolia Jinyu, Jiangsu Lianhuan Pharmaceutical and Apeloa, surged to their daily limit of 10 percent on April 27 and 28.

In comparison, the benchmark Shanghai Composite Index dropped an aggregate of more than 2 percent in these two sessions.

The Hong Kong listed H shares of some mainland drug companies soared nearly 40 percent since late April. On the Shenzhen bourse, the Pharmaceutics and Bio-tech Industry Index rose nearly 6.74 percent since late April to 827.3 on May 4.

Stock analysts are still skeptical on the expected demand for relevant drugs made by mainland manufacturers.

"This is a kind of speculation," said Ni Wenhao, analyst, Guotai Jun'an Securities. "Everybody simply assumes that the increased demand for antiviral drugs will benefit pharmaceutical companies in China. That's unreasonable," he said.

The China unit of international drug company, La Roche, said its facilities are operating at full capacity to meet the delivery schedule for a new order of 220 million doses of Tamiflu. But it didn't specify the suppliers of the key ingredients, including shikimic acid.

Meanwhile, Guilin Layn said in its statement that shikimic acid was not a major product of the company. It has the capacity to produce only 500 kg of the chemical per day, or about 180 tons a year. The company also said if demand for shikimic acid grows, it would raise the prices of its raw material star anise. The narrow profit margin would not have brought much real benefit to the company even if shikimic acid orders had increased, it said.

Guilin Lyne earlier said its profit for 2008 dived more than 80 percent from 2007 to just a little over 4 million yuan, on sales of 113 million yuan, down 8.37 percent.

"Investors should keep in mind that any epidemic is short term and it's almost impossible for a company to enhance its development capability and increase its production capacity fast enough to earn a windfall profit," Ni said.

Indeed, the allure of the pharmaceutical and biotech sector seems to have faded a little after the Labor Day holiday break as investors are beginning to realize that not all vaccines are effective against the H1N1 flu.

Jinyu shares slumped after it was made known that its specialty was in animal vaccine mainly for swine fever control and had nothing in common with any drugs for the treatment of H1N1 flu. The company's shares fell from 10.75 yuan on May 5 to 10.40 yuan yesterday.

Fan Jiming, a middle-aged Beijinger, who bought Jinyu shares at a peak price of over 11 yuan per share some weeks back, admitted that he has lost thousands of yuan after the May Day holiday.

"But I have no regrets," he said. "I bough the stock for its long-term value," he added.