Local Chinese Companies With Mix Of TCM And Western Medicines Poised For Strong Growth

HONG KONG - Tongitang Chinese Medicines Company, a developer and manufacturer of modernized traditional Chinese medicines is streamlining its operations by getting rid of less profitable segments and expanding its pipeline.

The move underscores the growth of this relatively small Shenzhen-based company, which is leveraging a Chinese tradition of using TCM and the growing popularity of Western medicines, particularly in urban centers.

Traditional Chinese medicine is widely accepted in China, with 62 percent of customers choosing TCM products to Western medicines, according to a survey conducted over the last year by independent brokerage firm CLSA. Most Western-trained doctors in China use some element of TCM. About 20 percent of prescriptions in China are for TCM products, which also account for 32 percent of drugs sold in pharmacies.

On Sept. 28, Tongjitang entered into a deal with Guizhou Huixian Invesment Management Ltd. to sell Guizhou Tongjitang Pharmacy Chain Stores and Gui Liquor Co. for RMB259.3 million ($38.8 million). Guizhou Huixian would pay in four installments, according to the deal announcement.

Move Coincides With China's Healthcare Reform

"We have undertaken this major strategic move in order to better capitalize on China's ongoing healthcare reform," said Tongjitang's CEO and Chairman Wang Xiaochun. "We expect out profit margins to further improve after the sale of the least profitable component of our business."

In April, a company controlled by Wang put forward a proposal to take the company private, although the deal awaits shareholder approval (Also see "Tongjitang Pins Loss On Delayed Implementation Of China's Essential Drug List; Proposed Buyout Still Under Review" - Scrip, 24 Aug, 2010.).

The first TCM company to list on the New York Stock Exchange, Shenzhen-based Tongjitang is a specialty pharmaceutical company. Its focus is the development, manufacturing, marketing and selling of modernized Chinese medicines in China. In 2009, the company had sales of $70 million, up from $28 million in 2004 but down from a peak $81 million in 2007.

The company reported a $694,000 net loss during Q2 2010, attributing it to increased sales and marketing expenses for sales infrastructure and its essential drug sales network.

Listed on China's essential drug list, Tongjitang's flagship product Xianling Gubao, is used to treat osteoporosis and is the market leader in terms of sales. The company also markets 36 other TCM products as well as 36 Western medicines.

Rolled out to community health organizations last year, the first part of China's EDL consists of 102 TCMs and 205 chemical drugs and biologics (Also see "China Releases First Part Of Essential Drug List For Community Health Clinics And Rural Hospitals" - Scrip, 19 Aug, 2009.). Key features of the EDL include a provincial-level online tendering and procurement system and the elimination of the traditional 15 percent mark up for drugs dispensed at hospitals. Analysts expect EDL drugs to see a spike in volume on one hand, and on the other hand price controls and more stringent government oversight.

Combo Of TCM And Western Drugs Strong Model

Tongjitang's combination of modernized TCM and Western medicines is potentially a winning combination.

The best known pharmaceutical company in the country, Tongrentang, has a similar pipeline.

Tongrentang, with sales of $191 million last year is listed in Hong Kong. According to CLSA it is the best-known pharmaceutical brand in China, ahead of Pfizer, the most recognized foreign brand. In fact, every single one of the customers surveyed by CLSA knew Tongrentang while only 26 percent of consumers knew Pfizer - although it was universally known among pharmacists and hospital drug purchasers.

"Consumers prefer traditional Chinese medicines but doctors prefer Western medicines," explained David Maris, managing director of CLSA's pharmaceutical practice, during an event in Hong Kong last month.

Tongrentang and its subsidiaries are primarily engaged in the manufacture and distribution of Chinese patent medicines in a range of markets including the U.S. and Canada as well as multiple countries in Southeast Asia. The company also buys and sells agricultural byproducts, while its subsidiary Tongrentang Technologies distributes products in Mainland China, Hong Kong, Malaysia, Canada and Indonesia.

Tongrentang's Hawkthorn capsule for hypertension was among 10 drugs banned by the Beijing Drug Administration in 2007, which marked the first time Chinese authorities implemented their enhanced enforcement authority under new drug advertising regulations (Also see "Beijing Bans Ten Illegally Advertised Drugs, Requires Apologies From Makers" - Scrip, 9 Jul, 2007.).

Royal History

The group is headquartered in Beijing, with a listed company in Hong Kong. Tongrentang has operations across China and enjoys a significant local advantage. Although the listed company was set up in 2000 in Hong Kong, Tongrentang can trace its roots more than three hundred years to 1669, when Tong Ren Tang was created to serve the Chinese emperor.

In 2000, billionaire Li Ka-shing became a major shareholder in the company.

With its combination of traditional products, modern Western medicines and centuries of history, Tongrentang has solid local footing.

And local companies, said Maris, are poised to take a significant share of the market.

"Local companies are in an amazingly good position. They are going to grow like weeds," said Maris.

- Alfred Romann ([email protected])