Healthcare: The Hottest Topic of 2009

Robert Hsu, October 27, 2009

It's hard to avoid the healthcare discussion when talking about hot sectors in 2009. Healthcare has probably been one of the hottest topics around the world this year, with the U.S.'s heated healthcare debate and China's much-needed healthcare reform plan.

Now, we've talked a lot about China's $125 billion healthcare reform plan this year. So I want to shift gears and focus more on China's pharmaceutical market this week -- mainly taking a closer look China's prescription and over-the-counter (OTC) drug markets.

Prescription Drugs: This market in China is projected to grow more than 20% per year, and it will likely account for one-fifth of the world's pharmaceutical growth in 2010. Given this double-digit growth, China will likely become the world's third-largest prescription drug market by 2013. Sales are projected to be around $80 billion in 2013, putting the country behind only the U.S. and Japan.

OTC Drugs: China is currently expected to become the world's second-largest OTC drug market next year. China's OTC market right now is about $10 billion with mineral products and vitamins accounting for the majority of sales. But this market is already growing between 18% and 20% per year -- double-digit growth that is drawing global pharmaceutical companies out of the woodwork.

Recently, Novartis (NYSE: NVS) and Sanofi-Aventis (NYSE: SNY) both have expressed their interest in expanding OTC sales in China. In fact, Novartis plans to quintuple its sales to the country -- it currently has three OTC drugs in China with ambitions for 20 by 2011. Sanofi-Aventis, on the other hand, is attempting to get its foot in the door by working on a joint venture with a pharmaceutical company in China -- it plans to invest $40 million in the venture.

With its more than one billion people and a renewed focus on healthcare, it's not surprising that China's pharmaceutical market is garnering such attention -- or that it's expanding rapidly. But what's the best way to profit from this trend?

Currently, I think one of the best ways to benefit from growth in China's pharmaceutical industry is by focusing on Chinese retail drug stores. As part of the country's healthcare reform plan, the Chinese government is removing drug prescriptions and distribution from hospitals, driving more business to independent drug stores.

And at the top of most Chinese's list is China's Walgreens -- the largest retail drugstore in China today with more than 2,300 stores in 63 cities. The company provides 1,000 private label products including prescription drugs, OTC medications, nutritional supplements, herbal products, medical devices and personal care products.

Much like Walgreens in the U.S., this leading drugstore chain is a familiar structure in many Chinese neighborhoods. Its popularity has already added nicely to the company's bottom line -- in 2008, revenues grew 23% while income expanded 30%. And given China's rapidly expanding prescription and OTC markets coupled with the country's healthcare reform plan, this company's business should pick up drastically.

Now, aside from China's Walgreens, there's another Chinese company profiting greatly from China's growing pharmaceutical market -- the leading supplier of traditional Chinese medicine.