Sino Biopharmaceutical is one of the largest pharmaceutical companies in China, competing in a very fragmented industry. There are more than 3000 pharma companies in PRC, representing 70-80% of the market. The rest belongs to drug majors like GlaxoSmithKline, Pfizer, Novartis or Johnson & Johnson. This is in contrast with developed countries where the top 10 companies usually control half of the market. During 2013, several western drug makers have been accused of bribery (paying doctors to prescribe their medicine), which led to many hospitals avoiding these companies. GlaxoSmithKline even said chinese doctors refuse to meet their sales representatives. This further strenghtened the power and reputation of domestic pharmaceuticals. China's healthcare spending totals around 150 billion USD (one-third of USA), but grows at 25% per year, it has already become the third largest pharmaceutical market in the world. Their current plan is to bring the entire country under medicare in the next 10 years, strenghten medical infrastructure and streamline drug research and delivery.
Chinese pharmaceutical industry is characterized by lack of innovaion. Most companies simply copy products from western drug makers, or create cheap and sometimes very faulty alternatives. On the other hand, Sino Biopharma owns 324 patents and has 95 products under clinical trial or awaiting production approval (39 of those relating to oncology, which could be a new sales growth driver for them). Sino spends 8.7% of turnover on R&D, that's a bit lower than Pfizer's (PFE) 12.5% or Eli Lilly's (LLY) 25%. Their most significant product is Ruzhong, which is a hepatitis tablet, representing 20% of sales (as of September 2013). The group has grown sales by 30% per year (since 2008), accelerating to 34% in the last quarter, ROE stands at 20% with no long-term debt and almost 3 billion in cash and cash equivalents. High growth is expected from this stock, as can be seen by their P/E of 31 and P/S of 4. But that is the case with all best stocks, if you avoid companies with higher valuations, you will automatically miss some of market's best opportunities.
But after a lot of thought, I decided not to buy this one, their operating margins have declined from 26% to 21%, and net margins from 13% to 10.7% in the past five years. I like the business, I like the growth but I don't see a sustainable competitive advantage here, the chinese market is very competitive, they have captured a certain market share, but seem to be slowly losing it. I will monitor this stock further to see if I made a mistake and meanwhile look for other stocks to buy. Since I had some stuff already written about Sino stock, I published it, someone might find it useful.