Wednesday, April 02, 2008

China Biopharma Stocks Suffer Tough First Quarter

by Richard Daverman, PhD
ChinaBio Today




China biopharma stocks listed on US exchanges weathered a difficult first quarter of 2008. The ChinaBio® Stock Index fell from 1675 to 1215 during the three months, a substantial decline of 27.4%.

During the same time, the Dow Jones Industrials Average was lower by just 7.5%, though Nasdaq lived up to its reputation for volatility by dropping 14%. Still, the loss in the ChinaBio® Index was almost twice as much.

China, on the other hand, suffered an even more negative quarter. The Shanghai Composite, which had climbed from 1,000 to over 6,000 in two years, peaked in October. Since that time, it dropped below 3,500. In the first quarter of 2008, it watched 34% of its value vaporize as it slid from 5261 to 3472.

Today, on the first day of the new quarter, most markets around the world posted positive sessions, as though they were celebrating, even if it was only a celebration that the first quarter was over. Japan and Hong Kong both gained more than 1%, but the Shanghai Composite dropped another 4%. Looking into the future, investors envision a slowing economy as the government clamps down to prevent inflation.

Interestingly, the Halter Golden Dragon ETF (AMEX: PGJ) – a composite of many China companies that trade in the US, and a list that is not restricted to any industrial sector – suffered the same 27% loss in the first three months of the year as the ChinaBio® Stock Index. This suggests that the difficulty is not located in biopharma, but in investors’ perceptions of the future of China.

Last year, China could do no wrong. Now, the future does not seem so completely free of limits.

The decline in prices has made many China biopharma stocks seem like bargains in terms of the usual financial measurements – PE ratios, Price to Revenue, etc. Of course, just because the stocks are cheap, it does not mean that they can’t get cheaper, as stock markets tend to overshoot the mark that says “Good Value,” both on the upside and the down.

Many of the China biopharmas that make up the ChinaBio® Stock Index are suffering in price because they are listed on less-desirable exchanges, like the Bulletin Board, and also because they lack the transparency of their Stateside counterparts – analysts have a difficult time vetting their operations. When stocks are on an upward roll, these problems are not as glaring as they become when stocks begin to slide lower.

This is not a problem for the likes of Mindray Medical (NYSE: MR) and WuXi PharmaTech (NYSE: WX). These large companies are adept at providing analysts with data and insight to convince the investment community that these enterprises are viable beyond a doubt. Still, Mindray and WuXi have watched their stock prices decline from very high PE ratios to modest ones. But the smaller biopharmas do not have this same sense of solidity, and their prices are very low in comparison to their revenues and earnings.

Nevertheless, if these smallish companies continue to perform well, announcing higher revenues and steady growth in net income – in other words, to perform as they did in 2007 – they will build the credibility they now lack. When that happens, their stock prices will move higher until the price of their shares is in line with that of other growing and profitable biopharmas.




ChinaBio Today is a regular contributor to BioHealth Investor
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