The Big Picture for Sinobiopharma, Inc. (SNBP)
Today's Financial News - Posted January 26, 2010
One of the Chinese drug companies I’ve been following for almost a year is Sinobiopharma, Inc. (OTC:SNBP).
by J. Christoph Amberger
Baltimore, MD: Last June, in a small ceremony in Guangzhou, China, U.S. and Chinese officials signed three agreements that will change the face of the global pharma industry. At face value, it was the most boring bit of news of the day.
But when the ink had dried into a deep royal blue, the United States government had committed to a huge strategic blunder. Like Napoleon selling Louisiana to President Thomas Jefferson… or Russia selling Alaska for $7,200,000…
Only bigger!
But here’s the good news: The “Guangzhou Agreements” have created an enormous investment opportunity! It could be like getting a second shot at investing in Chinese A-shares… in 1997! But let me give you an idea of the full scope:
In 2006, global spending on prescription drugs topped $643 billion. The United States accounts for almost half of the global pharmaceutical market. That’s more than the annual GDP of Venezuela… Greece… or Argentina! With one crucial difference: All these countries operate at a loss.
But profits for U.S. pharma companies actually grew as other top industries began to stall. In Fortune magazine’s annual survey, the pharma industry regularly tops the list of the most profitable industries, with a return of 17% on revenue.
Those Guangzhou Agreements mean one thing: The U.S. pharma companies will be shipping their profits abroad! And U.S. taxpayers will pay for them to do it!
Giving away the pharm
Here’s what went down: On June 18, the U.S. Pharmacopeial (USP) Convention reached three new cooperative agreements with Chinese drug control authorities.
You’ve probably never heard of the USP. It’s a scientific organization that sets standards for the quality of prescription and over-the-counter drugs. These standards are enforced by the U.S. Food and Drug Administration (FDA) in the United States. This was only the first wave in what Kiplinger magazine calls “a sea change in food safety regulation.”
Sidetracked by “health” reform, Congress is about to pass sweeping new legislation to overhaul of the nation’s food safety laws. Sources report there’s a “broad consensus” among consumers, industry groups, scientists, President Obama and members of both parties in Congress. It’s easy to understand why consumer groups and politicians are in it:
Remember the recent FDA investigation into the “Baxter heparin scare”… which uncovered a contaminated ingredient obtained from a Chinese manufacturer?
Or the 2008 scandal of melamine contamination in Chinese-made powdered formula, which sent 60 babies to the hospital?
Or how about the 2007 case when Chinese pet food ingredients killed and sickened thousands of dogs and cats in the United States…
It’s easy to see why politicians want to make sure Chinese food and drug exports are as safe as can be. U.S. companies are all for it, too. They want to avoid costly recalls. (The recent salmonella outbreak alone cost the peanut industry more than $1 billion.) Not to speak of billions in possible litigation awards! But there’s another reason for their enthusiasm:
Lack of reliable quality standards is the single major hurdle that’s kept the U.S. pharma industry from moving abroad!
And it’s been killing them!
U.S. politicians now demand that U.S. pharma companies make their products available at minimal profit margins. Nationalized healthcare threatens to undercut the profits needed to maintain vital research and development. But the industry hasn’t been able to offset increasing cost and shrinking revenues.
Over the next few months, U.S. pharma’s facing a rapidly declining return on investment as thousands of blockbuster drugs lose patent protection. Since 2007 the industry has laid off thousands of workers to cut costs.
There’s only one way out of this looming debacle: Follow the toy, textile, electronics, shoe, furniture, solar, and computer industry. And move to China!
Congress is now speeding up the process. This legislation will give the FDA more authority to enforce strong quality standards. Companies will have to verify that foreign supplies are safe.
Most importantly, there’ll be a bigger FDA presence abroad for more on-site inspections in more countries.
Especially China!
This is what the U.S. and Chinese pharma industry has been waiting for. You see, these days, 75-80% of all active pharmaceutical ingredients used by U.S. drug manufacturers are imported, mainly from India and China. So are 40%of finished dosage forms. But a recent government audit revealed that the FDA was unable to provide inspection records for a full two-thirds of the 3,250 facilities currently supplying the U.S. with pharmaceutical ingredients:
Right now, the FDA only carries out inspections of around 7% of the total number of foreign drug manufacturers a year. U.S. drug makers are subject to surprise inspections every two years. But foreign manufacturers are even given advance warning before an inspection takes place… and can provide the translators! China, which has the largest number of drug manufacturers eligible for FDA inspection (714), is scheduled for only 13 regulatory visits by the FDA this year.
That’s less than 2% of the country’s drug exporters!
Global competition
In a global economy, countries compete for manufacturing business via their labor cost and their currency. The country with the cheapest labor, pricing output at the most advantageous exchange rate, tends to get the order. But cheap labor is only good if it produces equal quality.
A DVD player, a car, a complex chemical “Made in China” can only compete if its quality is indistinguishable from counterparts made in Japan, Germany, or USA. It’s that quality differential that we owe the remaining American automotive and industrial manufacturing jobs to. The new wave of drug legislation will make sure that the risk of supply chain contamination is reduced drastically.
The Chinese love it! They’ve already committed $1.7 billion to improve the quality of the food and drugs manufactured fro export.
Now the Americans will not only show them how to apply quality controls. They’ll do the work for them… at U.S. taxpayers’ expense! It’s a classic Win-Win situation!
Uncle Sam, on his own nickel, is removing the last obstacle to shifting not just raw materials production but the manufacture of complex pharmaceuticals to China: If the quality of output is identical, manufacturers will go with the cheapest labor and the most advantageous business climate.
Here’s the inevitable outcome:
Once rigorous quality controls are in place, U.S. pharma manufacturers will follow their colleagues from the the toy, textile, electronics, solar industries to Guangdong, Shenzen, Shanghai. The benefits are unbeatable: Political culture in the United States is by now fully anti-business and pro-entitlement.
At home, the U.S. pharma industry’s being painted as a major obstacle to “affordable healthcare”. It’s a prime litigation target. High taxation and government-mandated unionization of many aspects of the labor market have already reduced the attractiveness of the United States as a manufacturing location for other industries.
China, however, loves business. The massive domestic market in China is just the icing on the cake!
Starting in early 2010, American drug makers will increasingly shift production abroad. They can do so safely: The U.S. government will make sure drugs can be manufactured at equal quality — but for a fraction of the cost. Plus, the Chinese government has initiated a $124 billion spending stimulus on healthcare for 2009-2011!
But to operate effectively within the Chinese system, foreign companies require well-connected partners. Merger & acquisition activity involving American and Chinese pharma companies will start picking up as early as this fall… and come to a boil by Spring 2010!
The most likely take-over candidates are not the large corporations… with whom American companies have partnered for manufacturing and distribution since the 1990’s.
It’s small but well-established Chinese companies with existing high-quality manufacturing capabilities and a foot in every door that counts in Beijing
One of the Chinese drug companies I’ve been following for almost a year is Sinobiopharma, Inc. (OTC:SNBP).
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