China medicine proves tonic for investors

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It is not the small brown pills that stand out at the Shanghai No. 1 TCM factory, produced by shiny machines inside pressure-controlled rooms and supervised by technicians in white coats. It is the ingredients.

Like any western drugmaker, Shanghai Hutchison Pharmaceuticals, the joint owner, produces neatly printed packets of medicine to high-quality standards, complete with holograms to dissuade counterfeiters. But the contents include musk, mandarin orange peel and cow’s liver.

SHPL, part of Hutchison Whampoa, one of Hong Kong’s most powerful conglomerates, is capitalising on surging demand for traditional Chinese medicine (TCM), which is attracting businesses and investors domestically and abroad.

Zhou Jun Jie, general manager, says TCM is growing just as rapidly as the fast-expanding Chinese market for western pharmaceuticals – at about 20 per cent per year. His company’s sales rose by a third to $18m in the first half this year.

Estimating the size of the market is hard, local pharmaceuticals analysts say, because it includes both hand-mixed “home brew” products dispensed without prescription, and modern pill versions of the same medicines.

IMS, the healthcare consultancy, says TCM has grown from 1 per cent to 11 per cent of the Chinese pharmaceuticals market over the past decade, with annual sales today of more than $2.5bn. The Chinese Food and Drug Administration says it represents 36 per cent of the total medicines market.

By its nature, TCM was difficult to turn into a large-scale business. It involved individual consultations with doctors, who prescribed a bespoke combination of herbs they collected and mixed themselves.

Ye Yang, deputy director general of the Shanghai Institute of Materia Medica, a division of the China Academy of Sciences, gestures to an image of such a prescription he was given recently: a full page containing several dozen dried ingredients, which were given to him in a bag to be boiled into a dark, bitter brew to drink.

He speaks fluent English and is well versed in western scientific methods, but he argues TCM can have an important role in disease prevention – and not just in China. “If it is a drug for the Chinese, it can be a drug for people worldwide,” he says, pointing out that while western medicines may be better for treating acute disease, TCM comes into its own for chronic care, with thousands of years of usage proving its safety.

Yet western regulatory demands, which require rigorous clinical trials normally testing each individual new molecule separately, hinder the approval of drugs based on natural products containing hundreds of compounds.

That helps explain the slow international expansion of companies such as Tongjitang Chinese Medicines, which listed on the New York Stock Exchange in 2007, but is proposing to buy back its shares which have performed poorly while a planned filing with US regulators for an osteoporosis drug based on TCM has stalled.

Yet within China, TCM is flourishing. Practitioners have been able to overcome suspicion about mass production, recognising that medicinal benefits may come from a standardised dose not tailored to each patient.

The Chinese government has also imposed tougher regulatory hurdles to improve the quality and consistency of ingredients, and to protect against “wild” harvesting of endangered plants. SHPL’s factory, for example, which is jointly owned with the state-controlled Shanghai Pharmaceuticals, has switched from using natural musk in She Xiang Bao Xin Wan, its top-selling pill for angina, to an artificial equivalent.

There are powerful economic reasons behind TCM’s growth. As China grows wealthier, there is greater demand for medicines of all types. While not all plants are cheap, common products are often more affordable than western-style drugs, and their long-term use offers the prospect of sustained sales.

Mr Zhou says Beijing is supporting TCM as a way to reduce the cost of healthcare. Traditional medicines comprise a third of China’s recently launched essential drugs list, ensuring significant reimbursement up to an annual limit.

But George Baeder, a healthcare expert at Monitor Group, cautions that Beijing does not have an “either-or” approach to western versus TCM medicines.

“The government believes TCM medicines in some cases to be more effective,” he says.

While most is focused on the home market, Prof Ye says there have been discussions with European and Asian regulators to examine the scope for greater authorisations in their own regions under dispensations for traditional medicine.

Another subsidiary of SHPL’s parent company is selling TCM through its upmarket Sen brand and outlets in Hong Kong, France and the UK.

TCM seems to be obeying the old medical mantra of doing no harm to its patients’ health. For its financial backers, it is also increasingly generating wealth.

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