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Drug stocks on roller-coaster ride

By Zhou Yan (China Daily)
Updated: 2009-06-25 07:51

Punting drug companies' stocks, though in vogue these days in the backdrop of the H1N1 flu pandemic, is definitely not for the faint hearted.

A case in point - the roller-coaster ride of the share price of Shenzhen Neptunus Bioengineering Co in the past few weeks.

The vaccine maker's shares traded on the Shenzhen bourse tumbled 12 percent for three consecutive trading days and, for unexplained reasons, bounced back nearly 4 percent yesterday to 9.05 yuan ($1.32) apiece.

If that was not thrilling enough, picture this: Before the three-day freefall, the company's shares had been surging at just under the daily cap of 10 percent for three consecutive trading sessions.

Before the latest fluctuations, the stock price of the Shenzhen-based drug producer, which manufactures about 400 different types of medicines mainly from herbal extracts, more than doubled within two months.

"The pharmaceutical sector, particularly herbal drugmakers, has seen big trades since the end of April," said Wang Bin, analyst, Industrial Securities. "The buying spree in Shenzhen Neptunus is not an exception, especially after the company's high-profile claim that is developing a H1N1 flu vaccine," Wang said.

The company announced on June 9 that it would set up a joint venture with British drug manufacturer GlaxoSmithKline to produce seasonal flu vaccines initially for the mainland, Hong Kong, and Macao.

In another announcement posted last week, the drug firm said it was also among the 11 companies approved by the Chinese State Food and Drug Administration to manufacture vaccines for the Influenza A virus.

The drugmaker's shares have soared 38.4 percent in four straight days on the back of these good news and the World Health Organization's declaration that the H1N1 flu had developed into a global pandemic.

The company's share turnover on June 15, for instance, reached 684.5 million yuan, up 52 percent from the previous day.

"The rush of capital into the company probably will end for a while after huge gains made earlier; its stocks are obviously over-valued," said Ge Zheng, a pharmaceutical analyst with GF Securities, adding that the company's price/earning (P/E) ratio was 400, compared with the market average of 26.7.

According to Ge, the average P/E ratio of the drug sector has exceeded 50, up from 45 at the end of April.

The increasingly irrational market sentiment about drug companies' shares was clearly reflected in the huge selling pressure on Shenzhen Neptunus at the beginning of this week. Figures from data provider Topview showed net sales of 37 million yuan of Shenzhen Neptunus' shares while per unit price dropped nearly 5 percent on Monday.

Related readings:  Drug firms play waiting game for vaccine  Pharmaceutical shares catch investor fancy  Pharmaceutical shares lose luster  Drug maker Sanjiu's profits surge 87% in 2008

"Like the buying rush, the selling spree in the drug firm is also within our expectation due to the absence of fundamental support," Wang said.

The company posted 24 million yuan in net profit for 2008, down 28.26 percent from a year earlier. The drugmaker, with 2.8 billion yuan in total assets, also had 2 billion yuan in debt as of the end of last year.

The company issued a clarification last week that its influenza vaccine still needed to go through a long process of clinical trials before it could be put on the market. For that reason, any sale of the new drug will not impact its 2009 performance.

"As such, it's unlikely Shenzhen Neptunus will get returns from the vaccine this year," Ge said, adding that the rumored release of a supplementary document by the end of June to support the government's healthcare reform measures may give a fillip to the sector.

In addition, according to a research by consulting firm Frost & Sullivan on the Chinese vaccine market, the compounded annual growth rate of the sector is expected to be around 14 to 15 percent in the next seven years.