Big Pharma Tapping Into Traditional Medicine

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Holistic and traditional health supplements and medicines are big business. Some pharmaceutical companies are developing traditional medicine products to tap this market.

As investors, we should consider whether companies which are initiating these ventures are trading at compelling valuations.

Traditional Drugs Market

China’s growing market for traditional drugs estimated by McKinsey at $13 billion in 2011 and expected to grow at 14% yearly increase for the next five years, is attracting the world’s largest drug makers. GlaxoSmithKline (NYSE: GSK) is testing a cure for immune disorders from botanical extract compounds, Sanofi (NYSE: SNY) is searching for alternative diabetes and cancer therapies from traditional Chinese medicines and Nestle (NASDAQOTH: NSRGY) in partnership with billionaire Li Ka-Shing plans to develop a drug for inflammatory bowel disease from old Chinese remedies.

Bloomberg Industries analyst Sam Fazeli said, “You have 1.3 billion people, many of whom cannot afford Western medicines and who believe that traditional Chinese medicines are good enough. If they can manufacture it on a meaningful scale, and do it with the stamp of a GlaxoSmithKline or a Sanofi on it, perhaps the consumer will be more interested in buying it than something that’s boiled up in a vat somewhere.”

Previous attempts to isolate single active ingredient from herbal medicines failed to achieve breakthroughs, so the drug-makers are shifting to compounds or mixtures from ancient recipes aimed for the global market and China in particular where regard for traditional medicine is quite high. GlaxoSmithKline currently implements a combination of Western drugs and traditional cures for its employees at its Shanghai Research Center.

In 2004, the U.S. (Food and Drug Administration) FDA introduced less strict conditions for botanical treatments and it brought an avalanche of more than 500 applications for testing treatments. FDA’s botanical review team head Shaw Chen said, “Almost all botanicals are complex natural mixtures that are difficult to have full chemical characterization and will need flexibility in regulatory approaches.” Chen explained that the guidelines are intended to encourage discovery of new cures especially for currently unfilled medical needs.  Most of the applications have been approved for human trials and many of them are already in phase three – the last stage before the final approval.

The scientific methods of western drug-makers combined with traditional Chinese methods is hoped to overcome the public’s doubts about the efficacy of botanical drugs. A prominent example is artemisinin, an extract from sweet wormwood, which is a very effective medicine against malaria. Artemisinin has been FDA approved and marketed in the U.S. by Novartis as Coartem. The 2011 Lasker Award for medical research has been awarded to Chinese scientist Tu Youyou for her work on artemisinin.  Another promising drug extract from ‘lei gong teng’ or ‘thunder god vine,’ a plant traditionally used in Chinese medicine, has wiped out pancreatic tumors in mice, as shown in research conducted at Masonic Cancer Center in the University of Minnesota. That drug may soon be slated for human testing.

GlaxoSmithKline’s efforts will focus on herbal drugs for immune disorders such as scaly skin causing chronic disease – psoriasis, and drugs that treat inflammatory diseases of the digestive system. (Research and Development) R&D head Zang Xun wants their company to quickly go into clinical development stage through collaboration with local companies, hinting that they may develop a product soon.

France’s largest drug-maker, Sanofi is talking with the Hong Kong University of Science and Technology about producing clinically tested traditional medicines that could be used to treat chronic diseases like cancer and diabetes.  The company is planning to register the drugs in China first, before marketing them globally after U.S. FDA approvals. Sanofi’s Asia Pacific R&D head Frank Jiang said, “If you have a very well-designed clinical trial, with evidence to show the mixture is better than a placebo in treating the disease, then in traditional medicine you may have less issues with getting approved.” Sanofi’s acquisition of Beijing-based BMP Suntone in October 2010 for $520.6 million, adds a local brand of children’s medicine for cough - Ha Wa Wa [translated: Good Baby], containing ephedra or mahuang a herb that has been a traditional medicine for asthma for millennia.

Nestle and Hutchison China Meditech (HCM), a drug-maker controlled by Li Ka-shing, entered an alliance to develop gastrointestinal drugs based on herbal medicines.  Because of the partnership, Nestle’s Health Science unit will gain exclusive access to Chi-Med’s botanical library of 50,000 extracts from medicinal plants and over 1,500 purified natural products.

Chinese pharmaceutical companies, in collaboration with foreign drug companies, believe that until they can offer ten to twenty different effective drugs derived from traditional medicine research, people’s perception of traditional Chinese medicine would not level up.

Beijing University of Chinese Medicine’s President Gao Sihua said, “Western doctors may feel Chinese medicines are not scientific enough, but we should look at what’s the aim.  As long as it heals the patient and doesn’t have strong side effects, then it should be scientific.”

Valuation Considerations

Two of the companies available to US investors that are pursuing traditional Eastern medicines are listed among their peers:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>Country</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>EPS Growth Next 5 Years</span></strong></p> </td> </tr> <tr> <td> <p><span>ABT</span></p> </td> <td> <p><span>Abbott Laboratories</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>15.9</span></p> </td> <td> <p><span>2.62</span></p> </td> <td> <p><span>23.45</span></p> </td> <td> <p><span>8.54%</span></p> </td> </tr> <tr> <td> <p><span>AZN</span></p> </td> <td> <p><span>AstraZeneca</span></p> </td> <td> <p><span>UK</span></p> </td> <td> <p><span>9.69</span></p> </td> <td> <p><span>2.01</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>-3.50%</span></p> </td> </tr> <tr> <td> <p><span>BMY</span></p> </td> <td> <p><span>Bristol-Myers Squibb</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>30.03</span></p> </td> <td> <p><span>2.86</span></p> </td> <td> <p><span>11.07</span></p> </td> <td> <p><span>2.51%</span></p> </td> </tr> <tr> <td> <p><span>GSK</span></p> </td> <td> <p><span>GlaxoSmithKline</span></p> </td> <td> <p><span>UK</span></p> </td> <td> <p><span>13.87</span></p> </td> <td> <p><span>2.54</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>5.80%</span></p> </td> </tr> <tr> <td> <p><span>JNJ</span></p> </td> <td> <p><span>Johnson & Johnson</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>23.25</span></p> </td> <td> <p><span>2.97</span></p> </td> <td> <p><span>32.21</span></p> </td> <td> <p><span>6.41%</span></p> </td> </tr> <tr> <td> <p><span>LLY</span></p> </td> <td> <p><span>Eli Lilly</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>12.99</span></p> </td> <td> <p><span>2.44</span></p> </td> <td> <p><span>25.22</span></p> </td> <td> <p><span>-4.71%</span></p> </td> </tr> <tr> <td> <p><span>MRK</span></p> </td> <td> <p><span>Merck</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>19.79</span></p> </td> <td> <p><span>2.77</span></p> </td> <td> <p><span>28.37</span></p> </td> <td> <p><span>3.78%</span></p> </td> </tr> <tr> <td> <p><span>NVS</span></p> </td> <td> <p><span>Novartis</span></p> </td> <td> <p><span>Switzerland</span></p> </td> <td> <p><span>17.85</span></p> </td> <td> <p><span>2.97</span></p> </td> <td> <p><span>31.13</span></p> </td> <td> <p><span>2.58%</span></p> </td> </tr> <tr> <td> <p><span>PFE</span></p> </td> <td> <p><span>Pfizer</span></p> </td> <td> <p><span>USA</span></p> </td> <td> <p><span>20.14</span></p> </td> <td> <p><span>3.06</span></p> </td> <td> <p><span>20.18</span></p> </td> <td> <p><span>2.21%</span></p> </td> </tr> <tr> <td> <p><span>SNY</span></p> </td> <td> <p><span>Sanofi</span></p> </td> <td> <p><span>France</span></p> </td> <td> <p><span>16.1</span></p> </td> <td> <p><span>2.66</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>2.10%</span></p> </td> </tr> <tr> <td> <p><span>VRX</span></p> </td> <td> <p><span>Valeant</span></p> </td> <td> <p><span>Canada</span></p> </td> <td> <p><span>310.68</span></p> </td> <td> <p><span>5.93</span></p> </td> <td> <p><span>16.29</span></p> </td> <td> <p><span>18.00%</span></p> </td> </tr> </tbody> </table>

GlaxoSmithKline is cheaper than Sanofi based on its lower price-to-earnings ratio and its lower price-to-sales ratio. It also has a higher estimated earnings growth according to analysts. Future earnings might benefit from their ventures into traditional Eastern medicines. Based on these price multiples, GlaxoSmithKline is a better investment candidate. Its pipeline could be bolstered by these new medicines and it trades at attractive price multiples.

BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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