Investors' search for shelter from the financial tsunami that has battered the global capital markets is zeroing in on the shares of pharmaceutical companies, which are seen to be least affected by the economic downturn.

"The pharmaceutical sector is largely recession-proof and has done pretty well in 2008," said Liu Yaming, an analyst with Pacific Securities.

The nation's drug makers have maintained brisk growth in recent years as the population grows older and more able to pay for expensive healthcare products and services.

Total medical bills of Chinese people surged from US$5.7 billion in 2000 to US$17.7 billion in 2007, an annual growth of 17.57 percent, some 2 percentage points higher than the global average.

The economic downturn appears to have made little impact on the sector. In the first 11 months of 2008, the total profit of pharmaceutical companies grew 29.12 percent year-on-year. In contrast, net income of the industrial sector as a whole only expanded 4.9 percent during the same period.

These performance figures have reinforced investors' confidence in pharmaceutical stocks, which have outperformed the bear market of the past 18 months.

The price index for the pharmaceutical sector declined only 34 percent in 2008, compared with a 60 percent drop in the benchmark Shanghai Composite Index.

However, at present price levels, pharmaceutical companies' shares must be seen as a defensive buy because the upside, as indicated by the higher than average multiples, seems limited, stock analysts said.

Pharmaceutical shares are traded in the Chinese stock market at an average earnings multiple of 29 times, compared to the market average of 15 times, according to Li Chao, an analyst with Goldstate Securities.

"The high valuation makes it difficult for the sector to further rise in price," said Li.

(China Daily January 21, 2009)