The List You Have to Be On

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Americans aren't the only ones with health-care costs spiraling out of control: China has problems of its own, with the prices of drugs becoming unaffordable for its growing middle class.

Unlike the U.S., though, China can make fairly unilateral decisions to help cut costs. Last week, it came up with a list of 307 drugs that it considers necessary. Two-thirds of the list is made up of western drugs, including quite a few generics made by Simcere Pharmaceutical (NYSE: SCR), with the rest being traditional-Chinese medicine treatments, including 61 from American Oriental Bioengineering (NYSE: AOB).

The government has a goal of getting the drugs into 30% of the state-run clinics by the end of the year and all the clinics by 2020, essentially creating a large market for companies with drugs on the list. Of course, the high demand comes at a price because the government will ensure that the drugs are sold at a reasonable price, compressing margins.

Ideally, companies would like to see a mix, with some of their drugs on the list while others are kept off the list so that they can produce higher-margin returns. A little Wal-Mart Stores (NYSE: WMT) mixed with a little Tiffany (NYSE: TIF), if you will.

Having no drugs on the list might seem ideal, but this is China after all, and companies not improving the state could become takeover targets.

As has become so typical with American Oriental Bioengineering, the press release announcing the list was a bit confusing: "The Company currently manufactures and markets six of the sixty-one products [on the list] ... the Company is actively exploring marketing other AOBO products included in the [essential drug list]." I know what you're thinking: What's the deal with the other 55 products?

The Motley Fool Global Gains team contacted management, and it turns out that the government put drugs on the list that were approved to treat common diseases, even if they weren't actively being made.

Others are gearing up to make sure they're on the list. sanofi-aventis (NYSE: SNY), for instance, has said it will spend millions of dollars to boost the output of Lantus, its insulin drug, in China.

All in all, this sounds like a growth opportunity for American Oriental Bioengineering and anyone else who can get a place on the list.