Investors Liked What They Saw in Simcere's Q3 Report

Simcere Pharmaceutical Group (SCR) released very positive unaudited financial results for its third quarter. At the same time, the company said it would begin a $50 million share buyback. At the end of the quarter, Simcere reported cash and short-term investments of 831 million RMB ($122.4 million). Simcere produces branded generic pharmaceuticals and its proprietary cancer drug, Endu.

Simcere currently has a market capitalization of $471 million. A full 70% of its shares are held by BVI-located entities that are the founding shareholders of the company. In its April 2007 IPO, Simcere placed 15.6 million shares (at a price of $14.50). Presently, 62.6 million shares are outstanding, and the 30% public float equals 19 million shares. At the current share price of $7.52, the float has a value of $142.5 million. The upshot is that a $50 million share buyback has the potential to make a meaningful difference, assuming the founding shareholders do not sell parts of their stakes.

In its Q3, Simcere reported that revenues climbed 37% to 443 million RMB ($65.3 million). Net income rose by a smaller 25% to 91 million RMB ($13.4 million). Simcere blamed its lower margins on a one-time event: a contract sale transaction involving resale of drugs for other pharmaceutical companies, an arrangement that is now ended. Although other costs rose in the quarter, the increases were less than the 37% rise in sales, and each cost category now represents a smaller percentage of revenues.

Sales of Endu, the company’s flagship cancer drug, remained disappointing. The product generated sales of $8 million, which was virtually unchanged from the year earlier quarter. Because the product is currently in the middle of clinical trials, Simcere continues to supply the drug to patients enrolled in the trial free of charge.

On the other hand, revenues from Simcere’s first-to-market Edavarone injection products, a vasodilator used after a stroke, were the largest driver of growth. Their revenues jumped 50% to $23.4 million. The company noted that competitors are now entering the market, but Simcere’s products have the advantage of greater name recognition.

In its Q3 announcement, Simcere reiterated its guidance that the company will realize full-year 2008 revenues of 1.75 billion RMB ($257 million) and net income of 400 million RMB ($58 million). Those results represent a net income margin of 22.5% and a Price/Earnings ratio of eight.

Investors liked what they saw in Simcere’s Q3 report and the $50 million stock buyback. The news sent the stock 94 cents higher in mid-session to $7.52, a jump of 14%.

Disclosure: none.