China Bio in Review: More Fallout from Economic Crisis

by: ChinaBio Today

Ramifications from the worldwide economic crisis continued to seep into the world of China biotech last week. Most notably, Charles River Labs (NYSE:CRL) noted that more and more of its contract research clients are postponing scheduled studies into next year (see story). Other clients, aware of their own tight budgets and increased capacity in the CRO industry worldwide, are aggressively seeking price reductions. The trend caused no more than a slowdown in growth in Charles River’s Q3. But for Q4, the effect will be more profound, according to company predictions. In fact, Charles River reduced its guidance for the entire year because of the delays. The trend is most pronounced in Europe, so its effect on China’s CRO industry remains a matter for speculation. Charles River said that its new China facility, opened October 15, will gradually progress to full use of its capacity over the course of 2009, implying that China will not suffer greatly from the slowdown. It could be argued that, if cost is really an increasing matter of concern, the China CRO industry would benefit, as more work is shifted to the most cost-effective sites in the world. Nevertheless, the notion that the worldwide CRO industry suddenly finds itself with excess capacity is a cause for concern.

A second example of fallout from the economic crisis hit 3SBio Inc. (NASDAQ:SSRX). The company announced a $2.7 million writedown of a $3 million investment in Lehman Brothers short-term notes (see story). 3SBio released the news as part of its preliminary Q3 unaudited results, which showed decent growth on the revenue side – they climbed 22% to $10.0 million. However, the writedown devoured almost all of the company’s net income, which dropped to $0.3 million or $0.01 per ADS. The company assured investors that the remainder of its commercial paper holdings was not in any jeopardy.

Patent law remains a concern to China biotech. China is rewriting its patent law and related administrative procedures, and the government has floated three different proposals for the new regulations, inviting comment from interested parties to each one. Last week, we published the third part of a review of the third proposal for the new law (see story), covering five topics:

• Damages and Injunctive Relief,
• Patent Misuse and Unfaithful Proceeding,
• Compulsory Licenses, Disclosure of Genetic Resources,
• Designation of Patent Firms to Handle Foreign-Related Matters, and
• Empowerment of Patent Administration.

In difficult economic times, sometimes a company’s safest investment is in itself, rather than taking on the uncertainties inherent in acquiring another company. Accordingly, two China biopharmas announced stock buybacks last week. Simcere Pharmaceutical (NYSE:SCR) will begin a $50 million share purchase of its shares (see story), and Tongjitang Chinese Medicines (NYSE:TCM) will purchase up to $20 million of its outstanding stock (see story). In both cases, the companies have fairly small public floats, implying that the initiatives could have a significant effect on both share price and financial ratios.

NeoStem (NBS) began its expansion into China with two M&A transactions of China-based companies (see story). One acquisition will give NeoStem control over Shangdon Research Institute, which offers regenerative medicine therapies. NeoStem is in the adult stem cell collection industry, so Shangdon is an extension of NeoStem’s existing business. NeoStem also took a 51% position in China Biopharmaceuticals Holdings (CHBP.OB), a company with $50 million in revenues. China Biopharma offers distribution for NeoStem’s products. The acquisitions follow a $1.25 million private placement in NeoStem from RimAsia Capital Partners, a pan-Asia private equity firm, which was completed in September. RimAsia had the goal of giving NeoStem a global presence, and NeoStem has now made good on the promise.

TomoTherapy (NASDAQ:TOMO) of Madison, Wisconsin, which makes the Hi•Art treatment system for advanced radiation therapy, will buy privately held Chengdu Twin Peak Accelerator Technology Inc., located in the provincial capital of Sichuan, China (see story). Twin Peak produces linear accelerators, which are used in radiation therapy systems to create the high-energy x-rays that treat cancer. TomoTherapy said it was looking for a second source of linear accelerators, and Twin Peaks offered a lower cost system that could produce better reliability. Terms of the transaction were not disclosed.

WuXi PharmaTech (NYSE:WX) signed a new three-year CRO deal with Pfizer (NYSE:PFE) (see story). WuXi will provide the big pharma with in vitro ADME (Absorption, Distribution, Metabolism and Excretion) services. Although WuXi has already been providing these services to Pfizer, WuXi said the new agreement “strengthens an already productive relationship.” WuXi also provides Pfizer with synthetic chemistry, parallel medicinal chemistry (PMC), and bioanalytical services.

Roche (OTCQX:RHHBY) has broken ground on an expansion of its facilities at its site in Shanghai’s Zhangjiang Hi-Tech Park (see story). The expansion is an ambitious undertaking intended to provide the backbone for the next ten years of the company’s China growth. In addition, Roche has established an office for Roche Pharma Partnering in Asia at the site. The goal of both initiatives is to discover innovative medicines in China. The Pharma Partnering business includes cooperation with universities, patent applications and M&A.

BioCurex Inc. (BOCX.OB), headquartered in the Vancouver area, has completed the incorporation process for a fully-owned subsidiary, BioCurex China, which will be sited in Shanghai (see story). The new company will operate initially as a clinical laboratory that will perform cancer tests, using BioCurex’s proprietary RECAF technology. The receptor for alpha-fetoprotein (RECAF) is found on malignant cells of a variety of cancer cell types but is absent in most normal and benign cells. Although BioCurex has out-licensed rights to automated use of its technology, it retained the right to offer manual testing, which is especially appropriate in countries with inexpensive labor.

And finally, Sinovac Biotech (NASDAQ:SVA) was pleased to announce that its growth received the recognition of being named to the Deloitte Technology Fast 50 China 2008 (see story). A vaccine maker, Sinovac’s revenues derive mainly from its hepatitis A vaccine, Healive. Sinovac said it was put on the list because of its 290% growth rate over the past three years.

Disclosure: none.