Simcere Issues Net Income Warning for 2008

Simcere Pharmaceutical Group (NYSE: SCR) announced that, according to preliminary figures, the company’s full-year 2008 revenue was 1.72 billion RMB ($252 million). That is up 24% over 2007, but at the low end of its previously announced 1.7 billion to 1.8 billion RMB estimated range. A more negative note is that net income will be about 10% below the forecast, which was 390 million RMB to 400 million RMB. This indicates earnings of about 355 million RMB ($52 million), only an 18% improvement over 2007.

The company blamed the shortfall on two major factors: (1) self-pay drugs – those not covered by insurance – saw a decrease in demand as consumers curtailed their spending, a trend especially evident in Q4; and (2) Simcere’s interest income and foreign exchange gain declined significantly. In 2007, Simcere recorded almost $3.8 million in foreign exchange gains.

The 2008 increases were not as great as those of 2007. Simcere generated revenues of 1.39 billion RMB ($190.5 million) in 2007, a rise of 46% over the previous year, while net income came in at 301 million RMB ($41.3 million), a 75% jump from 2006. Simcere promised a full report of Q4 and fiscal year 2008 in March.

Simcere produces branded generic pharmaceuticals as well as the biotech cancer drug Endu. The company focuses on first-to-market generics, such as its stroke management drug, Bicun. Although the company’s stroke drugs are first-to-market, competing drugs have appeared. Simcere’s drugs have name recognition, but consumers now have alternatives. The company has more than 12 products in its pipeline.

Investors were disappointed by the news. Shares of Simcere fell $1.19 to $7.51, a 14% decline. Volume was very heavy.

In November 2008, Simcere announced that it would begin a $50 million share buyback. The company currently has a $470 million market capitalization. 70% of its shares are held by BVI-located entities that are the founding shareholders of the company.

Disclosure: none.