Simcere Pharma's Q3 Did No More Than Meet Expectations

On Monday, Simcere Pharma (SCR) reported sharply higher Q3 financials, but investors were not impressed, sending the stock 9% lower. However, second-thoughts on the “day after” are causing the stock to regain the entire loss and close just below $16 per share, right where it was before it released its Q3 report.

By themselves, the numbers are impressive. Total revenue, year over year, is up 45% at 323.4 million RMB ($43.2 million) for Q3, and gross margins climbed from 79% to 81.7%. The company said it remains on track to hit its 2007 revenue target of 1.3 billion RMB ($177 million). But the numbers do no more than meet expectations, leaving investors and analysts without a happy surprise.

After making its Q2 report, Simcere apologized for spending too much effort on its high-profile pharmaceutical drugs, which caused the company’s branded generics to suffer. This time, the disappointment came from Endu, a high-end, patented anti-cancer drug. Year-over-year, revenues from Endu showed spectacular growth: they were up 377% at 52.8 million RMB ($7.1 million). However the numbers are misleading because the product was newly on the market in 2006. It launched in July 2006.

Unfortunately, Q3 revenues for Endu were slightly below the Q2 numbers, indicating little continuing momentum. Simcere explained that some patients are now receiving the drug for free as part of a clinical trial, which reduced sales. Endu, a recombinant human endostatin indicated for non-small cell lung cancer, is the first drug of its class to receive approval in China, which happened in 2005. The company is seeking to add the indication of liver cancer to Endu’s label.

In a recent investor conference, CEO Jinsheng Ren said that about 30% of the revenues for the drug come from off-label use. Simcere is actively seeking to out-license the drug in ex-China markets. Bicun, the company’s edaravone injection for treatment of stroke, also did well, rising 84% to 106.2 million RMB ($14.2 million), which represents almost one-third of the company’s total revenues.

On October 1, just after the end of Q3, Simcere completed the acquisition of a 51% stake in Boda Pharmaceuticals. Boda markets Yidasheng, another edaravone injection, which Simcere characterized as a low to mid-market alternative to the high-end Bicun. By gaining control of Boda and Yidasheng, Simcere feels it has eliminated the major competitive pressure to Bicun.

The majority of Simcere’s revenues come from its line of branded pharmaceuticals, which brought in 163.3 million RMB ($21.8 million) or 51% of the total. Simcere made a profit of 73.1 million RMB ($9.8 million), which was an increase of 73% from last year’s Q3 and represents a profit margin of 23%. Earnings per ADS came in at 1.14 RMB ($0.15) (fully diluted), a jump from 0.85 RMB last year. The market capitalization of Simcere is $961 million.

On September 30, Simcere had cash of 684 million RMB ($91.3 million), much of which came from the company’s IPO in April. Simcere reduced that amount by spending $14.8 of its reserves on the first day of the fourth quarter to buy 51% of Jilin Boda and its Yidasheng edaravone injection. That purchase leaves the company with considerable financial reserves to make additional acquisitions.

Disclosure: none.