3SBio Plunges on Q4 Earnings Miss

3SBio (Nasdaq: SSRX) a leading China-based biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products, reported its fourth quarter and full year results for 2007. The company missed expectations and lowered guidance for 2008. Shares dropped over 25% on the news to a new low.

For the fourth quarter, net revenues were RMB 45.7 million (US$6.3 million) rising 29.8% over the same period in 2006. Operating income dropped 29.6% to RMB 6.1million (US$0.8 million). Net income was RMB 17.9 million (US$2.5 million, with earnings per ADS at RMB 0.82 (US$0.11). With net revenue consensus expectations at US$7.09 million and EPS of US$0.13, 3SBio’s results missed expectations on both the top and bottom line.

For FY 2007 net revenues were RMB 180.2 million (US$24.7 million) rising 41% over the previous year. Operating income rose 32.9% to RMB 48.5 million (US$6.7 million), and net income increased 167% to RMB 81.5 million (US$11.2 million). Earnings per ADS were RMB 3.89 (US$0.53) in 2007, compared to RMB 2.13 per ADS in 2006 and meeting analyst expectations. Looking forward, management saw revenues of US$30 to $32 million, significantly lower than analyst consensus forecasts of US$36 million.

For the full year, the company’s recombinant human erythropoietin product EPIAO accounted for revenues of RMB 118.6 million (US$16.6 million), up 22.6% from 2006. Market share for EPIAO rose to 32.6% on a volume basis and 39.9% based on value. Sales of TPIAO gained 168.3% to RMB 42.1 million (US$5.9 million). Export sales rose 15.4% to RMB 6.8 million (US$ 0.9 million).

Margins were negatively impacted by higher operating costs. For the fourth quarter, total operating expenses increased by 42.8% to RMB 33.8 million (US$4.6 million) as compared to the same period in 2006, which was primarily attributed to the increase in research and development expenses of the company’s recombinant human thrombopoietin product TPIAO, higher personnel costs, and increased sales and marketing expenses. For the full year, total operating expenses increased by 43.4% to RMB 114.2 million (US$15.7 million) from RMB 79.6 million in 2006. Of note is that operating expenses rose faster than revenues for both the quarter and the full year.

Much of the rise in operating costs was due to sales, general and administrative expenses. SGA rose 41.3% and 39% for the quarter and year respectively. This was attributed to higher marketing costs, staff costs and bonuses as a result of an increase in headcount. The new hiring, including a previously announced increase in the company’s oncology sales force, resulted in a rise in recruitment bonuses which the company characterized as non-recurring.

R&D expenses were another concern. These expenses rose 58.4% to RMB 3.7 million (US$0.5 million) in the fourth quarter 2007 from RMB2.3 million for the same period in 2006. R&D expense as a percentage of total net revenues increased to 8.1% in the fourth quarter 2007 from 6.7% for the same period in 2006. For the full year, R&D increased by 90.7% to RMB11.6 million (US$1.6 million) from RMB6.1 million in 2006. R&D expense as a percentage of total net revenues rose to 6.5% in 2007 from 4.8% in 2006.

The increase in R&D expenses was attributed primarily to increased phase IV post-marketing clinical tests for TPIAO which are expected to be completed in the second quarter of 2009. In addition, phase III studies of high dose EPIAO have been extended by the prinicipal investigators to evaluate for risks associated with higher hemoglobin levels. Ongoing product pipeline development also contributed to R&D costs.

Along with the phase III studies on high dose EPIAO, the company is in phase III trials for the use of TPIAO in treating the blood disorder idiopathic thrombocytopenic purpura. The company has initiated phase III trials on NuLeusin , an interleukin-2 compound for the treatment of cancers including renal cell cancer and malignant melanoma. The company is also in pre-clinical development on a second generation erythropoetin (NuPIAO) and a humanized monoclonal antibody anti-TNF mAb (SSS07).

An earnings miss and lowered earnings expectations going forward were not received well by analysts or investors. UBS analyst Vicky Chen said the results were 'lower than expected,' calling the company's margin 'significantly lower.' In a note to clients, the firm is reported to have said that it would be revisiting its earnings model on the company. Investors were similarly downbeat. Prior to the close shares fell over 27% to US$8.47 on over 15 times average volume.

Disclosure: none