Are Simcere Pharmaceutical Group's Shares Headed Into A Downward Trend?

| About: Simcere Pharmaceutical (SCR)

One has to wonder about Simcere Pharmaceutical Group (NYSE:SCR). While the company has a very small market capitalization of around $424 million, it's trading at a P/E of slightly over 21, a very high P/E for a Chinese company showing significant declines in both revenues and net income.

Continuing what appears to be a negative trend, the company's revenues and net income were both down for the second quarter of this year. Total revenue decreased from $83.2 million from $86 million for the same period in the same quarter of 2011, a decrease of over 3 percent.

More important, net income was $4.2 million for the second quarter of this year, a staggering decrease of over 63% from the same period in 2011. And, for the first six months of this year, net income was a minuscule $8.8 million, a decrease of over 45 percent for the same period last year.

While there is no question that the company has a good niche in its market, especially with its branded generic drugs, Biqi, Yingtaiqing and Zailin, as well as its new drug Iremod. The company also has a good product pipeline and has received approval to start clinical trials for its oncology drug Thiphenib, and has four other drugs in clinical trials. But there is no question that the slowdown in economic activity in China is having a significant effect on the company's ability to sell its products, as well as its revenues, and more importantly its net income.

With continual bad news on the economic front coming out of China, including the recent dire manufacturing data, it's likely that the rest of 2012, and perhaps at least the first quarter of 2013, will be tough for Simcere Pharmaceutical. I wouldn't be surprised to see a continuing decline in revenues and net income for the foreseeable future.

As a biotech/pharma company, Simcere Pharmaceutical has been able to maintain a relatively high P/E for Chinese companies at a time when most Chinese companies have suffered due to questions as to accounting and business practices. While the shares today are trading at around $8.14, I wouldn't be surprised to see the company re-visit its 52 week low of $7.12, nor would I be surprised if the company's shares continue a downward trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Neither I, my firm, nor any related entities, have ever had a long or short position in this company. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.