Simcere’s Q2 Fails Expectations

Simcere Pharmaceutical Group (SCR) reported significantly improved Q2 financials Tuesday, but the results came in below analysts' estimates and the company reduced its guidance for full-year 2008. The disappointments caused a 4% selloff in the company’s stock price.

Simcere makes branded generic pharmaceuticals for the China market as well as the patented cancer therapeutic Endu, a biologic drug.

Simcere said it faced two problems in Q2: Endu revenue growth was lower than expected because the company restructured its Endu sales force. Also, Simcere is giving away Endu to accelerate participation in a Phase IV clinical trial of the drug, resulting in lower-than-projected sales.

On first blush, Simcere’s Q2 report showed a steady, though not spectacular year-over-year improvement. Revenues climbed a solid 30% to 436 million RMB ($63.6 million) and net income was up a less-impressive 14.5%, at 95 million RMB ($13.9 million). Gross margins dropped a couple of percentage points to 81.7% and net margin was off by 3% at a still healthy 22%. The net income works out to a profit of 1.52 RMB ($0.22) per share. These are decent results, though the decline in profitability is a setback.

However, analysts had called for 458 million RMB of revenue, which Simcere missed by 22 million RMB or $3.2 million. Simcere’s Q2 net income was actually just a little higher than estimates, despite the revenue shortfall.

Because Q2 was a disappointment, Simcere trimmed its full-year projected revenues by 300 million RMB to a 1.7 billion-1.8 billion range. The company still expects its net income to hit somewhere between 390 million RMB and 400 million RMB or $58 million. That yields a price-to-earnings ratio for 2008 of just under 13, a bargain for a company that is growing at around 20% annually and has an enviable profit margin. 

Simcere recorded 10.1 million RMB in Q2 revenue from its first-to-market products, Jiebaishu and Sinofuan, both of them cancer drugs. These products were not available in Q2 of 2007.

In a conference call with investors, following release of its Q2 report, Simcere’s management said the company plans to increase its marketing activities to drive revenues higher and to continue seeking M&A opportunities.

In mid-session trading, Simcere was down 44 cents at $12.10 in moderately heavy trading.

Disclosure: none.