China Biotech Week in Review: Earnings, Earnings, Earnings

by: ChinaBio Today

Last week was a big week for earning announcements from China life science enterprises: a total of eight companies announced their results. Earnings reports far overshadowed almost any other kind of news from the China life sciences sector. For the most part, the eight companies posted incredible increases in revenues, though many times each enterprise’s net income was not as spectacular. Perhaps this is the adolescent phase of China biopharma development: spectacular growth spurts, but often accompanied around the edges by adjustment difficulties as young enterprises grow into adulthood, almost as we watch.

WuXi PharmaTech Inc. (NYSE: WX), the Shanghai CRO that can lay legitimate claim to the highest profile of any China life science company, reported a very solid 80% increase in revenues and 134% jump in net income (see story). The results also beat expectations, but there was little surprise in them. The growth was there, as was the small but necessary increase over the forecasts. In short, it was almost too predictable. Much of the big increase was due to its new AppTec division, which was not part of the company a year ago. Here are the numbers: revenues up 134% at $70.8 million and net income higher by 81% at $15.5 million or 21 cents per ADS (non-GAAP). WuXi dangled the prospect of a major contract in front of analysts, but the company will not divulge details until it has a contract in hand. Similarly, the Covance contract is still being worked out, so the company was similarly reluctant to speak about it. WuXi also refused to break out specific numbers on AppTec. Chairman Ge Li said the integration is going well and that the two sides of the company will be able provide each other with added business. But WuXi admitted that revenues from AppTec were down from last year. The entire picture caused one brokerage house, Jefferies & Co., to lower WuXi to Hold status.

American Oriental Bioengineering (NYSE: AOB) used the occasion of its Q2 earnings report to announce that it will soon finalize a huge acquisition (see story). AOB intends to purchase an unnamed China pharmaceutical distribution company with $550 million of revenues at a price of $110 million. Margins in the distribution business are very low (usually below 5%), which is just the opposite of biopharma, where they are very high. American Oriental refused to disclose the profitability of the company, but did say that its margins are “above the industry standard.” Overshadowed by the acquisition news, the earnings report revealed that AOB continues to grow: Q2 revenues rose 74% to $59.0 million, while net income lagged slightly: it climbed 43% to $13.9 million. Fully diluted EPS were 18 cents. 

Sinovac Biotech (AMEX: SVA) enjoyed a substantial increase in its Q2 revenues: they were up 73% to $16.5 million (see story). However, the company admitted the increase included a $4.6 million government vaccine order after the May earthquake in Sichuan province. Without the government order, Sinovac’s revenues would have been higher by only 25%. Thus, the growth may not be sustainable. Net income in Q2 was $3.3 million, which was almost equal to profit in the first six months of 2007. The company now has a comfortable cash cushion of $17.1 million after having completed a $9.8 million secondary in Q1.

While releasing a very positive Q2 report, China Sky One Medical (AMEX: CSY) spent much of its announcement detailing the projects that will keep the company on a growth path (see story). The company is active on the acquisition front, and it has a welter of products awaiting SFDA approval. Revenues increased 62% to $23.7 million, and net income jumped 92% to $8.1 million or 50 cents per diluted share. These numbers beat estimates. With a P/E ratio of just 11 for the trailing 12-months and a forward P/E of 5.7, shares of China Sky One offer growth at a discount price.

BMP Sunstone Corporation (NSDQ: BJGP) enjoyed a very positive Q2, its revenues driven higher by the Sunstone acquisition that transformed the company from a distribution-centered enterprise into a vertically integrated biopharma-distribution company (see story). BMP Sunstone’s Q2 revenues climbed an amazing four-fold, rising from $7.2 million to $29.6 million. $19.6 million of that derived from Sunstone. Profitability remains a problem: non-GAAP net income was a positive $1.3 million, but charges put the official GAAP net income figure at a negative $1.3 million. BMP Sunstone’s performance so far this year led the company to bump its official 2008 revenue forecast higher by $20 million to a $110 to $120 million range. The company continues its pursuit of acquisitions as it also signs contracts to register and distribute products for foreign biopharmas in China.

Q2 was not quite so successful for 3SBio Inc. (NSDQ SSRX) (see story). The company enjoyed a healthy increase in revenue, which rose 38% to $8.7 million. However, net income was lower by 17% at $2.2 million or 13 cents per ADS. The culprit for the earnings shortfall was a 54% increase in operating expenses due mainly to sales, marketing and distribution costs as well as general and administrative expenses. 3SBio said the company is creating a new market among cancer patients for its TPIAO product, which will eventually pay off. 3SBio also reminded investors that it signed a partnership in Q2 with AMAG Pharma of Boston to develop and commercialize an iron replacement agent to treat iron deficiency anemia in chronic kidney disease ("CKD") patients. The company said it remains in the hunt for advantageous M&A deals, but any potential acquisition must be right in terms of price and/or synergies. So far, 3SBio has not spent much of the $120 million it raised in its February 2007 IPO. 

Benda Pharmaceutical’s [OTCBB: BPMA] flagship drug, the gene-therapy cancer drug Gendicine, reported a disappointing 47% drop to $.8 million (see story). The drug is loved by the media, but it hasn’t developed the same enthusiasm in the China medical establishment. Fortunately for Benda, its TCM and conventional drug business was strong enough to take Q2 revenues 40% higher to $7.3 million. That left the company with a net loss of $1.8 million for the quarter, a significant improvement over the $8.8 million that Benda lost in the year-earlier quarter. Benda now faces a $7.4 million payment for its purchase of a 60% share of SiBiono, the company that developed Gendicine. Benda paid a combination of cash and 2.2 million shares of stock and guaranteed that the Benda shares would have a price of at least $3.60 within one year. The year was up in April of 2008, and Benda, which has a price of 22 cents per share, must buy the stock for $3.60. Unfortunately, Benda has just $1 million in cash. 

Tongjitang Chinese Medicines Company (NYSE: TCM) continues to suffer because competitors are selling counterfeit versions of its flagship product, the TCM osteoporosis treatment Xianling Gubao (see story). At $17.4 million, Tongjitang’s Q2 revenues were 15% lower than 2007’s pace. On a GAAP basis, Tongjitang reported net income of $1.1 million or $2.5 million for non-GAAP earnings, a 67% decline from the year-earlier net income of $7.5 million. Tongjitang has made some small acquisitions lately, and it is prosecuting counterfeiters, which may eventually turn its fortunes around. However, the price of the company’s stock remains in the doldrums after the company Chairman/CEO withdrew an offer to buy Tongjitang for $10.20 per share. The company still has $106.6 million in cash and a market capitalization of $140 million.

China Medical Technologies (NSDQ: CMED) placed $240 million in 4% convertible senior notes, due 2013 (see story). The size of the offering was increased from the originally announced $150 million in response to demand. The company wants to raise the money to acquire businesses, products and/or technologies. The offering contained a highly unusual concurrent placement of ADSs that will effectively take 4.7 million ADSs off the market, theoretically a prop to the stock price. It didn’t work very well. Investors, who were very pleased with China Medical’s Q2 report, which was released during the previous week, sold the stock down from $54.78 before the announcement to $45.77 at the end of the week, a decline of 16%. China Medical ended Q2 with $114 million of cash. After the note offering, it has in the neighborhood of a staggering $344 million.

China Sky One Medical has developed a nasal spray for rheumatic disease (see story). The formulation is already readily available in China, where it is manufactured by only five other companies. China Sky One has received approval to begin its own production of the spray. After production begins late this year, the company expects the new product to add $500,000 in revenue in Q4. 

Schering-Plough Corporation (NYSE: SGP) bought in the 45% of its majority-owned China JV that it did not already own (see story). Schering-Plough portrayed the acquisition as an expansion of its commitment to the China pharmaceutical market. The former partners in the JV, Shanghai Pharmaceutical Group and Shanghai Pharmaceutical Industry Corporation, put the 45% stake up for sale in May, saying they wanted to streamline their business into fewer subsidiaries. At the time, the two companies were asking 66.3 million RMB ($9.6 million) for their stake. Schering-Plough did not disclose the final price. Established in 1994, the JV manufactures, markets and distributes allergy and skincare products in China.

Disclosure: none.