Is consolidation the new theme in China’s fragmented CRO sector? Over the past five to ten years, an almost bewildering array of new CROs has sprung into existence. Many of them have teamed up with others to provide a broader level of services. But last week, in a surprise announcement, PPD, Inc. (NSDQ: PPDI), a worldwide $2.6 billion CRO with headquarters in the US, announced it has reached an agreement to acquire Excel PharmaStudies (see story).

Excel is a China-based CRO specializing in Phase II-IV clinical trials. Founded in 2000, the company has offices in 15 China cities and over 300 employees. It has worked with more than 120 pharmas and biotech companies. PPD said the purchase will add capacity and expertise in China, while also increasing its employee count and client base in the Asia Pacific region. Unfortunately, financial terms of the acquisition were not disclosed. The question now becomes whether this transaction is a one-off or the harbinger of a trend toward consolidation, a trend that results in larger, more dominant CRO enterprises.

Tianyin Pharmaceutical, Co. (TPI) has formed a joint venture with Sichuan Mingxin Pharmaceutical Co. to produce macrolide antibiotics, such as azithromycin, clarithromycin and roxithromycin. Tianyin will own 77% of the JV, which will be known as Sichuan Jiangchuan Pharmaceutical Co., Ltd. Although Tianyin was historically focused on TCM products, it received its first SFDA approval for an antibiotic, Azithromycin Dispersible Tablets, in 2008.

The new JV, Sichuan Jiangchuan, will be tasked with managing research and development activities, while simultaneously manufacturing and selling macrolide antibiotic APIs.

Tianyin Pharmaceutical Co., Inc., (TPI), which produces TCM and generic pharmaceuticals, announced final results for its 2009 fiscal year, which ended June 30, 2009. The company’s revenues rose 28% to $42.9 million, while net income climbed 32% to $7.9 million. Both numbers improved slightly on Tianyin’s forecast, which was issued with two weeks left in the fiscal year.

Tianyin also reiterated guidance for 2010, saying it expects revenues of $59 million and net income of at least $10.5 million. Both figures represent gains of about 35% over this year’s results.

Tianyin Pharmaceutical Co. (TPI) announced it received GMP certification for its new solid dosage manufacturing facility from the SFDA. The company said the new facility will triple its solid dose capacity. Tianyin, which has historically concentrated in TCM, has been branching out into generic versions of western drugs.

Tianyin Pharma has predicted a 40% increase in revenue for its 2010 fiscal year, which ends June 30, 2010. Eventually the company expects the new facility will provide capacity for $100 million in annual revenues.

China biopharma is very different from its western counterparts, and for foreigners, its high rate of change further complicates the difficulty of understanding the sector (see story). That was the common theme that ran through four presentations at this week’s ChinaBio Workshop, “Leveraging China to Build a Global Biotech.” Each of the four presenters used their expertise to shed light on one facet of the world of China biopharma.

The purpose of the Workshop was to provide an overview of China biopharma. But for companies already involved in the sector, last week served as a time to solidify their relationships with cross-border deals.

Tianyin Pharmaceutical (TPI) announced that it currently produces four generic products that are included in China's recently released Essential Drug List (EDL). They are: Azithromycin Dispersible Tablets, Simvastatin Tablets, Hugan Tablets and Xiao Yan Li Dan Capsules and Tablets. Tianyin thinks the EDL may cause revenues of the products to double in 2010 to $12 million.

Because all drugs on the Essential list are included in the basic health insurance catalog, they are given a higher reimbursement percentage. Pricing of products on the Essential Drug list is determined through public tenders carried out on a province by province basis. The products selected through this process may enjoy higher revenues, though margins will be affected by government price controls.

Most of the stories emanating from the world of China life science had to do with the business side of the segment: an IPO, a possible takeover, new capital and earnings – lots of earnings. In addition, there were cross-border deals that will introduce new products to China and China products to the rest of the world, plus new product approvals and China-France collaborative research.

Cheezheng Tibetan Medicine Co. has been approved to IPO on the Shenzhen exchange (see story). It will offer up to 41 million shares in the deal. The approval gives evidence that the IPO market in China is continuing to open for life science companies, following the almost year-long absence of any IPO activity as worldwide financial markets imploded. Established in 1992, Cheezheng Tibetan was the first pharmaceutical company in Tibet to be granted GMP certification. The company offers products that are drawn from the practices of traditional Tibetan Medicine.

Tianyin Pharmaceutical Co., Inc. (TPI) received SFDA approvals for two new products: 0.5 gram/tablet formulations of Sanqi Tablets and Yinqiao Jiedu Tablets. Sanqi is a generic TCM that treats traumatic injuries and stops bleeding without causing blood stasis, while alleviating pain and reducing swelling. Also a generic TCM, Yinqiao Jiedu is used to treat acute respiratory system ailments, such as influenza and common cold.

Tianyin said its research showed annual sales of Sanqi in China are approximately $73.5 million in China. Sales of Yinqiao Jiedu Tablets are approximately $1.2 billion each year. Tianyin expects the launch of Yinqiao Jiedu to increase its share in the market for flu drugs.

4:12 PM, Aug 13, 2009 --

• NYSE up 65.19 (1%) to 6,604.06.
• DJIA up 35.9 (0.4%) to 9,398.
• S&P 500 up 6.9 (0.7%) to 1,013.
• Nasdaq up 10.6 (0.53%) to 2,009.

GLOBAL SENTIMENT

Like the U.S., China's healthcare costs have soared in recent years. Outpatient costs were 12 times higher in 2007 than in 1990 though incomes increased by only 5-7 times during the same period. Spending on healthcare amounted to about $185 billion or 5.67% of China's GDP in 2007, yet healthcare investments have clearly not kept pace with China's miraculous economic growth.

Eli Lilly (NYSE: LLY) won the prize for last week’s most innovative business plan. The company is transforming itself from a fully integrated big pharma to a partnership model, which it calls a Fully Integrated Pharmaceutical Network (FIPNet). The goal is to foster open collaboration between Lilly and global laboratory researchers. To implement that collaboration, Lilly unveiled a new program last week: the Phenotypic Drug Discovery Initiative, or PD2 (pronounced PD-squared) (see story). Lilly is offering a free-of-charge use to outside researchers of its disease-state assays, complete with a secure web portal, which will evaluate the therapeutic potential of externally-developed synthesized compounds. In return, Lilly will have an exclusive right to make the first bid on a partnership deal for any promising discoveries.

Another big pharma, Pfizer (NYSE: PFE), announced it will use acquisitions and partnerships in an effort to become the number one drug seller in emerging markets such as China (see story). At present, Pfizer occupies the number three position. The emerging markets sector is worth $80 billion currently, and is expected to grow to $120 billion by 2012. Asked if acquisitions figured in the company’s future, Jean-Michel Halfon, President of Emerging Markets for Pfizer replied, "We see opportunities coming from the financial crisis ... opportunities to build partnerships in emerging markets."

Tianyin Pharmaceutical Co., (TPI), whose fiscal year ends in two weeks on June 30, announced it expects to report revenues of $42 million and net income of $7.5 million in its 2009 fiscal year. Both numbers reflect an increase of 25% over year earlier results.

Tianyin also issued guidance for further growth of 40% in fiscal 2010. The company predicted revenues will hit $59 million and net income will total $10.5 million next year. Tianyin focuses on modernized forms of traditional Chinese medications.

After spending the last two weeks on a precious metals binge, preparing for the good ol' dollar's demise, I've returned to hunting for more of what my portfolio is built around: Undervalued Chinese companies driven by domestic consumption, not exports. Normally these searches lead me to thinly traded OTC stocks with less than transparent finances. Surprisingly, three companies that still meet my stingy criteria are traded on major exchanges.

1. China Cablecom Holdings (CABL): I don't say there aren't drawbacks to my findings and this company has major ones. CABL announced last month that it received a default notice for the last $2.2M owed to one of its subsidiaries from a prior joint venture. Additionally, CABL operated to the tune of a $14M loss in 2008. Surely this one sounds a little overboard on the contrarian side so far, but the stock IPOd at over $6/share a year ago and traded at over $7/share before Asian markets crashed. Establishing infrastructure for television service is expensive and costs can be expected to decline, although doubtfully enough to result in a profitable 2009. Still, with $30M in cash and assets totaling $183M, this $5M company is heavily undervalued. Insiders still own 38% of outstanding shares and nobody dares to short this stock at the current valuation.

Tianyin Pharmaceutical, Co. (TPI) reported that it is very pleased with the results of the 2009 tender process recently completed for its flagship drug, Ginkgo Mihuan Oral Solution. Ginkgo Mihuan Oral Solution is a TCM used to treat sequels of cerebral thrombosis, coronary heart diseases and myocardial infarction. It generated 26% of Tianyin’s revenues in the December quarter.

Each year in China, medical organizations and institutions invite tenders from pharmas, essentially a reverse auction that sets a price for products. If a company’s product is selected in the tender process, it becomes the preferred product in a particular treatment area. Ginkgo Mihuan Oral Solution completed the process, receiving recognition from hospitals, clinics and market experts in charge of the tender process. Successful tenders will improve sales and the overall margin for the product, according to Tianyin.

Q2 2009 Earnings Call Transcript

February 18, 2009 at 8:45 am ET

Last week, the Lunar New Year holiday pretty much shut down business in China. But the festivities could not completely curtail news from individual China-based biopharma companies, which released items showing their continuing growth, including news of deals, developments and financial results.

On the deal front, NovaMed Pharmaceuticals signed a $5 million licensing and distribution agreement with Orexo [STO: ORX] that gives NovaMed the right to seek approval in China for Abstral, Orexo´s drug for breakthrough cancer pain (see story). If the drug is approved, NovaMed will distribute Orexo in China. NovaMed already has a sizeable portfolio of cancer drugs. In June 2008, the company agreed to distribute six of Pfizer’s (NYSE: PFE) cancer drugs. Abstral is a fast-dissolving tablet for sub-lingual administration of fentanyl, intended for the management of breakthrough cancer pain in patients who are already receiving opioid analgesics.

Christmas week put its usual chokehold on biopharma news in the U.S., slowing the flow down to a trickle. But China stepped into the near void, making up the difference by delivering stories about investments, deals and progress on new drug deals. In ChinaBio Today, we published an exclusive interview with the two companies that jointly won the “Most Promising Company” for drug development at the recent ChinaBio Investor Forum. The two companies were ProteLight Pharmaceuticals of China and BioAMPs International of Denver, CO (see story). Together, they own the worldwide rights to V13K, a peptide-based antibiotic currently in pre-clinical development. As a peptide, V13K attacks the membrane of the pathogen, instead of targeting a metabolic pathway as a small-molecule drug would do. The goal of the new mechanism is to address the unmet need of drug resistant infections. Two companies have an unusual method for handling the international development of a new drug class, showing innovation in their business plan as well as their highly original scientific research.

News also surfaced of a new VC fund for Jilin province, aimed at increasing biopharma activity in Jilin. Power Capital Co., Ltd. and a fund of funds in Jilin Province established a 200 million RMB ($30 million) venture capital fund that will invest in pharmaceutical companies in Jilin (see story). Power Capital also plans to set up a parallel fund for M&A and reorganization of the province's pharmaceutical resources. Power Capital, a joint-venture VC fund, offers experience in fund of funds management, direct investment, and investment banking. Jilin’s fund of funds, which has a value of approximately 1 billion RMB ($150 million), was co-founded by the Jilin government and the China Development Bank.

Tianyin Pharmaceutical (TPI) received a production license for Tongbianling Capsules, a generic TCM treatment for constipation, in a dosage of 0.25 gram/capsule. The company plans to launch the new product in February 2009.

Tianyin Pharma said constipation is a common problem among China’s elderly population. Its incidence in people over the age of 60 is between 15% and 30%. Tianyin said about 45 million Chinese use laxatives regularly.

Last week was the quarterly high watermark for earnings announcements in China Biotech. As a basic theme, the reports seemed each in their own way to reiterate the same message: the majority of China biopharmas reported higher revenues, though the good news was generally clouded by some less-than-ideal disclosure. Any decent novelist will attest that it is the variations to the theme that make a story interesting, and we have tried to present the notable details of each earnings release.

There were a few other stories in China biopharma – overwhelmed in number by the outpouring of financial results, but nevertheless notable. Most importantly, ChinaBio Today covered the story of the huge Mega-Drug Development Program, the only government program that is devoted exclusively to creating an innovative drug development industry in China (see story). The program, which could be worth up to $10 billion, will invest almost $1 billion in its first four years (2007-2010) and be matched with funds from local governments and industry. Grants have already been awarded to the first batch of applicants, and a second group is under consideration. 

Tianyin Pharmaceutical Co. (TPI) reported higher results for the first quarter of 2009 fiscal year. Revenues rose 33 % to $9.6 million, while net income increased at a slower pace, rising 11% to $1.8 million. However, because the number of shares outstanding almost doubled to 24.6 million shares, earnings per share dropped to 7 cents in Q1 from 12 cents a year ago.

The company cited three factors in its growth: greater marketing efforts, expanded sales channels and a broader product portfolio.