China Biotech in Review: Earnings Week

by: ChinaBio Today

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. 

It is important to note that the Mega programs exist in addition to the National 863 and 973 Programs, as well as the $584 billion stimulus program China announced this week to address the current slowdown. The stimulus program could also have a sizable effect on China biopharma, but at this point, it is not clear how much of the $584 billion of stimulus will find its way to the drug sector. 

Another investment item came from diabetes powerhouse Novo Nordisk (NYSE:NVO), which broke ground on a new $400 million insulin manufacturing facility in Tianjin (see story). The new facility will function as the company’s primary production site in China and also serve the entire Asia Pacific region. The 22,500 sq. meter plant will eventually employ almost 500 people and is expected to become operational in 2012. It is being built on a site adjacent to Novo Nordisk’s existing manufacturing plant in Tianjin. 

In another development story, China Sky One Medical (OTCPK:CSKI) paid 15 million RMB ($2.2 million) for the rights to nine new drugs from Shandong Medicine Research & Development Institute (see story). The company estimates the nine products will generate $5 million in revenue during 2009. According to China Sky One, the nine products, which have received all necessary SFDA approvals, are popular in rural areas of China. 

On the approval front, China Medical Technologies (CMED) received SFDA approval for its Breast Cancer HER2 FISH probe, the first company in China to be given an SFDA OK for a HER2 probe (see story). Breast cancer patients are routinely tested for overexpression of HER2 protein because overexpression is associated with a higher incidence of recurrence and also predicts a better response to Genentech’s (DNA) breast cancer drug, Herceptin. China Medical has been building up its FISH (Fluorescent in situ Hybridization) business, a comparatively recent acquisition that is adding significant revenues. The company recently paid $345 million for a FISH-based HPV diagnostic test, indicating that the company believes the potential market for FISH probes can be very large.

The remainder of China biopharma news last week was earnings related. China Pharma Holdings (NYSEMKT:CPHI) was a good example of the overarching theme: higher revenues but some complicating problem. The company reported its Q3 revenues climbed 52% to $12.61 million and net income was up 38% to $4.25 million, which equates to 10 cents per share fully diluted (see story). Unfortunately, China Pharma is having trouble with cash flow. Its Accounts Receivables have ballooned during the first nine months of the year, rising from $19 million to $32 million, a fact that has largely offset the beneficial effects of China Pharma’s profits.

American Oriental Bioengineering (AOB) announced another solid financial performance in Q3. The company’s revenues rose 62% to $70.6 million. The major downside for the company was that net income failed to keep pace. It was higher by only 38% at $16.5 million or 21 cents per diluted share (see story). According to the company, net income was hurt by higher expenditures for sales and marketing and because of amortization of costs from acquisitions. 

On the face of it, the Q3 financial report issued by medical device maker Mindray Medical (NYSE:MR-OLD) was very positive. Revenues were up 94% at $146.5 million and non-GAAP net income climbed a smaller but still respectable 48% to $33.7 million. Nevertheless, Mindray’s stock price suffered in the aftermath, falling 17% to $19.91, a price that is considerably lower than its $45.10 high this year (see story). Mindray lowered its guidance for the rest of 2008, disappointing investors. Plus, Mindray’s acquisition of Datascope’s patient monitoring business, an expensive deal, was the driver for much of the gains. Mindray promised that synergies with the acquired assets are already beginning and will increase the financial logic behind the deal. 

BMP Sunstone Corporation (BJGP), a company that has been building itself through profitable acquisitions, announced very strong Q3 results (see story). It was the first quarter in which results included participation from BMP Sunstone’s acquisition of drug distributor Rongheng. BMP Sunstone said its Q3 revenues were a record $30.5 million, up 240% from a year earlier. Non-GAAP net income reached $1.9 million (it was a loss of $1.5 million last year), though BMP Sunstone remains unprofitable on a GAAP basis, recording a loss of $816,000. Stock-based compensation costs, amortization of debt and amortization of acquisition were the non-cash expenses that took Sunstone’s GAAP net income negative.

Tianyin Pharmaceutical (NYSEMKT: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 just 11% to $1.8 million (see story). 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. Maintaining the theme of a negative cloud, Tianyin reported that operating expenses increased faster than revenues, climbing 155%. The culprit for the increase, according to Tianyin, was a $1.6 jump in SG&A costs to $2.6 million.

China Biologic Products (NASDAQ:CBPO), enjoying higher prices for its products and lower operating expenses, reported a very substantial 54% rise in Q3 revenues to $13.8 million (see story). Net income climbed an even larger 98% to $4.5 million, which works out to 21 cents per share, fully diluted. Prices for China Biologic’s plasma-centered portfolio increased 22% during the period, a major factor in the company’s success. The increase in price masked a decline in unit sales for some products, which were constrained by a lack of blood donations. However, all in all, it was a positive report for China Biologic, whose pending acquisitions will increase results even more in 2009.

The last two financial reports showed actual declines in revenues. China Medicine Corporation (OTCPK:CHME) said a delay in a provincial bidding system caused its Q3 revenues to fall 17% to $10.5 million (see story). Even though margins rose slightly, the increases were not enough to offset Q3’s lower revenues. As a result, net income dipped 10% to $2 million or 13 cents per share. Despite the negative Q3 comparisons, nine-month China Medicine revenues remain on the upside. Revenues so far in 2008 are up 13% to $29.2 million, and net income climbed 37% to $5.6 million or 36 cents per share, fully diluted. 

And finally, Shengtai Pharmaceutical (OTCPK:SGTI) reported that the August Olympics caused a slowdown in its fiscal year 2009 Q1 (the quarter ended September 30, 2008) financial performance (see story). According to Shengtai, the government restrictions on manufacturing and transportation, put in place in Beijing to reduce pollution, disrupted normal business activity. As a result, Shengtai reported that Q1 revenues were 6% lower at $18 million, while net income fell a more serious 72% to $630,000. The company attempted to reassure investors by saying it considers the disruptions temporary. Shengtai expects better times ahead, based on a resumption of normal business levels and its recently announced international sales initiative. In addition, a recently completed (and certified) glucose manufacturing plant tripled the company’s manufacturing capacity to 180,000 tons annually.

Disclosure: none.