Simcere Beats on Top & Bottom Line - Analyst Blog

Simcere Pharmaceutical Group (SCR) posted third-quarter 2010 earnings of 15 cents per American Depository Share (ADS), beating the Zacks Consensus Estimate by 8 cents and the prior-year earnings by 11 cents per ADS. Impressive gross margin led to the substantial beat in earnings.

Quarterly Details

Quarterly revenues were $82.2 million, up 24% in local currency and sharply above the Zacks Consensus Estimate of $75 million. Higher sales of cancer drugs, Endu (up 195.6% year over year in local currency) and Sinofuan (up 34.0% year over year in local currency), helped boost revenues.

Gross margin went up to 84.8% during the quarter, compared with 82.2% in the prior-year quarter. Stable pricing of the company's products and favorable mix shift helped boost the margin.

Simcere Pharma's research and development expenses amounted to $4.9 million, reflecting a decrease of 0.9% in local currency.

Sales, marketing and distribution expenses increased 20.8% in local currency to $44.6 million. Elevated advertising costs for marketing of the company's products and increased promotion expenses for newly launched products inflated expenses. We expect these expenses to continue increasing in the near term.

General and administrative expenses were $11.1 million, up 33.1% in local currency.

Bristol-Myers Squibb Deal

In early November 2010, Simcere entered into a deal with Bristol-Myers Squibb (BMY) to develop BMS-817378, a potential cancer treatment currently undergoing preclinical studies. As per the terms of the agreement, Simcere will develop and commercialize the candidate in China while Bristol-Myers will retain the rights in all other markets.

Our View

We currently have a Neutral recommendation on Simcere Pharma, which is supported by a Zacks #3 Rank ('Hold'). We are pleased to note that the company's recently launched drugs, Anxin, Shufutan and Xinta, continue to build a strong presence in hospitals. These drugs have also been included in China's national reimbursement drug list, which should aid long-term growth of Simcere Pharma. The agreement with Bristol-Myers Squibb is also a major milestone for the company.

However, increasing operating expenses could restrict Simcere Pharma's bottom-line growth.

 
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