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Simcere Pharmaceutical Group’s second quarter 2013 earnings of 2 cents per American Depositary Share (ADS) were significantly short of the Zacks Consensus Estimate of 12 cents per ADS. In the year-ago quarter, Simcere earned 8 cents per ADS.

We note that each ADS represents two ordinary shares of Simcere.

Revenues at Simcere came in at $78.7 million in the second quarter of 2013, well short of the Zacks Consensus Estimate of $90 million and down 3.0% year over year.

The decline was attributed to government policies imposing pricing restrictions on antibiotics as well as stiff market competition.

Quarter In Detail

All growth rates mentioned below are in terms of local currency.

Sales of Bicun (anti-stroke) decreased 18.5% year over year primarily due to pricing restrictions by the government along with issues relating to the tendering process.

Sales of oncology drugs Sinofuan and Endu were up 9.8% and 32.3% year over year respectively. Lowvo (oncology) was up 15% from the year-ago quarter.

However, sales of Jiebaishu (oncology) declined 3.0%. Simcere expects sales of its oncology drugs to improve in the second half of 2013 due to adjustment in the drug reimbursement list.

Sales of gastroenterology drug Biqi grew 1.4% year over year.

Sales of anti-infection drugs continue to be hit by government restrictions on the use of antibiotics leading to a 15.3%, 41.2% and 30.7% decline in sales of Anxin, Anqi, and Zailin, respectively. To counter the decline, Simcere will delegate more resources to key markets and hospitals and promote sales.

Gross margin dipped to 83.1% during the second quarter of 2013 from 84.5% in the year-ago quarter.

The decline in gross margin was due to a reduction in sales of drugs with higher gross margins.

Simcere’s research and development (R&D) expenses decreased 16.5% primarily due to the completion of development of the company’s influenza vaccine and subsequent transition to commercial manufacturing. Sales, marketing and distribution expenses decreased 0.8%. General and administrative expenses increased 27.1% from the year-ago quarter.

Pipeline Update

During the second quarter, Simcere entered into collaboration with Bristol-Myers Squibb Company (BMY - Analyst Report) for the development and commercialization of the subcutaneous (SC) formulation of Bristol-Myers Squibb’s rheumatoid arthritis drug, Orencia.

Our View

Simcere’s second-quarter results were disappointing. We believe that Simcere will face challenging market conditions in the remainder of 2013 due to pricing pressure from the government. Nevertheless, improvements in cost structure should boost the overall performance.

We note that in Jun 2013, Simcere announced the sale of its 99.99% stake in Jilin Boda Pharmaceutical Co., Ltd. for RMB 400 million to Zhuhai Rongding Equity Investment Partnership.

We remind investors that Simcere received a buyout proposal from Mr. Jinsheng Ren, New Good Management Limited, Assure Ahead Investments Limited and its subsidiaries in Mar 2013.

In response, Simcere’s board has formed a special committee of independent directors, headed by Mr Alan Au, to consider the proposal.

Simcere Pharma currently carries a Zacks Rank #2 (Buy). Others stocks which look attractive include Biogen Idec Inc.  (BIIB - Analyst Report) and Actelion Ltd. (ALIOF), each with a Zacks Rank #1 (Strong Buy).

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