3SBio Stays a Buy, Post-Report

Highlights include 3SBio Inc. (SSRX - Snapshot Report), AMAG Pharmaceuticals Inc. (AMAG - Analyst Report) and Novartis AG (NVS - Snapshot Report).

First quarter 2009 financials better than expected
    
Net revenues increased by 23.7% to RMB68.6 million (US$10.0 million) for the first quarter of 2009 from RMB55.5 million (US$7.9 million) for the same period of 2008. This increase was largely due to continued strength from TPIAO and EPIAO products, which increased by 21.3% and 21.0%, respectively, over the same period of 2008, and to a lesser degree by impressive growth from export sales, which grew 75.6% and iron product sales which grew 47.5% over the same period of last year. Total revenue was slightly higher than our estimate of $9.6 million.

The growth in sales from EPIAO was driven in part by an expanded oncology sales force, which continued to perform well. TPIAO remained 3SBio's second largest revenue contributor in the quarter, accounting for 27.3% of total net revenues. Export sales exceeded RMB3.3 million (US$0.5 million), and sales of 3SBio's IV Iron Sucrose rose to RMB2.0 million (US$0.3 million) for the first quarter of 2009.

As a result of continued sales growth from key products despite the economic situation, gross profit increased by 23.8% to RMB62.6 million (US$9.2 million) for the first quarter of 2009 from RMB50.6 million (US$7.2 million) for the same period of 2008. Gross margin increased slightly to 91.3% for the first quarter of 2009 from 91.1% for the first quarter of 2008 and 90.6% for the fourth quarter of 2008.

Non-GAAP operating income for the first quarter of 2009 grew 40.7% year-over-year to RMB20.6 million (US$3.0 million). GAAP operating income was RMB20.1 million (US$2.9 million) for the first quarter 2009, an increase of 41.7% from operating income of RMB14.2 million (US$2.0 million) for the same period of 2008.

Non-GAAP net income for the first quarter of 2009 was RMB21.0 million (US$3.1 million, $0.14 per share), excluding share-based compensation and recognition of an impairment loss of RMB4.6 million (US$0.7 million) on available-for-sale securities. This was comparable to non-GAAP net income of RMB20.2 million (US$2.9 million, $0.13 per share) for the first quarter of 2008.

GAAP net income was RMB15.9 million (US$2.3 million) for the first quarter 2009, compared to net income of RMB19.8 million (US$2.8 million) for the same period of 2008. GAAP net income was largely impacted by the recognition of an impairment loss on available-for-sale securities.

Based on the current market condition and the performance of the available-for-sale securities held by the Company, the Company expects no further impairment losses from the financial instruments currently being held. Non-GAAP net income for 1Q09 was higher than our estimate of $1.8 million ($0.09 per share).

3SBio had positive operating cash flows for the first quarter of 2009. As of March 31, 2009 the company had cash, cash equivalents and time deposits of RMB752.3 million (US$110.1 million), an increase from RMB733.0 million (US$107.4 million) as of December 31, 2008 and a slight decline from RMB790.4 million (US$ 112.7 million) as of March 31, 2008. We believe the company’s balance sheet is strong. There are no cash burn concerns.

Deep pipeline provides sustainable growth

In addition to a diversified marketed product portfolio, SSRX also has a decent pipeline under development.

In the EPO franchise, the company has filed new drug applications (NDA) with China State Food and Drug Administration (SFDA) for higher dose EPIAO (36,000 IU/vial vs regular 10,000 IU/vial) for the treatment of anemia associated with chemotherapy in cancer patients. If approved, high-dose EPIAO would be the only dosage form of this kind available in China.

Also, 3SBio has completed preclinical test for NuPIAO and the company plans to move NuPIAO into clinic in 2009. NuPIAO is second generation of EPIAO that is designed to have a longer half-life. NuPIAO is comparable in structure and function to Amagen’s Aranesp. Preliminary testing has demonstrated that NuPIAO has a comparable half-life to Aranesp.

In the TPIAO franchise, in addition to the indication for chemotherapy-induced thrombocytopenia, 3SBio is also developing TPIAO for Idiopathic thrombocytopenic purpura (ITP). ITP is an auto-immune disease with a low platelet count. The company reported positive phase III trial and filed for the label expansion in middle Jan 2009.  We expect the approval in late 2009 or early 2010. TPIAO will be the first in class for the treatment of ITP if approved. We believe the ITP indication will make a meaningful expansion of the company’s TPIAO franchise.

The company’s IV Iron product portfolio is further expanded in May 2008, when the company signed a thirteen-year development and commercialization deal for Feraheme (Ferumoxytol) with US-based AMAG Pharmaceuticals Inc (AMAG - Analyst Report). The deal grants 3SBio exclusive rights to develop and commercialize Ferumoxytol, an IV Iron replacement product for the treatment of anemia with chronic kidney disease (CKD), in China, with an option to market the drug for additional indications. Ferumoxytol is under the US FDA review and 3SBio plans to initiate a registration trial in China in 2009 after the US approval.

Late stage pipeline products also include NuLeusin. NuLeusin is a second generation IL-2 product that is designed with a longer half life. NuLeusin is similar to Chiron’s Proleukin in structure and function. The company has completed a pivotal phase III trial of NuLeusin for kidney cancer.

Compared to Novartis (NVS - Snapshot Report) Chiron's Proleukin, a treatment available in the United States, which is believed to be the only similar product on the market today, Nuleusin demonstrated similar levels of efficacy with a much lower dosage. More importantly, NuLeusin showed an improved safety and tolerability profile in patients who participated in the phase III study.

Based on the above positive phase III trial results, on Nov. 10, 2008, 3SBio filed with the Chinese State Food and Drug Administration (SFDA) for approval of NuLeusin for the treatment of late stage metastatic renal cell carcinoma. If approved, NuLeusin is expected to be the only treatment of this kind available in China.

We reiterate our Buy rating on SSRX shares with a price target of $10.50.