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Simcere Pharma Beats on Bottom Line

MRK

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Simcere Pharmaceutical Group’s second quarter 2011 earnings of 21 cents per American Depositary Share (ADS) surpassed the Zacks Consensus Estimate of 13 cents and the year-ago earnings of 10 cents. Increased revenues and lower share count helped boost earnings.

Revenues

Revenues at Simcere Pharma came in at $84.4 million in the second quarter, up 0.3% year over year in local currency. Revenues however fell short of the Zacks Consensus Estimate of $89 million.

Higher sales of drugs, Endu (up 30.3% in local currency to $10.8 million), Sinofuan (up 25.8% in local currency to $8.2 million) and edaravone injection products (up 12.7% in local currency to $33.7 million) helped boost revenues.

Other Details

Gross margin declined to 84.9% during the quarter, compared with 86.8% in the prior-year quarter. A rise in the cost of materials and production led to the decline in gross margin.

Simcere Pharma’s research and development (R&D) expenses came in at $6.2 million, up 28.7% in local currency. The increase was attributable to the company’s efforts to develop its pipeline.

Sales, marketing and distribution expenses amounted to $44.6 million, down 9.7% in local currency. Stronger budget control measures and improved and efficient marketing activities helped reduce the expenses.

General and administrative expenses increased 27.3% in local currency to $11.5 million in the reported quarter. This upside reflected higher salary expenses and legal fees incurred for the joint venture with Merck & Co., Inc. (MRK - Analyst Report), which the company had entered into last month.

Our Take

We currently have a Neutral recommendation on Simcere Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

We are pleased with Simcere Pharma’s efforts to expand its portfolio by launching new drugs. With over 100 drugs in the National Drug Reimbursement List issued by the China’s Ministry of Human Resources and Social Security, we believe the company, which boasts of a well-established sales network, is well-positioned for long-term growth.

However, we also believe that bottom-line growth at Simcere Pharma will be restricted in the near-term due to rising operating costs.

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