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Simcere Pharmaceutical Group’s first quarter 2012 earnings of 8 cents per American Depositary Share (ADS) were in-line with the year-ago earnings but short of the Zacks Consensus Estimate by 2 cents. Lower-than-expected revenues led to the earnings miss in the first quarter of 2012. We note that each ADS stands for two ordinary shares of Simcere Pharma.

Revenues at Simcere Pharma came in at $77.4 million in the first quarter of 2012, up 5.2% year over year. Higher sales of oncology products such as Endu, Jiebaishu and Sinofuan aided revenues in the reported quarter. Revenues were, however, short of the Zacks Consensus Estimate of $79 million. In terms of local currency, revenues increased 1.1% to RMB 487.6 million.

Sales of cancer drug Endu increased 13.5% in local currency to RMB 56.3 million. Sales of branded generic drugs, including Zailin, climbed 7.7% in terms of local currencies to RMB 231.1 million.

We note that Zailin sales were adversely impacted in the final quarter of 2011 (down 9.7%) by the Chinese government’s decision to cut the prices for branded generic drugs. To combat the situation, Simcere Pharma changed its strategy with respect to marketing and selling Zailin in the first quarter of 2012 in addition to joining hands with the top 100 pharmacy chains in China.

Sales of edaravone injection products declined 14.7% to RMB160.9 million primarily due to the adverse impact of changes to the tender process in certain regional areas coupled with the realignment of the sales force at Simcere Pharma. However, cancer drug Sinofuan performed impressively in the quarter with sales increasing 33.7% in terms of local currency to RMB 39.3 million.

Gross margin went down to 82.0% during the quarter, compared with 83.9% reported in the prior-year quarter. Reduced sales of the high margin offerings coupled with the reduction in price of some drugs contributed to the decline in gross margin.

Simcere Pharma’s R&D expenses were up 13.4% in local currency to RMB 48.3 million. The increase was attributable to Simcere Pharma’s efforts to develop its pipeline.

Sales, marketing and distribution expenses decreased 2.1% in local currency to RMB 258.8 million. General and administrative expenses at Simcere Pharma were down 4.5% in local currency to RMB 65.1 million.

Neutral on Simcere Pharma

We currently have a Neutral recommendation on Simcere Pharma. The stock carries a Zacks #3 Rank (short-term Hold rating). We are pleased by Simcere Pharma’s efforts to expand its portfolio by launching new drugs. Moreover, the Chinese company’s associations with leading players such as Merck & Company, Inc. (MRK - Analyst Report) and Bristol-Myers Squibb Company (BMY - Analyst Report) should stand in good stead.

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