Simcere Misses 2Q Estimates

Simcere Pharmaceutical Group’s (SCR - Snapshot Report) second quarter 2012 earnings of 8 cents per American Depositary Share (ADS), a couple of cents below the Zacks Consensus Estimate and well below the year-ago earnings of 21 cents.

Lower-than-expected revenues led to the earnings miss in the second quarter of 2012. We note that each ADS represents two ordinary shares of Simcere Pharma.

Revenues at Simcere Pharma came in at $83.2 million in the second quarter of 2012, down 1.4% year over year. Lower-than-expected sales from products such as Endu, edaravone and Sinofuan resulted in the year-over-year decline in revenues. Revenues were also short of the Zacks Consensus Estimate of $86 million. In terms of local currency, revenues decreased 3.2% to RMB 528.7 million.

Sales of cancer drug Endu decreased 4.6% in local currency to RMB 66.8 million. Sales of branded generic drugs, including Zailin, climbed 40.8% in terms of local currencies to RMB 61.6 million.

Sales of edaravone injection products declined 18.4% to RMB177.8 million during the reported quarter. Cancer drug Sinofuan also performed disappointingly during the quarter with sales decreasing 21.3% in terms of local currency to RMB 41.7 million.

Gross margin went down to 83.9% during the quarter, compared with 84.9% reported in the prior-year quarter. Reduced sales of high-margin offerings coupled with the reduction in price of some drugs led to the decline in gross margin.

Simcere Pharma’s R&D expenses increased 36.9% in local currency to RMB 55.0 million. The increase was primarily attributable to expenses related to Simcere Pharma’s ongoing R&D projects. The company expects to add new products to its portfolio in the coming quarters.

Sales, marketing and distribution expenses increased 0.9% in local currency to RMB 291.4 million. Simcere Pharma’s increased expenditure related to promotional activities of its branded generic pharmaceutical products resulted in the year-over-year increase.

General and administrative expenses at Simcere Pharma declined 25.3% in local currency to RMB 55.7 million.

Neutral on Simcere Pharma

We currently have a Neutral recommendation on Simcere Pharma. The stock carries a Zacks #4 Rank (short-term Sell rating). Though Simcere Pharma had a disappointing second quarter, we expect investor focus to stay on new product launches in the upcoming quarters.

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.