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Simcere Pharmaceutical Group reported third quarter 2012 earnings of 7 cents per American Depositary Share (ADS), in line with the Zacks Consensus Estimate but well below the year-ago earnings of 23 cents.

Higher research and development expenses and sales, marketing and distribution expenses led to the decline in year-over-year earnings. We note that each ADS represents two ordinary shares of Simcere Pharma.

Revenues at Simcere Pharma came in at $83.8 million in the third quarter of 2012, up 6.8% year over year. Higher-than-expected sales from products such as Zailin, Yingtaiqing and Anxin resulted in the year-over-year increase in revenues.

Revenues in the reported quarter were nominally higher than the Zacks Consensus Estimate of $83 million. In terms of local currency, revenues increased 5.1%.

Sales of branded generic drug, Zailin, climbed 86.4% in terms of local currencies. Yintaiqing (up 23% in local currency) and Anxin (up 64.1% in local currency) also performed well during the quarter.

Products like Edaravone injection (declined 6.6% in terms of local currency) and cancer drug Sinofuan (declined 23.3% in terms of local currency) performed disappointingly during the third quarter. Sales of another cancer drug Endu also decreased 9.6% in local currency.

Gross margin declined to 83.6% during the quarter from 84.6% in the prior-year quarter. Reduced sales of high-margin products as a percentage of total sales led to the decline in gross margin.

Simcere Pharma’s R&D expenses increased 43.7% in local currency. The increase was primarily attributable to higher expenses related to Simcere Pharma’s ongoing R&D projects. We remind investors that the company gained approval to conduct first in-human clinical trials for its category 1 new drugs, metatinib and anti-VEGF human monoclonal antibody this September and October, respectively.

Sales, marketing and distribution expenses increased 5.1% in local currency. General and administrative expenses at Simcere Pharma declined 12.6% in local currency.

Neutral on Simcere Pharma

We are pleased with Simcere’s cost-control measures and spending efficiency, which are likely to drive profitability. 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 Simcere in good stead.

We currently have a Neutral recommendation on Simcere Pharma. The stock carries a Zacks #4 Rank (short-term Sell rating).

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