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Simcere Beats 1Q Earnings & Revenue Estimate

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Simcere Pharmaceutical Group reported first quarter 2013 earnings of 9 cents per American Depositary Share (ADS) beating the Zacks Consensus Estimate by a penny. We note that each ADS represents two ordinary shares of Simcere Pharma.

Revenues at Simcere Pharma came in at $85.1 million in the first quarter of 2013 beating the Zacks Consensus Estimate of $82 million. Sales increased 8.4% year over year in local currency despite continued pricing restrictions from the government and stiff competition.

Quarter In Detail

All growth rates mentioned below are in terms of local currency. Sales of Edaravone injection decreased 10.3% year over year primarily due to pricing restrictions by the government along with issues relating to the tendering process. Cancer drug Sinofuan (declined 16.9% in terms of local currency) also performed disappointingly during the reported quarter.

Sales of other cancer drugs like Endu and Jiebaishu increased 42.4% and 12.6%, respectively. Sales of gastroenterology drug Biqi posted year-over-year growth of 11.5%.

Nevertheless, sales of Anxin (anti-infection) increased 7.2% year over year notwithstanding government restrictions on the use of antibiotics. The growth was primarily attributable to Simcere Pharma’s strategy of targeting key regions and key hospitals. Sales of another anti-infection drug Anqi, however, were down 13.3% in the reported quarter. 

Sales of Zailin (anti-infection) increased 4.2%. Yintaiqing (inflammation) also posted an increase of 46.2% from the year-ago quarter. Sales of Kechuanning (respiratory) were up 26.3% from the year-ago quarter. Simcere Pharma is reformulating its pricing strategy for tenders along with exploring new models for better promotion of its generic products in the market to combat intensifying competition.

Gross margin declined to 79.2% during the first quarter of 2013 from 82.0% in the year-ago quarter. The decline in gross margin was due to a reduction in sales of drugs with higher gross margins. Simcere Pharma also incurred certain fixed overhead costs ahead of the commercial production of influenza vaccine products, which negatively impacted margins.

Simcere Pharma’s research and development (R&D) expenses decreased 7.0% primarily due to the completion of development of the company’s influenza vaccine product and subsequent transition to commercial manufacturing. Sales, marketing and distribution expenses increased 0.3%. General and administrative expenses declined 1.6% from the year-ago quarter.

Our View

We believe that Simcere Pharma will face challenging market conditions in the remainder of 2013 owing to pricing pressure from the government. Nevertheless, improvements in cost structure should lift the overall performance.

We note that Simcere Pharma has associations with leading players in the pharmaceutical space, such as Merck & Company, Inc. (MRK - Free Report) and Bristol-Myers Squibb Company (BMY - Free Report) , to expand its product portfolio.

We remind investors that Simcere Pharma received a buyout proposal from Mr. Jinsheng Ren, New Good Management Limited, Assure Ahead Investments Limited and its subsidiaries in Mar 2013. In response, Simcere Pharma’s board has formed a special committee of independent directors, headed by Mr Alan Au, to consider the proposal.

Simcere Pharma currently carries a Zacks Rank #3 (Hold). Right now, Santarus looks attractive with a Zacks Rank #1 (Strong Buy).

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