Post IPO: Simcere Announces Q2 Earnings and Posts Higher Revenues

Simcere Pharmaceutical Group (SCR) said its revenues and profits were sharply higher in the second quarter, when compared to results a year ago. The company saw its sales rise 51% to 355 million RMB ($46.6 million), while net earnings advanced 67% to 49.7 million RMB ($10.9 million). Simcere manufactures and markets first-to-market generics in the Chinese market (see our article).

Even though the results were healthy increases, investors registered some disappointment with the report. After the announcement, the company's shares traded lower, dropping 10% at one point. In mid-session trading, the stock was off by 6%, slipping $0.86 cents to $12.88. On April 20, the company made its IPO on the NYSE at a price of $14.50. It subsequently traded as high as $19, but is now trading at the low end of its range.

In a call with investors, company officials admitted that it has been emphasizing its new, first-to-market generic drugs, while the revenue from its traditional generics have slipped, somewhat. Simcere said it will strive to redress the imbalance of its promotion.

Analysts also questioned a 24 million RMB item for "other income." The company refused to say exactly what the item represented, although 4 million RMB was from a government grant, and the remainder represented a rebate that was somehow related to the IPO. Simcere tried to minimize the impact of the item by saying that the revenue was offset by IPO-related expenses.

In response to another question, the company said attractive acquisition targets can still be found. The response came from a question pointing out that many Chinese pharmaceuticals had raised capital, either in the U.S. or Hong Kong, for acquisitions. The question was whether the capital had pushed valuations past the point where deals made sense. Simcere said that it was looking at small R&D companies, with attractive products, but sub-par sales and marketing operations.

The biggest contributor to growth for Simcere was Bicun, its prescription drug for strokes. Bicun is a generic edaravone injection, which is a synthetic free-radical scavenger that eliminates excessive free radicals in the brain after a stroke. During the second quarter, Bicun produced revenues of 110 million RMB ($14.4 million). That represented a full one-third of Simcere's sales, which was up from 20% a year ago. Bicun has now been included in the medical insurance catalogs in 22 out of 31 provinces.

Endu, the new anti-angiogenesis cancer drug from Simcere, brought in 60.3 million RMB ($7.9 million) during Q2. That was 18% of the company's total sales, and a 55% increase from the first quarter. The drug has now been on the market for a full year. The company is close to its goal of having Endu registered in 800 hospitals.

Other facts from the earnings report:

Simcere reiterated that it expects to realize a $36 million profit on sales of around $180 million for the full 2007 year.

The report also showed an increase over the first quarter of 15% in revenues, and 20% in profits.

Gross margins came in at 83.7% for the second quarter, against 78.9% one year ago.

The company's top five branded generic products contributed 68% of the total revenue, a 22% rise from the previous year.

Gross margins were 97% for Bicun and 88% for Endu.

General and administrative expenses were higher, largely because of the company's IPO. Because of the IPO, Simcere now has cash reserves of 1.12 billion RMB (US$147.5 million), which is a ten-fold increase. As promised, Simcere used a portion of the IPO proceeds to pay off $35 million in short-term loans.

On a per-share basis, the company earned 1.34 RMB (17 cents) per ADS, fully diluted.

Disclosure: none.