Check on China: 3SBio Inc.

After a spate of food, drug and product safety recalls from China has left the nation's reputation in tatters among trading partners, one might think all the negative publicity would have shaken confidence in the country's pharma industry. It hasn't.

To allay Western concerns, Beijing, which wants a healthy pharmaceutical industry, has pledged $1.2 billion to clean up its food and drug safety problems. China's State Food and Drug Administration, which has a regulatory system similar to the U.S. Food and Drug Administration, is being reformed to improve safety standards and crack down on corrupt practices and drug counterfeiters (the Chinese media has reported the agency has yanked hundreds of manufacturing licenses and stepped up facility inspections).

Lower costs, top scientific talent and access to one of the world's largest and fastest-growing markets for prescription drugs have led every Big Pharma company—including Pfizer Inc. (NYSE: PFE), GlaxoSmithKline (NYSE: GSK), Bristol-Myers Squibb Co. (NYSE: BMY), Sanofi-Aventis (NYSE: SNY), Britain's AstraZeneca (NYSE: AZN) and Switzerland's Novartis (NYSE: NVS)—to set up shop in China.

But international heavyweights aren't the only ones vying to tap China's rich drug market. In one niche in the bio-drug sector, a local player dominates rivals. 3SBio Inc. (Nasdaq: SSRX), a leading producer of high-quality, low-cost biopharmaceuticals, has cornered the market in China for the biologic drug Epoetin, known as Epo, which is used to treat anemia associated with chemotherapy and kidney dialysis by increasing production of red blood cells.

Similar to Amgen Inc.'s (Nasdaq: AMGN) wildly popular Eopgen, 3SBio's flagship Epo product, sold under the brand name Epiao, makes up 37% of the Chinese market in product sales. (Amgen's product, distributed in China under the name Espo, has 15% market share; Swiss pharmaceutical company Roche's Epo drug, Recormon, has 10%.) Epogen sales, which are growing 30% annually, account for about 70% of 3SBio's total revenue.

Tpiao, 3SBio's second best-selling product, is used to treat platelet deficiency, a side effect of chemotherapy treatment. Since its January 2006 launch, the drug has sold unchallenged with no known competition in China. Analyst Kimberly Lee of Pacific Growth Equities estimates the drug will rake in $4.8 million in fiscal 2007 and could see sales grow in the neighborhood of $29 million in five years.

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