Check on China: 3SBio Inc.

Shannon Roxborough | Nov 15, 2007 10:34am EST | Comment

Rating: Unrated [rate it]

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.

In the third quarter ended Sept. 30, 3SBio's total revenues surged 57.3% to $7.5 million from $4.8 million in the same period a year earlier (Epiao took in $4.8 million; while Tpiao brought in $1.9 million, a 172% jump over the year-ago quarter). For the nine months ended Sept. 30, revenues have swelled to $12.2 million, a 25.5% increase over revenues of $9.7 million in the comparable period, one year ago.

Despite the company's strong financials, and prior to 3SBio’s third-quarter earnings release, in early October, analyst Elliot Wilbur at CIBC World lowered his rating on 3SBio to "sector perform," from "sector outperform," after shares ran up more than 70% over a two-week period. But Wilbur, who removed his prior $17 target price on the stock, acknowledged the company has strong business fundamentals and a solid financial outlook. He continues to project 40%-plus EPS growth from 2007 through 2010; collectively, analysts project 32% year-over-year growth in the next fiscal year and continued strong double-digit earnings growth through 2011.

A rich pipeline of six promising drugs are in development, including second-generation, high-dose versions of Epiao and Tpiao as well as a vaccine for human papilloma virus, or HPV, which can lead to cervical cancer if left untreated. 3SBio, which plans to start selling in Europe by 2011, is upgrading its existing plant (and planning a build a new one) that will be in full compliance with European health standards.

3SBio owes much of its success to the leadership of CEO Jing Lou, who holds a Ph.D. in molecular and cell biology from Fordham University and received his medical degree from Shanghai 2nd Military Medical University. Lou has 20 years of experience working with Epo drugs, including postdoctoral studies at the U.S. Department of Health and Human Services' National Institutes of Health.

"He's a smart manager with an intimate knowledge of the life-sciences, and he understands the Chinese pharmaceutical market inside and out," says Wang Cheng, a private consultant to the biotechnology and pharmaceutical industries.

China's domestic pharmaceutical market has grown more than 20% a year for the last three years (the biotech segment is growing at an equal pace), according to IMS Health, a market research firm. Business advisor Boston Consulting Group estimates that by 2010, China's annual drug sales will nearly double to $25 billion.

As mainland Chinese consumers' income continues to rise, spending on prescription drugs is sure to follow suit. And history has shown that emerging middle classes and increasing wealth often lead to lifestyle changes—less healthy eating habits and more sedentary habits, for example—that contribute to a rise in chronic diseases such as heart disease, cancer and diabetes, a major cause of kidney disease. (Cancer is already the leading cause of death in China; by 2025, China will have some 38 million diabetes patients, according to projections by PricewaterhouseCoopers.)

3SBio's growth prospects are promising, due to its dominant position, strong product pipeline and growing sales force set to tap deeper into a huge market. The company is likely to see continued revenue growth, positive earnings gains and cash flow generation in 2007 and 2008.

Shares of SSRX are trading at $16.68 during morning trading today. The 52-week high was $22.75 on Oct. 31. The 52-week low was $8.18 on July 13.