Check on China: 3SBio Inc.

Shannon Roxborough | Jul 24, 2008 6:20am EDT | Comment

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A recent study by China's Ministry of Health and the Ministry of Science and Technology said a combination of smoking, poor diet and rampant pollution has caused the nation's cancer rates to swell 80% in the last 30 years, making the disease the leading cause of death in China today, claiming 1.5 million lives every year.

And according to another report published earlier this month, the nation's growing health woes and aging population have caused health-care expenditures to explode. Total health-care spending in China is expected to rise at a compound annual growth rate of 11% between now and 2012.

It should come as no surprise, given the size of the market and the ongoing debate over Chinese drug safety, that regulators at China's State Food and Drug Administration (SFDA) have intensified their oversight and testing measures for drugs. The regulators plan to work closely with their counterparts in the United States, Europe and Australia to coordinate inspections of factories in China that produce pharmaceutical raw materials.

One Chinese company capitalizing on the spike in health-care spending while avoiding drug safety problems is 3SBio Inc. (Nasdaq:SSRX), a Shenyang-based biopharmaceutical products company that specializes in high-quality, low-cost drugs. In stark contrast to the recent disappointing setbacks experienced by a number of other domestic players and multinational pharmaceutical giants such as Merck (NYSE:MRK) and Schering-Plough (NYSE:SGP), 3SBio is thriving.

The company dominates the domestic market (with close to 40% market share) for the drug Epoetin, commonly referred to as Epo, which is used to treat anemia associated with chemotherapy treatments and kidney dialysis by increasing red blood cell production. 3SBio's protein-based therapeutic recombinant human thrombopoietin (Tpo) products, which are used to treat iron deficiency (another side effect of chemo), controls the Chinese market virtually unchallenged.

In the meantime, 3SBio is forging ahead, looking to extended its already formidable dominance of the business. The firm has completed its Phase III clinical trials for high-dosage EPIAO and expects to file with the SFDA to commercialize the new drug in the third quarter of 2008. Though human trials for TPIAO for treating idiopathic thrombocytopenic purpura (ITP), a condition that causes patients to suffer from blood clots, were delayed due to a higher-than-expected drop-off rate, 3SBio expects to complete the clinical study in the fourth quarter of 2008. Phase III trials have been completed for NuLeusin, a promising second-generation IL-2 cancer drug, bringing 3SBio a step closer to tapping a completely new market.

In May, the company reported that revenue for the quarter ended March 31 increased 56.8% to $7.9 million over the year-ago quarter, while first-quarter net earnings rose 22.3% to $2.82 million, or $0.13 per American Depositary share, beating Wall Street's consensus view by a penny.

Since then, analysts have expressed bullish sentiment. Lewis Fan of Brean Murray, who maintains a "buy" rating on 3SBio, has raised his 2008 and 2009 EPS estimates for the company to $0.55 from $0.54 and to $0.80 from $0.79, respectively. The firm also upped the stock's 12-month target price to $14 from $13. Pacific Growth Equities, which maintains a "buy," feels 3SBio has the ability to form a long-term partnership with an American company to develop a product with "significant market potential." Oppenheimer, with its "outperform" rating, says 3SBio shares are undervalued and it expects to see "material share appreciation in the next 12 to18 months."

Last week, Piper Jaffray Initiated coverage on 3SBio with a "buy" and a $12 price target, noting that the company is "well positioned to benefit from the fast growing pharmaceutical market in China because of dominant product market shares of its key products EPIAO and TPIAO, a well established high-quality product reputation, and the expected insurance coverage expansion in China." The analysts also expressed confidence that 3SBio's robust pipeline of products are "becoming increasingly important revenue contributors" and that the company's strong business model and R&D efforts are attributes that point toward "long-term growth potential."

Adding to its potential, 3SBio recently made a wise investment that is bound to pay off. In exchange for an upfront payment of $1 million and tiered sales royalties of up to 25%, the company announced it formed a strategic partnership with Cambridge, Mass.-based AMAG Pharmaceuticals Inc. (Nasdaq:AMAG) that will allow it to sell the intravenous iron replacement drug Ferumoxytol in China. Under the terms of the agreement, AMAG will grant 3SBio exclusive rights to develop and commercialize the product in China while retaining all manufacturing rights.

With a growing number of Chinese suffering from cancer and kidney disease, existing and new oncology and nephrology treatments in the company's pipeline could find a huge market and make SSRX a healthy addition to your portfolio.

The stock has traded between $7.29 and $22.75 over the past 52 weeks. Shares closed at $9.79 on Wednesday.