Simcere Pharma Misses on All Fronts (MRK) (SCR)

Zacks

Simcere Pharmaceutical Group’s (SCR) third quarter 2011 earnings of 10 cents per American Depositary Share (ADS) fell short of the Zacks Consensus Estimate and the year-ago earnings by 5 cents each. The reduction in earnings was attributable to lower revenues recorded in the third quarter of 2011.

Revenues at Simcere Pharma came in at $78.5 million in the third quarter of 2011, down 4.5% year over year. The decline was primarily attributable to reduced sales of some branded generic products at Simcere Pharma. This was attributable to the changes in the pricing policies of the Chinese government coupled with issues pertaining to the tender process in certain areas. Revenues were well short of the Zacks Consensus Estimate of $96 million.

In terms of local currency, revenues declined 8.9%. The decline in revenues of edaravone injection products (down 5.3% in local currency) and certain branded generic offerings such as Zailin and Yingtaiqing (down 20.1% in local currency) outweighed the increase in revenues from cancer drugs Endu (up 21.9% in local currency) and Sinofuan (up 9.9% in local currency).

The decrease in the sales of edaravone injection products was primarily attributable to increased competition coupled with the realignment of the sales team by Simcere Pharma in some areas. Gross margin came in at 84.6% during the quarter, compared with 84.8% in the prior-year quarter.

Sales, marketing and distribution expenses came in at $45.7 million in the reported quarter, up 2.5%. The expenses however declined 2.5% in local currency. Research and development expenses climbed 4.6% to $7.1 million. The increase was attributable to the company’s efforts to develop its pipeline. The expenses increased 39.6% in local currency.

General and administrative expenses at Simcere Pharma were $10.9 million in the reported quarter, down approximately 1.8%. The expenses fell 6.0% in local currency.

Our Take & Recommendation

We are impressed by Simcere’s joint venture with Merck (MRK) which is aimed at providing Chinese patients enhanced access to quality therapies. However, pricing pressures and competition for the Chinese company’s branded generic offerings are expected to continue impacting Simcere’s top line.

We currently have a Neutral recommendation on Simcere Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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