More Than Generic Growth in China

01/05/2010 12:00 pm EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor-in-chief of China Stock Digest, says a Chinese pharmaceutical company could ride a new wave of generic drug sales in China.

Although [its American Depositary Shares are] relatively new to the New York Stock Exchange, Simcere Pharmaceutical Group (NYSE: SCR) has been in business since 1995, growing its generic pharmaceutical business from its base in Nanjing, China.

Simcere manufactures 35 generic pharmaceutical products and is licensed to distribute three others under its brand name. The manufacture and distribution of generic drugs has proven to be a highly profitable branch of the pharmaceutical industry for Western companies because of the relatively low [research & development] required to bring a product to market and the high profit margins generics yield.

In addition, Simcere has acquired the manufacturing license in China for Rosuvastatin from Tianjin Tianda Pharmaceutical Co. Rosuvastatin was first marketed by AstraZeneca as Crestor in 2003 and is widely regarded as an effective statin to treat high cholesterol and related conditions.

Simcere is also getting into the biologic drug business, [having] just announced that Jiangsu Yanshen Biological Technology Stock Co., Ltd (Jiangsu Yanshen), in which the company holds a 37.5% stake, was awarded a new drug certificate and production license from China’s State Food and Drug Administration (SFDA) for Jiangsu Yanshen’s H1N1 (swine flu) vaccine.

The drugs being marketed [by Simcere] cover a range of conditions [including] cancer, stroke, infections, arthritis, and diarrhea. The company also produces medications for the treatment of allergies, respiratory conditions, and urinary problems.

In addition to its excellent margins and growing sales, Simcere has an enviable pipeline. The company says China’s SFDA has also granted Simcere approval for the manufacture and sale of 100 other products.

Simcere’s total revenues are not large [compared with those of] American generic drug makers, but that indicates the enormous growth potential within the immense Chinese population. Chinese traditional herbal medicines still hold a substantial market share, but we’re confident that generics will continue to penetrate the market as Chinese patients look for affordable and effective pharmaceuticals, especially [for] serious diseases.

In addition to a long-established network of collaborations with researchers in China, the company is building links to the US biotech industry. Simcere recently forged an agreement with OSI Pharmaceuticals (Nasdaq: OSIP) to develop, manufacture, and market its KDR/Kit inhibitor OSI-930 in China.

OSI-930 is designed to target both cancer-cell proliferation and blood-vessel growth (angiogenesis) in selected tumors. The drug shows broad efficacy in tumor models representative of small cell lung cancer; glioblastoma; colorectal, renal, head and neck, [and] non-small cell lung cancer, and gastric cancers.

Given its potential pipeline and the size of the market, we predict very substantial growth for the company’s revenues. Also, given its profit margins, we expect exceptional profits growth after a year of modest gains for Simcere. The company’s stock has recently shown considerable momentum, breaking above its moving averages. (It closed above $9 Monday—Editor.)

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