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The Week in Review: Earnings, Deals and Drug Development in China

publication date: May 31, 2008
 | 
author/source: Richard Daverman, PhD

After a long line of China Biotech companies announced very healthy Q1 earnings, two companies in the last week reported results that gave investors pause. On the surface, there was little to complain about in the revenues and net income delivered by WuXi PhamaTech (NYSE: WX), the high visibility Shanghai CRO. Revenues were up 69% and net income jumped 132%, both of them beating Wall Street estimates (see story). However, digging deeper, analysts found something they did not like: revenues from the AppTec acquisition, completed on February 1, 2008, were down $2 million/month or 27% from the amounts predicted by WuXi when it announced the takeover (see story).

Was the shortfall just a glitch caused by the unsettled conditions of a change in ownership? Or was it something more significant? The problem is that investors have to be convinced that the AppTec initiative makes sense for WuXi, which seemed to be doing quite well by itself. WuXi may have the ambition of becoming a global player in the CRO space, but Wall Street is attracted to the economies offered by doing business in China. A facility in the US, in the view of the latter, does little but raise the cost of doing business. Thus, the confidence levels of investors were not raised upon news that the initial results from AppTec were a below-plan number for revenues. Be assured that the AppTec earnings contributions in the next quarters will continue to receive scrutiny.

For Tongjitang Chinese Medicines (NYSE: TCM), the results were much more obviously negative. The company reported a 29% decline in revenues, caused mainly by a 39% drop in sales from its lead product, osteoporosis drug Xianling Gubao (see story). Sales of the drug have been flat in recent quarters, and now they have moved to the negative side. Tongjitang blamed the disappointment on the heavy winter snows of February, though the weather seems to be only part of the problem. For the past six months, investors have been skeptical of Tongjitang’s prospects for growth. In March, the stock had slid to $6.60, prompting its Chairman to offer $10.20 for all publicly held shares, an offer the board continues to consider. The offer has had the effect of putting a floor under the price of the stock. The stock closed the week at an $8.95 high even though in the middle of the week, the earnings announcement sent the shares for a temporary 6% loss.

On the deal front, there were two developments, both of which were related (sometimes tangentially) to the earnings season that is now in its closing phases. China Pharma Holdings (OTCBB: CPHI) completed a $10 million secondary offering (see story). In early May, China Pharma announced a 62% increase in revenues, though much of the sales increase was not paid for – it was accompanied with a $6 million increase in the Accounts Receivable column. That hurts cash flow, as we pointed out, and accordingly, China Pharma sold 5 million shares at a below-market price of $2 and also gave investors 1.25 million three-year warrants to buy additional shares at $2.80 as a further inducement (see story). The new investment will raise cash levels, which had sunk below $700,000.

American Oriental Bioengineering (NYSE: AOB) pointed out in its call to analysts following the company’s earnings announcement that its report contained $16 million in prepayments for acquisitions (see story). The payments are refundable if the deals do not go through, and the payments are for more than one company. Having tantalized investors with those details, American Oriental refused to elaborate further on what to expect.

There was also news in China biotech last week about individual drugs. 3SBio (NSDQ: SSRX) reached an agreement with AMAG Pharmaceuticals over ferumoxytol, an intravenous iron replacement therapy (see story). In exchange for $1 million upfront and milestone payments, 3SBio now will seek to obtain SFDA approval for the treatment and then commercialize it in China, once approval is obtained. Ferumoxytol is administered to dialysis patients suffering from chronic kidney disease.

Essex Bio-Technology Limited signed a similar deal with InSite Visions (AMEX: ISV) that will allow Essex to market AzaSite® (azithromycin ophthalmic solution) 1%, an antiseptic eye drop, once Essex has secured SFDA approval for the product (see story). Essex will seek an indication of ocular bacterial infection for AzaSite, which uses InSite’s proprietary drug delivery technology, DuraSite®, to extend the residence time of the antibiotic in the eye.

Sinovac Biotech Ltd. (AMEX: SVA) received a special 20 million RMB ($2.9 million) order for its main revenue driver, the hepatitis a vaccine Healive®, from the China Ministry of Health (see story). Officials want a large supply of the vaccine for the victims of the recent earthquake, as they seek to stave off any outbreak of infectious disease in the aftermath of the disaster.

And Kiwa Bio-Tech Products Group (OTCBB: KWBT) will form a JV with Hebei Huaxing Phrarmaceutical Co. to develop an anti-viral spray for veterinary use (see story). The spray will be used in fowl houses and other animal holding facilities to prevent virus-caused diseases, especially avian flu. Kiwa in-licensed the technology for the viral spray in May 2006 from Jinan Kelongboao Bio-Tech Co., Ltd., which is affiliated with the Chinese Academy of Medical Sciences.

Disclosure: none.


 

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