China Tough Medicine For Simcere
US-listed drug maker Simcere Pharmaceutical (NYSE: SCR) must be eagerly looking forward to completing its pending privatization, following the release of its latest quarterly results that show the fast-growing Chinese healthcare market is suddenly losing some of its luster. Simcere is just the latest drug maker to encounter headwinds in China, where fierce competition and strict government oversight are suddenly giving both domestic and foreign drug makers a major headache. Many of those companies were hoping to make big bucks as China rolled out a new national healthcare network to replace its old system where everyone got medical care through their state-run work units. But Beijing is pushing back by showing it aims to get maximum value for its money, and also that it won’t tolerate aggressive sales tactics practiced by many companies.
Simcere has always been in a difficult spot in terms of attracting foreign investors, since it is one of only a handful of Chinese drug makers listed in the US. Despite a strong track record that includes a growing tie-up with global drug giant Bristol-Myers Squibb (NYSE: BMY), investors have never really embraced the company. As a result, Simcere announced a plan to privatize back in March, adding its name to a growing list of Chinese firms to launch similar bids due to lack of interest from US investors.
Now that privatization plan is starting to look like a smart move, following Simcere’s release of its latest earnings that show a company on the cusp of a major slowdown. Simerce’s revenue from continuing operations slipped 3 percent in the second quarter to $78.7 million, while profit from continuing operations tumbled 58 percent to $3.1 million. (results announcement)
The company was quite direct in explaining the reasons for its poor performance, citing the government’s strict pricing policies for drugs, restrictions on the use of antibiotics and broader market competition. It added that it doesn’t see the situation improving in the second half of the year.
Simcere shares fell slightly to $9.41 after the results came out. But they are still not far from the privatization price of $9.56 announced back in March, indicating investors still believe the privatization plan will ultimately be executed. (previous post) If the company continues to post similarly sluggish results, I wouldn’t be surprised to see it privatize and then ultimately get sold to one of the big western drug makers, with Bristol-Myers as one obvious potential suitor.
Simcere’s sluggish results are just the latest in a string of bad news for drug makers in China, who once held out big hopes for the market as Beijing overhauled the country’s medical system. Last month the country’s state planner launched an investigation against a number of major global drug companies over price fixing allegations. (previous post) A short time later, it launched another probe into bribery against British drug giant GlaxoSmithKline (London: GSK), which included the detention of some company officials. (previous post)
The news hasn’t been all bad, with China’s other major US-listed drug maker, Wuxi PharmaTech (NYSE: WX), reporting more upbeat results earlier this week. (results announcement) But even Wuxi PharmaTech could only eke out 9 percent revenue growth for the quarter, although its profit grew a stronger 45 percent.
All of this shows that many of the big hopes that domestic and foreign firms once held for China’s drug market may have to be adjusted to reflect Beijing’s determination to get the best value for its money. I suspect we’ll see a bit of consolidation in the next few years that will result in many smaller players either closing or being purchased by big domestic and international names. At the end of the day, the market will still offer plenty of profits for remaining companies, though perhaps not quite as much as many had previously hoped.
Bottom line: Weak results from Simcere and other recent troubles at foreign drug makers reflect increasing challenges in China’s reforming health care market.
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