Oct. 29, 2007 (Investor's Business Daily delivered by Newstex) --
The biotech industry isn't just a U.S. phenomenon. Yep, China has one, too, and it's growing about 20% a year.
One of China's leading biotech firms -- 3SBio SSRX -- is growing faster than the overall market, and it has been profitable for the past few years.
It holds the No. 1 market share in China for the popular protein-based biotech drug recombinant human erythropoietin -- also known as Epoetin, or Epo for short.
The drug typically is used to treat anemia associated with chronic kidney failure. It stimulates growth of red blood cells.
3SBio's flagship Epo product, under the brand name Epiao, has cornered 37% of the Chinese market in product sales. It's similar to Epogen, the blockbuster from U.S. biotech giant Amgen (NASDAQ:AMGN) AMGN.
Amgen's product, sold in China by Japanese licensee Kirin Brewery under the name Espo, has 15% market share.
Best-Seller
A smaller Epo entrant is Recormon from the Swiss drug firm Roche, with 10% market share. 3SBio also competes with several Chinese biotechs.
"This is the best-selling (biologic) drug in the world and it will have great potential in China for a long time," said 3SBio Chief Executive Jing Lou, who holds a Ph.D. in molecular and cell biology.
He's worked on Epo drugs for the past 20 years, including postdoctoral studies at the National Institutes of Health in Bethesda, Md.
Why is 3SBio ahead of the Epo pack in China? For one thing, its low-cost and quality yield manufacturing plant allow it to price the drug below foreign rivals, analysts say.
"We're priced at one-third of Kirin and Roche and our gross margins are still 90%," said David Chen, the company's VP of business development.
3SBio, which formerly was named Shenyang Sunshine, has worked to make its high-tech manufacturing facility less labor-intensive than rivals, says analyst Kimberly Lee of Pacific Growth Equities, which helped take the firm public in February.
In addition, Epiao is approved by Chinese authorities for three indications rather than the typical one or two. They include anemia associated with chronic renal failure, anemia from chemotherapy in cancer patients with non-myeloid malignancies and red blood cell mobilization.
With approval expected soon of a high dosage Epiao, the company likely will tap deeper into the oncology market.
"Right now in China, we're the only one who can sell to the oncology market," Chen said. "And we have a dedicated oncology sales force, so we think we will continue to maintain market leadership over Kirin and Roche for years to come."
Still, Chinese doctors don't treat anemia in oncology patients as aggressively as they do in the U.S., says analyst Lee. While 70% of oncology patients in the U.S. are treated for anemia, only 2% in China are so treated, she says.
Even so, 3SBio has sold about 7 million vials of Epiao since 1999. The drug accounts for about 70% of 3SBio's total revenue and is growing more than 30% annually.
Total revenue in the firm's second quarter jumped 49.2% over the earlier year to $5.7 million.
Sales of 3SBio's second best-selling product, Tpiao, which launched in January 2006, grew faster -- 263%. Used to treat chemotherapy-induced platelet deficiency, Tpiao took in $1.3 million in the quarter.
Still, the company has a lot riding on its core brand Epiao, execs admit. But because the drug still has a low penetration rate in China, over-reliance on one drug isn't as big a concern as one might think.
In addition to new cancer applications, continued growth likely will come from use in kidney dialysis. Costly dialysis still isn't as widely practiced in China as it is in the U.S. One big reason: affordability.
Only 10% of the Chinese population is covered by government insurance -- most of them through employers. That figure will no doubt expand as the state gradually increases health care spending over the next several years, Lou says.
Education, meanwhile, will play a key part in growing 3SBio's hospital business. Most drugs in China are sold to hospitals. Through third-party distributors, 3SBio sells Epiao to more than 800 hospitals in China's larger cities. It expects to have contracts with 921 hospitals by year-end.
The company's expanding sales force still has plenty of Chinese hospitals to tap into.
"Our focus is on the biggest facilities in big cities," Lou said. "In China, more than 4,000 hospitals have over 100 beds."
Then there's continued growth potential for Tpiao. Not only has it been growing fast since its launch in January 2006. It has no known competition in China.
"So we can charge whatever we want," Lou said. Analyst Lee writes that Tpiao is priced at least five times that of Epiao. She estimates the drug will take in $4.8 million in fiscal 2007 and could grow to about $29 million in sales in five years.
Drug Pipeline
Six pipeline drugs, meanwhile, are in development. They include second-generation versions of Epiao and Tpiao as well as a vaccine for human papilloma virus, or HPV, to name a few. HPV is a silent virus that can lead to cervical cancer if undetected and untreated.
By 2011, 3SBio also wants to sell into European markets. It's preparing its existing plant, and a new one not yet built, to comply with European standards.
When it does enter Europe, the firm will have a competitive edge, Lee says.
"They can price their drugs lower compared to other products because of their high-tech manufacturing abilities," she said.
Analysts polled by Thomson Financial expect 3SBio to post strong double-digit earnings growth through 2011, starting with 32% year-over-year growth in the next fiscal year, to 62 cents a share.
Newstex ID: IBD-0001-20538884
Originally published in the October 29, 2007 version of Investor's Business Daily.
