3S Bio ( Nasdaq - SSRX )

3S Bio (SSRX $16.00) is a leading Chinese provider of genetically engineered pharmaceuticals.  The company's two lead products were developed internally and currently hold the largest share of their respective markets.  EPIAO is an injectible version of EPO, the drug that put Amgen on the map in the 1990s.  It's used to stimulate red blood cell production to treat anemia, primarily in post surgical and cancer applications.  That line accounts for 60% of sales and has a 42% share of the Chinese market.  TPIAO treats chemotherapy induced platelet deficiencies and represents 30% of sales with a dominant market share.  Foreign compeition was blocked out of China while TPAIO went through the evaluation stage, but those restrictions were lifted earlier in 2010.  3S Bio also markets three older products through its direct sales force.  Two additional products have been licensed from foreign drug companies.  Those drugs are in clinical trials and probably won't be introduced for 2-3 years, assuming approval is obtained.

Demand is growing at a fast pace.  China implemented a comprehensive health care reform law in 2009, which expanded coverage to most of the country's population.  Economic stimulus funding has generated further impetus.  Proliferation of advanced medical technology is increasing the number of procedures performed.  And the basic need for treatment is rising due to the rapidly aging Chinese population.  The entire medical industry is expanding at a 10%-15% annual rate.  3S Bio is growing even more quickly, in the 25%-30% area, due to its focus on the high end of the market and a superior sales force.

We estimate 2010 sales will rise 25%-30% to $58-$60 million.  Earnings are likely to end relatively flat with those of the prior year at $.65-$.70 a share due to a higher tax rate and greater R&D spending.  Next year sales could reach $75 million as 3S Bio's two lead products retain their leading positions in China's fast growing pharmaceutical industry.  Income could attain $.75-$.80 a share, depending on how well margins hold up.  3S Bio recently doubled production capacity, which will cause unit costs to increase until volume catches up.  Further hikes in R&D spending are possible, too.

The long term outlook is bright.  3S Bio is managed by American trained scientists who enjoy a stellar reputation among foreign executives.  Its proven track record could lead to increasingly large joint venture relationships.  Finances are robust, with $109 million in the bank and no debt.  New products already in the pipeline have the potential to amplify performance dramatically.  In 2-3 years the current line-up could yield sales of $125 million, and earnings of $1.40 a share.  New products and joint ventures could generate substantial leverage beyond that.   Applying a P/E multiple of 25x suggests a target price of $35 a share, potential appreciation of 120% from the current quote.  3S Bio represents a high potential acquisition candidate, moreover, so a higher valuation is possible.

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