3S Bio ( Nasdaq - SSRX ) -- Follow-up Report

3S Bio (SSRX $15.25) reported better than anticipated Q4 results.  Sales advanced 40% to $15.3 million.  The company's two main recombinant DNA drugs led the charge, growing 40% and 53% respectively.  Those products accounted for 91% of total revenue for both the quarter and the full year.  Higher marketing and R&D costs prevented income from advancing as quickly as sales.  In fact, earnings declined 50% to $.08 a share in the period.  Most of the shortfall stemmed from a one time payment to acquire the Chinese rights to sell a promising anti-rejection drug being developed in Canada.  3S Bio also made an equity investment in the developer, and will finance a Phase III clinical trial in China later in 2011.

Growth in the core business remains vibrant.  A new manufacturing facility came on line in 2010, expanding capacity by 300%.  The government's new national health insurance law is boosting patient coverage.  And while price controls limit 3S Bio's revenue potential, those regulations are accompanied by approved supplier lists that reduce competition, as well.  Several new products are in the pipeline, which could leverage performance in future years.  Cash reserves exceed $100 million.  So additional deals with non-Chinese drug companies are a possibility.

We estimate sales will improve 26% in 2011 to $80 million.  Earnings could rise 34% to $.75 a share as volume builds at the new facility and R&D costs level off as a percentage o sales.  3S Bio remains well positioned to thrive in China's still evolving health care industry.  The company is preparing to expand outside the country, as well, which should demonstrate it's ability to compete without government protection. 

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