3S Bio ( Nasdaq - SSRX ) -- Clear Sailing

3S Bio (SSRX $12.00) reported excellent on target Q3 results.  Earnings advanced 53% to $.23 a share.  Sales improved 33% to $63.0 million.  3S Bio is a leading Chinese biopharamceutical producer.  Its two lead products are internally developed improvements on TPO, the breakthrough product invented by Amgen three decades ago.  Those products account for approximately 90% of total sales.  Applications are primarily in cancer treatment and dialysis, same as the original.  3S Bio is the leading provider in China because the company performed the necessary clinical trials there, and developed an effective direct sales force.  Last year 3S Bio quadrupled the size of its manufacturing facilities.  The expansion was certified by government inspectors early in 2011.  Depreciation charges and start-up costs impacted earnings in Q1.  Rising volume overtook those costs in the June period.  Further gains were realized in the latest period.

New products are in the pipeline.  3S Bio bought the Chinese rights to several candidates last year.  Clinical trials are underway.  Approvals could start to be obtained in 2014.  Meantime, the company has expanded its sales efforts in China.  The new health law curtailed prices somewhat in 2010.  But it also broadened the potential market.  The population in China is aging, reinforcing the trend.  3S Bio has begun to pursue international markets more aggressively, as well.  The company is addressing emerging markets like Turkey and Egypt with its low cost high performing products.  Exports represented 4% of the total in Q3, up 57% from the year ago quarter.

Fourth quarter results usually decline on a sequential basis.  A strong performance is likely all the same.  We estimate full year earnings will reach $.75 a share (+34%) on sales of $80 million (+26%).  R&D costs should expand in 2012 as the company's new products enter bigger rounds of clinical testing.  Gross margins might improve, though, as greater manufacturing efficiencies are realized.  3S Bio still is operating at less than 50% of capacity.  There aren't any upcoming reimbursement issues on the table, but another reduction might be enforced at some point as volume continues to build.  We estimate 2012 income will advance 20%-27% to $.90-$.95 a share on sales of $100-$105 million (+25%-31%).  New products could amplify performance over the long haul.  3S Bio is run by U.S. trained scientists and is well equipped to operate on the world stage without the state's helping hand.  As it becomes more entrenched Western drug companies might view it as an attractive distribution partner.

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