3-S Bio ( Nasdaq - SSRX ) -- Hikes Expenses

3-S Bio (SSRX $14.90) reported better than expected Q4 revenues.  Despite price reductions mandated by the Chinese central government volume advanced 18% to $26.3 million.  Higher sales and marketing costs enabled the company to penetrate less populated areas.  They also blunted competitive inroads.  Market share for 3-S Bio's leading drugs was preserved in the 40% range.  Product development costs accelerated, as well.  The company signed a partnership with U.S. based Davita last year to establish a chain of dialysis centers in China.  3-S Bio will supply a large component of the drugs to that venture.  Development costs jumped to get those formulations approved and into production.  Earnings declined 33% due to the elevated spending, coming in at $.12 a share.

The acquisition of the company remains on track.  An offer was announced last September.  The purchasing group included 3-S Bio's chief executive, a large bank controlled by communist party members, and a hedge fund also run by communists.  In February an agreement was reached to purchase all the outstanding stock at $15.40 a share.  3-S Bio's shareholders must approve the transaction by a 2/3 margin.  A vote is expected in the second quarter.

The uptick in spending suggests the deal is likely to go through.  The Davita venture holds good potential in its present form.  That encompasses a small part of the total Chinese market.  The addition of state controlled entities could open up additional territories, generating a bid payday for the private equity group.  3-S Bio has plenty of cash on hand to fund operations.  So any new capital won't be sidetracked from the huge opportunity the Davita partnership affords.  Investments in other initiatives could be made through the private structure, as well.

The shares are trading close to the ultimate buyout price.  An upward revision to the price appears unlikely.  Aggressive holders are advised to close out positions and put the money to work in another Special Situation.

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