August 2007

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Philips and the Institute of Health Sciences Join Forces in Molecular Medicine

8/30/2007

by Life Science: China

Royal Philips Electronics (NYSE: PHG) announced yesterday an agreement “to establish a joint research laboratory within the IHS in Shanghai, China. The IHS is part of the Shanghai Institutes for Biological Sciences (SIBS) and is also affiliated to the Shanghai Jiao Tong University School of Medicine. The joint laboratory will conduct advanced research in the field of molecular medicine.” (http://www.newscenter.philips.com/about/news/press/20070829_instituteofhealthsciences.page)

Philips is an international conglomerate with four major divisions: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, and Lighting. Philips has underperformed in its industry and it shows in its stock price, now sitting near $38 and 17% off its 52 week high. Despite restructuring efforts the company lags its industry in most metrics as reflected below, although some improvement in EPS may be seen.

Ratios	PHG	Industry
Gross Margins (TTM)	32.1%	39.1%
Gross Margins 5 Years	31.5%	41.5%
Operating Margins (TTM)	4.8%	15.3%
Operating Margins 5 Years	2.0%	14.4%
Net Margins (TTM)	11.3%	11.8%
Net Margins 5 Years	1.3%	11.7%
Sales Growth (TTM)	-1.7%	10.2%
Sales Growth 5 Years	-3.6%	6.6%
Capital Spending Growth 5 Years	-19.5%	1.0%
EPS Growth (TTM)	60.0%	13.9%
EPS Growth 5 Years	NA	10.9%
Source: Reuters

In China, Philips had sales of €1.74B in 2006, a decline of 4% from 2005 due to sluggish performance in Consumer Electronics dragged down by disappointing mobile phone sales. However, the Medical Systems division showed a stronger performance with sales growth reported at 14%.

Following the latest restructuring, Philips will apparently be running its R&D operations via its Innovation and Emerging Businesses division. This division includes research centers in Einhoven, Bangalore, and Shanghai, with €40M allocated to the Shanghai center annually. The budget for the IHS laboratory has not been disclosed. The main focus of Philips Medical Systems in the field of molecular medicine has been in molecular diagnostics, including high sensitivity optical detection, magnetic biosensors, and miniaturization of diagnostic cartridge electronic and fluidic components. A good overview of their strategic outlook can be found here:

Position: None

China Overtakes India in Drug Testing	8/29/2007
by Life Science: China
Following on our recent discussion of the CRO industry in China comes this article in today’s Financial Times (http://www.ft.com/cms/s/0/b44cfc94-54fe-11dc-890c-0000779fd2ac.html). Analyzing clinical trials data from www.clinicaltrials.gov, the FT finds that China has surpassed India in the number of clinical trials performed with a cumulative 510 trials completed or ongoing, versus 471 in India. This study follows on the news that Novartis plans to switch millions of dollars in planned R&D investment from India to China following it’s loss in the Indian courts in a battle over patent protection for it’s anti-cancer drug Imatinib (Glivec/Gleevec). (http://timesofindia.indiatimes.com/India/Novartis_loses_fight_for_cancer_drug_patent/articleshow/2260719.cms). In 2005, India adopted stricter patent restrictions on generic drugs, and it is felt by many that this recent court ruling significantly undermines those restrictions. Novartis had previously announced approximately $100M in planned R&D investments in India. Given the well-documented problems of IP protection in China, the protection of IP under the 2005 regulations was felt to be a competitive advantage for India. Despite these recent events India continues to have several advantages for clinical research, including a genetically diverse population, a large number of Western-trained English-speaking physicians and researchers, a legal system based on British law, and an established IT infrastructure. So the competition continues!
Position: None

Covance Advances on its Shanghai Lab	8/27/2007
by Life Science: China
Nice article on SeekingAlpha from the folks at ChinaBio regarding Covance (CVD) and it’s new 17,000sf lab in Shanghai. Based in Princeton, NJ, Covance is a “a leading drug development services company providing a wide range of early-stage development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries,” with $1.5B TTM in revenues and operating margins of 13.9%. The company’s global presence includes facilities in England, Germany, Australia and Singapore, and offices in Moscow, Bulgaria and Romania. Interestingly, Covance is reported to have based it’s decision to develop its lab at the Zhangjiang High tech park on “the high level of pharmaceutical activity” in China. This fits into a favorite topic for this site, as the development approach shifts from a low cost, low value added perspective. With a pharmaceutical market growing at 18 to 20% annually, China is developing a major domestic healthcare market. In addition, a significant critical mass in R&D efforts appears to be developing, with clusters of research facilities developing in Shanghai, Beijing and Shenzhen.
Position: None

A Look at Chindex	8/23/2007
by Life Science: China
One of my partners requested me to take a look at the current situation at Chindex (NSDQ:CHDX) following its recent 8/9/07 10Q filing. Given the recent market conditions its taken me a while but this company is always worth a look, both for its own operations as well as the window it provides into the status of foreign investment in, and regulation of, private healthcare in China. The company and its CEO, Roberta Lipson, have been operating in China since 1981. Initially the company focus was on sales of medical equipment in China. With the opening of Beijing United Family Hospital in 1997 the company’s revenues have been increasingly driven by its Healthcare Services division and the development of private international standard hospitals. Starting with the Beijing facility, CHDX subsequently has opened a second inpatient/outpatient facility in Shanghai along with satellite outpatient facilities in Beijing and Shanghai. A long-planned 3^rd facility in Guangzhou is reportedly in the final planning stages. In the future the company anticipates developing facilities in Wuxi and Xiamen. The company’s Medical Products division markets, distributes and sells medical equipment, instrumentation and products for use in hospitals. The equipment sales consist primarily of US and German export, and are frequently secured through export financing or other government backed loan programs.CHDX primarily sells to hospitals through domestic Foreign Trade Corporations and, given the typical delays seen in high dollar sales backed by government financing the revenues of the division can be “lumpy”. Such was the case with the latest quarter. Also, revenues for the division declined in fiscal 2006 due to the discontinuation of its money-losing retail operations. For fiscal year 2007, the Healthcare Services division accounted for 45% of total revenue with operating margins of 10.5%. The Medical Products division showed a 2% operating loss for the year, and has consistently run in the red for three straight years. Although typically considered a Health Care Distributor, CHDX’s operations are steadily morphing it into a Healthcare Services company. At a PE of 45 valuation of the company is rich for either industry, and likely reflects its status as a “China Play.” CHDX now trades near $18, having come off its 52 week and all-time high of $26.75. The stock, however is up over 500% from its October 2005 lows. CHDX will likely remain an interesting stock to follow for some time to come. There are without question significant risks. Operating in a highly regulated industry such as health care is always problematic, and this is compounded in China by the limitations placed on foreign companies at the central, provincial and local levels. In addition, ongoing trade tensions between the US and China threaten to grow. The growth prospects of CHDX are clearly dependent on growth of its Healthcare Services division. Healthcare facilities are highly capital dependent, and recent volatility in the global credit markets indicate tightening in the availability of credit. Although there are numerous reasons to be cautious, CHDX has shown that it can operate in a difficult environment, and it seems positioned to grow along with the Chinese economy. In addition, the upcoming 2008 Olympic Games in Beijing should provide a lift due to the large influx of Western tourists.
Position: None

Sinovac Announces Postponement of Annual General Meeting	8/21/2007
by Life Science: China
News from out of Beijing via Xinhua/PR Newswire that Sinovac (Amex:SVA) will postpone its annual meeting, scheduled for tomorrow. This is reportedly due to “the geographical nature of its shareholders and technical difficulties with the mailing of proxy materials.” This comes on Shares closed at $3.04 today, off slightly from yesterday’s $3.22 close, but still up significantly on the back of improved earnings reported last week. {LINK} As of close of business today, there has been no 6-K filed on the Edgar database. The SEC requires a 6-K filing for foreign issuers regarding: “material with respect to the issuer and its subsidiaries concerning; changes in business; changes in management or control; acquisitions or dispositions of assets; bankruptcy or receivership; changes in registrant's certifying accountants; the financial condition and results of operations; material legal proceedings; changes in securities or in the security for registered securities; defaults upon senior securities; material increases or decreases in the amount outstanding of securities or indebtedness; the results of the submission of matters to a vote of securityholders; transactions with directors, officers or principal securityholders; the granting of options or payment of other compensation to directors or officers; and any other information which the registrant deems of material importance to security holders.” This implies SVA doesn’t consider this a material event, leaving one to assume that it is a compliance issue. These types of compliance issues are not uncommon in the world of small caps, particularly for foreign issuers with limited experience on US exchanges. For SVA investors it is worth monitoring Edgar for any additional news, but until then this looks to be just one more of those “pucker factor” news items that make small cap investing so interesting.
Position: None

Hutchison China, Eli Lilly Plan to Develop Cancer Treatments	8/20/2007
by Life Science: China
From Bloomberg, news of another Big Pharma-China Pharma hookup . The deal with Lilly follows on a similar collaboration with Merck for cancer targets, and Procter and Gamble for consumer health and beauty applications. This is more good news for Hutchison China Meditech. In early July the company announced that Phase II studies on its TCM-derived HMPL-004 compound for ulcerative colitis showed symptom improvement and tolerance similar to Mesalazine. An active metabolite of Sulfasalazine, Mesalazine in indicated in the treatment of inflammatory bowel disorders. Global sales of drugs directed towards inflammatory bowel disorders are expected to reach $3 billion by 2012. Hutchison China Meditech is a subsidiary of Hutchison Whampoa, and trades on the LSE AIM (LSE:HCM).
Position: None

A Tale of Two Countries?	8/20/2007
by Life Science: China
Anyone who has spent time in China will attest to the idea that it is a land of great contrasts: rich and poor, urban and rural, old and new. The recent rash of news regarding tainted Chinese products again highlighted contrasts, this time between sectors of the Chinese economy. While some sectors of the economy including the life sciences have shown tremendous growth, other sectors including low value-added manufacturing seem stuck in the past. With these issues in mind CNNMoney turned it eye towards China life sciences, and didn’t like what it saw. In general, it’s a rehash of China product safety complaints, and focuses on interest of Western companies in “cheap manufacturing”. The growing importance of outsourced research and development is downplayed, and the stereotype of China as a producer of cheap, low quality goods is reinforced. Recent news flow gives a different view. The success of the Wuxi Pharmatech (NYSE:WX) IPO and ongoing deals such as the link between Eli Lilly and Hutchison China Meditech (AIM:HCM) are evidence of the increasing prominence of Chinese life science firms in the global pharma development process. Rather than cheap goods, Western companies are tapping into high quality research at a lower cost than can be achieved elsewhere. Burrill & Co. reports that the average cost of preclinical development in China is 20% of that in the US. Lilly, Merck, Novartis and other big biopharma continue to make substantial investments in Chinese CROs, driven not only by cost but by the quality of the work they are receiving. Given the current challenges in drug development these investments are likely to continue. Regardless of the problems faced by Chinese dog food companies, the life sciences still have room to grow.
Position: None

Wu Yi Takes Charge	8/18/2007
by Life Science: China
The Wall Street Journal is reporting that Chinese Vice Premier Wu Yi (吴仪) will head a new cabinet panel on product safety in response to the ongoing flood of product recalls and safety concerns. In Beijing, the appointment of Wu Yi is seen as a sign that the central government is serious in it’s crackdown on product safety issues. Trained as a petroleum engineer, Ms. Wu rose steadily in the Chinese government under the tutelage of Zhu Rongji. She is famous for her pragmatism, bluntness and ability to focus on core problems and bear down hard until the problems are solved. These strengths have led to become the “Go-To” government official for societal problems that threaten to cause political difficulties for the Chinese leadership. She first rose to international prominence in March of 2003 during the SARS outbreak when she forcefully took charge of the Ministry of Health, revamping it’s approach to the outbreak and increasing cooperation with international health agencies. More recently she has played a prominent role in China-US trade relations, meeting with US Treasury Secretary several times over the past year in both Washington and Beijing. Vice Premier Wu was named one of Time Magazine’s Most Influential People for 2004, and was #3 on Forbes Magazine’s list of Most Powerful Women of 2006.
Position: None

Sinovac Reports First Half 2007 Financial Results	8/16/2007
by Life Science: China
Sinovac(AMEX: SVA) is reporting strong earnings for H1 2007 via Xinhua/PRNewswire (http://www.prnewswire.com/). Sales were up 289% to $13.5M compared to H1 2006. On a TTM basis operating margins are at nearly 30%., with profit margins in excess of 15%. Founded in the PRC as Tangshan Yian Biomedical Engineering Co. in 1993, the company went public via reverse merger in January 2004. It is also known in China as Beijing Kexing Bioproducts Inc. (北京科兴生物制品有限公司). Specializing in the development, manufacturing and sale of vaccines, the company’s main products are: Healive^® inactivated Hepatitis A vaccine Bilive^® inactivated Hepatitis A+B vaccine Anflu^® split influenza vaccine The company reports it has received approval from the SFDA of the PRC to begin Phase Ib and II trials on Panflu^® its H5N1 whole viron vaccine, and to begin Phase I trials on its split H5N1 vaccine. Its H5N1 vaccines were developed in conjunction with the PRC CDC. The company is also developing vaccines for SARS and Japanese encephalitis. Units sales for the company’s Healive vaccine have been boosted by increased government purchases along with the phase out of competing liquid formulation Hep. A vaccines. The company reported unit sales of 2.45 million doses, representing 26% of total market share. The company reports it is the largest Hep. A vaccine producer in China. According to SEC filings the company has entered into partnership with GlaxoSmithKline (NYSE:GSK) to market and promote Anflu in the PRC. Also of note, in July the company was included in the Claymore/Clear Global Vaccine Index ETF (AMEX:JNR) of companies that “research, develop, manufacture, license, and/or market vaccines”. SVA, the sole Chinese stock in the index, represents 0.29% of the index weighting.
Position: None

WuXi PharmaTech Jumps More Than 30% in Debut	8/10/2007
by Life Science: China
Wuxi Pharmatech (NYSE:WX) performed as many expected yesterday, rising 34% to close at $18.70 yesterday. WX priced at $14, above the expected range of $11-$13 with a total of 15.2 million ADS offered. From Reuters: http://www.reuters.com/article/marketsNews/idUKWEN029420070809?rpc=44 For followers of Chinese life science companies, Wuxi Pharma’s IPO has been highly anticipated for some time. The company’s F-1 filing with the SEC is a great read for its overview of the Chinese CRO industry. (http://www.sec.gov/cgi-bin/browse-edgar?company=&CIK=wx&filenum=&State=&SIC=&owner=include&action=getcompany) A few items of note: The company’s 2 largest customers are Pfizer and Merck. Other customers include Pharmacopeia, AstraZeneca, Vertex Pharmaceuticals and BASF. Approx. $80 million of the proceeds of the IPO will go towards construction of manufacturing capacity in Jinshan and a preclinical drug safety evaluation center in Suzhou. WX’s Q1 2007 annualized growth rate was 165%, and gross margins were 46.7%. The company considers its major competitors in China to be Charles River Laboratories partnered with Shanghai Bioexplorer Co., Shanghai ChemPartner Co. and Bioduro. Venture firms with board seats included TianDi Growth Capital, General Atlantic, UOB Venture Management, and Fidelity International.
Position: None