coverage initiation the people’s republic of china report ... · pdf filethe...

Coverage Initiation Report

The People’s Republic of China Pharmaceuticals

Please see analyst certification and required disclosures on page 12 of this report.

July 7, 2010

Lisa Springer, CFA Senior Research Analyst

Sinobiopharma (SNBP – OTC:BB) Proprietary Technologies and Two High-Margin, First-to-Market Drugs. Specialty Pharma Co. Trades at Just 4.5x our FY 2011 EPS Estimate. Exceptional Risk-Reward Tradeoff.

Strong Buy

Recent Price: US$0.225 Summary and Investment Opportunity

• PRC Pharmaceutical Industry Poised for 20%+ Long Term Growth Growth in the PRC pharmaceutical market, which IMS Health estimates will exceed 20% annually over the next few years, reflects this country’s robust GDP growth, an aging population requiring more prescription drugs, an increasing incidence of lifestyle-related diseases, and the PRC government’s expanding support for healthcare. China is forecast to grow from the world’s 8th largest pharmaceutical market today to the 5th largest next year, and become the world’s largest by 2050. • PRC Government is Investing $125 Billion in Healthcare Initiatives The PRC government has committed to spend $125 billion over the next three years on healthcare initiatives that include upgrading medical services, building thousands of new hospitals and making 300-400 Essential Drugs available to every citizen. In addition, recently passed legislation promises to bring universal healthcare to China by the year 2020. • The Company Owns Proprietary Technologies and Two First-to-Market Drugs Sinobiopharma has patented methods for synthesizing Active Pharmaceutical Ingredients (API) at lower cost and drug formulations that improve usability. The Company has leveraged its technology by introducing two first-to-market drugs. These drugs have premium pricing and marketing exclusivity in the PRC. Its flagship product KuTai has already captured 70% of Cisatracurium market in terms of injections sold. YiTai, a hypertension drug the Company launched in Q3 FY2010, is expected to contribute at least $4.0 million in sales to FY 2011 (note: the Company’s Fiscal Year ends May 31). Sinobiopharma also has other high margin drugs in its pipeline it expects to launch next year.• SNBP Shares Trade at Just 4.5x our FY 2011 EPS of $0.05 The Company earned over US$2.3M on sales of $5.4M in the first nine months of FY 2010, and management anticipates full-year earnings of $3.5M. SNBP had the highest growth rate among our PRC pharmaceutical manufacturer peer group, yet currently trades at a 14% discount to the peer group median. Overall, we believe the Company has compelling advantages as a result of it patented technology and rich development pipeline, and warrants a forward EPS multiple of least 13x, leading us to our 12-month price target of $0.65 per share. We believe significant upside to this price target exists and that SNBP shares entail relatively low downside risk at current levels.

Market Data (closing prices, July 7, 2010) Market Capitalization (mln) 26.5

Enterprise Value (mln) 29.2 Fully Diluted Shares (mln) 117.6 Avg. Volume (90 day, approx.) 164,186 Institutional Ownership (approx.) 0% Insider Ownership 23% Exchange OTC:BB

Balance Sheet Data (as of February 28,, 2010) Shareholders’ Equity (000) 8,658 Price/Book Value 2.7 Cash (000s) 790 Net Working Capital (000s) 510 Long-Term Debt (000s) 1.2 Total Debt to Equity Capital 45%

Company Overview Sinobiopharma is a profitable, rapidly-growing specialty pharmaceutical company focusing on the anesthesia and cardiovascular markets. The Company’s lead product KuTai, a muscle relaxant, has captured 70% of its market. A new hypertension drug, YiTai, is expected to contribute meaningfully to FY 2011 sales. Sinobiopharma has patented low cost API synthesis and drug formulation technologies that enhance usablility. Company founder/ CEO Dr. Lee Huang led R&D teams at Bayer Pharmaceutical USA for 12 years and currently serves as SNBP’s lead scientist.

Company Contact Information James Mu Chief Financial Officer Sinobiopharma, Inc. Email: [email protected] Tel: +86-258-622-8290 www.sinobp.com

P&L (000s) FY’08A FY’09AQ1

‘10A Q2

’10A Q3

’10A Q4

‘10E FY’10E FY’11E Revenues 1,810 3,850 1,294 2,137 1,993 2,540 7,964 13,640 Rev CAGR 113% 139% 120% 145% 124% 107% 71% Gr. Margin 32.1% 65.9% 74.4% 80.5% 80.9% 81.0% 80.0% 81.0% Op. Income (757) (2,231) 292 1,124 1,019 1,320 3,760 6,889 Op. Margin -41.8% -57.9% 22.6% 52.6% 51.1% 52.0% 47.2% 50.5% Net Inc. (506) (2,154) 237 1,073 941 1,200 3,451 6,410 Net Margin -26.3% -55.6% 18.6% 50.0% 47.2% 47.2% 43.1% 47.0% Dil. EPS (0.01) (0.03) 0.003 0.013 0.009 0.011 0.037 0.05 Dil. Shares 79,900 79,903 79,978 80,020 104,117 110,000 93,529 130,000 *Fiscal Year Ends May 31

Sinobiopharma (SNBP – OTC:BB) July 7, 2010

Copyright © Harbinger Research, LLC, 2010 of 14

Industry Background Economic Overview With a population exceeding 1.3 billion, The People’s Republic of China (PRC) is the world’s most populous nation. The PRC economy has also been delivering robust GDP growth, with a long-term compound annual growth rate of approximately 9%.1 This high rate of economic expansion is fueling rapid growth in per capita income for China’s citizens and increased spending on goods and services such as travel, consumer electronics and pharmaceuticals/healthcare. Pharmaceutical Industry Overview Growth in the PRC pharmaceutical market, which IMS Health estimates will exceed 20% annually over the next several years, reflects not only the country’s steadily rising GDP, but also an aging Chinese population, an increasing incidence of lifestyle-related diseases and expanding government support for healthcare funding and pharmaceutical development. China is already one of the world’s largest pharmaceutical markets with a value estimated at $122 billion in 2008, and is forecast to grow from the 8th largest pharmaceutical market currently to the 5th largest by 2011 and the world’s largest pharmaceutical market by 2050. The growing senior population is also creating more demand for pharmaceuticals in China because seniors tend to use more prescription drugs than other age groups. At present, an estimated 11% of China’s population is aged 60 years or older, but the percentage of seniors is expected to climb to approximately 30% by 2045.

Per-capita Pharmaceutical Spending by Nation – Current and Forecasted Growth

Per capita expenditures on pharmaceutical products are significantly higher in the developed nations than in China and India, with spending averaging several hundred dollars per person in the US and Europe versus less than one hundred dollars per capita in China. As growth in the PRC economy brings per-capita income levels closer to developed-world standards, per capita spending on pharmaceuticals should also move towards developed-world levels. As a result, the PRC is likely to experience strong growth in per capita pharmaceutical spending for at least the next several years, which will create favorable growth opportunities for pharmaceutical manufacturers, distributors and other industry participants.

1 According to DLA Piper, from “Doing Business in China” Fourth Edition, March 2008



Industry Consolidation According to China Market Research Group, the PRC pharmaceutical industry is still quite young - 90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only about 13% of industry revenues. At present, the PRC has about 3,500 drug companies, down from over 5,000 a few years ago, and this number is expected to drop further. Since June 30, 2004, the SFDA has been closing down manufacturers that do not meet GMP standards, setting the stage for continued consolidation in this very fragmented market. Distribution Pharmaceutical manufacturers in the PRC market directly to hospitals and other healthcare institutions, as well as to distributors, retail chains, and consumers. Sales to hospitals and other institutional buyers are highly regulated and most healthcare facilities are required to purchase pharmaceuticals through a government-regulated tendering process, which includes the use of government-mandated price controls. In this process, drug manufacturers may bid based on price, clinical effectiveness, and service reputation but all final selections are made by government committee. To navigate the bidding and selection process within individual markets, PRC manufacturers often depend on the services of a local distributor. Similar to pharmaceutical manufacturing, distribution of pharmaceuticals remains highly fragmented in the PRC; supply chain integration, inventory management and other technologies standard in more developed markets are still relatively uncommon. The recent entry of a number of large foreign players into the PRC market should help foster more widespread use of technology and we think a shakeout in the pharmaceutical distribution market is likely over the next few years, as industry leaders continue to grow market share and the PRC government mandates the shutdown of smaller, less efficient industry players. PRC Healthcare Reform The PRC government has been taking progressively more impactful steps to improve access to healthcare services for its citizens and is committed to spending RMB870 billion ($125 billion) over the next three years on initiatives that include upgrading the country’s medical services system, building thousands of new hospitals and making 300-400 essential drugs available to all. In addition, the PRC government has instituted a universal health plan, whereby the central and local governments will pay the majority of premiums for the uninsured and underinsured, thus extending healthcare coverage to millions of new patients.

. The PRC Ministry of Health has laid out the “2020 Healthy China” plan, which has three stages of development. In the first stage, the PRC will establish a national sanitary service system covering urban and rural areas. In the second stage, the PRC will boost its ranking among developing countries in terms of sanitary services. By the third stage, the PRC expects its healthcare standards to match those of most developed countries.

Conclusion Pharmaceutical industry growth in the PRC is forecast to exceed 20% annually over the next several years as a result of robust growth in GDP and per capita income, an aging population, increased healthcare spending by the PRC government and a rise in consumption to levels approaching those of more developed nations. This long-term growth trend strongly favors pharmaceutical companies such as Sinobiopharma, which have leading brands and extensive distribution capabilities, and are well-positioned to benefit from industry consolidation.



Company Analysis Corporate Overview Sinobiopharma (SNBP – OTC:BB) is a profitable, rapidly-growing specialty pharmaceutical company engaged in the research, development, manufacture and marketing of biopharmaceutical products in China through its operating subsidiary, Dong Ying China. The Company has patented new methods for synthesizing active pharmaceutical ingredients (APIs) at a lower cost, and owns drug delivery formulations that improve usability. At present, Sinobiopharma focuses its R&D efforts on two drug categories - skeletal muscle relaxants (used in conjunction with anesthesia during surgery) and cardiovascular drugs. Each of these categories represents global markets generating more than $1 billion in annual sales. The Company’s production site with a 30,000 square meter cGMP certified manufacturing facility is located in Nantong’s Economic and Technology Development Zone. The administration headquarters, sales center and R&D center are in Nanjing City, which is close to several major universities and research facilities. Because of its location in a technology zone, Sinobiopharma qualifies for five years of tax credits, resulting in a very low effective tax rate. Although these tax credits expire in 2013, the Company anticipates it may qualify for a 50% tax break beyond 2013 as a result of being a high technology enterprise. In addition to its manufacturing facility, Sinobiopharma also has a research and development laboratory in Nanjing, China and long-term cooperative research relationships with numerous world class research institutions, including Cornell University, China Pharmaceutical University, Nanjing University and Nanjing Suji Pharmaceutical Research Center. The Company’s R&D team is led by Dr. Lee Huang, a prominent scientist who led a R&D team at Bayer Pharmaceutical USA for more than 12 years. IP Portfolio Sinobiopharma’s intellectual property portfolio consists of five patents covering the low cost synthesis of API compounds and drug formulations that enhance usability. Most of these patents have 17-18 year remaining lives. The API synthesis patents provide broad protection in the area of isomer purification. While patent protection is at present limited to the PRC market, Sinobiopharma plans to apply for worldwide patents. The Company has already launched two First-to-Market (FTM) drugs in the PRC, based on its proprietary technologies, and plans to further leverage its API cost advantage by exporting API to the overseas market. SNBP has the intention to potentially acquire another API manufacturer in the PRC that is already exporting most of its production overseas and has multinational customers such as Pfizer. If funding becomes available soon to close this acquisition, Sinobiopharma could begin selling API overseas within the next 24 months. The Company is also contemplating future product acquisitions that would expand its pipeline of FTM drugs and/or solidify its market share in core therapeutic areas.

Products and Services Sinobiopharma has launched two FTM products in the PRC - KuTai (Cisatracurium Besylate), a muscle relaxant, and YiTai (Perindopril), an ACE inhibitor and treatment for hypertension. The Company also markets KeSu (Clindamycin), an antibiotic for penicillin-allergic patients, and is one of a handful of pharmaceutical companies worldwide that manufacture injectable Clindamycin in a high dosage form. Sinobiopharma sells approximately a million Clindamycin injections annually in the PRC. KuTai (Muscle Relaxant) The Company launched KuTai, a skeletal muscle relaxant, in May 2006. Within 14 months, KuTai had captured over 70% of the Cisatracurium Besylate market in the PRC. The muscle relaxant sold by GlaxoSmithKline and Jiangsu Hengrui Pharmaceutical Co. Ltd account for the remaining 30% market share. Compared to competitor products, the advantages of KuTai include:



• Significantly lower cost: GlaxoSmithKline sells its drug Nimbex for $22 per injection whereas KuTai sells for under $5. Nimbex goes off-patent in the U.S. in 2010. The global market for muscle relaxants is estimated to exceed US$1 billion.

• Greater convenience: Sinobiopharma’s proprietary formulation allows the product to be safely stored at room temperature. Competitor products require cold storage and special handling.

• Safety and efficacy: KuTai is more stable, safer and, effective than other types of muscle relaxants. Muscle relaxants are administered with anesthesia during major surgeries and are also used for pain suppression. The PRC market for muscle relaxants is estimated to exceed RMB1billion (approximately US$130 million) and is growing 25% annually, because of a steady increase in the number of general anesthesia surgeries being performed. There are four main types of muscle relaxants used; Cisatracurium (which include KuTai) is known to have the fewest and mildest side-effects. Sinobiopharma differentiates its product with a patented formulation that enhances stability, thus allowing the product to be stored at room temperature. Demand for Cisatracurium muscle relaxants is expanding 35% annually and faster than the overall market. With 70% market penetration in over 1,300 major hospitals in China, KuTai is well-positioned to capture the dominant share of market growth. KuTai sales improved 164% year-over-year in FY 2009 to $3.6 million as a result of 158% growth in volume to 1.5 million units and a 2% price increase. During the first nine months of FY 2010, KuTai sales rose 108% year-over-year to $5.3 million and Sinobiopharma anticipates full-year sales will exceed $7.3 million. As an FTM drug, KuTai commands premium pricing in the PRC market and is delivering high gross margins; margins on product sales currently exceed 70% and net margins on this product are above 40%. YiTai (ACE Inhibitor) The Company launched YiTai, a cardiovascular ACE Inhibitor, in Q3 FY 2010. Sinobiopharma anticipates YiTai sales will be modest in FY 2010 but ramp up quickly to approximately $4.0 million in FY 2011. At the $4 million sales level, management believes net margins on product sales could approach 50%. The Company expects to achieve peak sales exceeding $20 million annually within two to three years. YiTai is another FTM drug that enjoys premium pricing and is also reimbursed under PRC government-sponsored health insurance plans. Sinobiopharma is the only Chinese manufacturer of this drug; the only other company supplying it to the PRC market is Servier, a French pharmaceutical firm importing the product from overseas. Cardiovascular disease is a leading cause of death worldwide, accounting for an estimated 17.5 million deaths annually or about 1/3rd of total deaths. Research firm American Decision Resources estimates the PRC market for cardiovascular drugs at approximately $800 million. A number of different drugs are used to treat cardiovascular disease in the PRC, with effectiveness varying by patient type. Compared to other ACE Inhibitors, YiTai has been shown to be more effective and have fewer side-effects. For example, YiTai is effective at doses as low as 2 milligrams, whereas competing products require minimum doses of 10 milligrams or higher. Clinical studies have also proven YiTai effective in preventing heart failure and reducing blood clotting. Business Strategy Sinobiopharma’s business strategy incorporates three components, each designed to address short-term, mid-term and long-term growth objectives. The Company’s initial focus is on developing high margin, FTM drugs that are improvements on existing branded versions because of enhanced stability and usability. By capitalizing on its low cost API synthesis and proprietary formulations, Sinobiopharma hopes to become China’s version of the giant Israeli drug manufacturer/marketer Teva Pharmaceutical (TEVA - NasdaqGS). The second phase of its business strategy further leverages the Company’s patented technologies by exporting low cost API to the international market and licensing its drug formulations overseas. Sinobiopharma plans to increase API manufacturing capacity by acquiring another cGMP-certified manufacturer already exporting API overseas.



Longer-term, the Company plans to leverage its technology platform by identifying and developing promising new drug candidate compounds from among Traditional Chinese Medicines.

In selecting drug candidates, Sinobiopharma focuses on products that address $1+ billion global markets and treat high incidence, high mortality diseases. New drugs should support premium pricing in the PRC and provide a period of marketing exclusivity. The Company has already introduced two new drugs in the PRC, and established a track record of SFDA (Chinese Food and Drug Administration) approvals.

Sinobiopharma's other competitive advantages include:

• Strong scientific leadership from CEO Lee Huang, who founded Sinobiopharma after a 20 year research career in the US and previously leading a R&D team at Bayer Pharmaceutical USA;

• Portfolio that includes four marketed drugs and six drugs in the development pipeline;

• Integrated manufacturing and six cGMP-certified production lines, currently operating at only 50% of

capacity;

• Proven R&D partnerships with leading research institutions in the US and the PRC; and

• Distribution network encompassing all 30 provinces, key major cities and over 1,300 major hospitals across the PRC.

Development Pipeline In addition to its four currently marketed products, Sinobiopharma has several product candidates in the development pipeline: Diapeptide promotes more rapid healing of surgical incisions. Sinobiopharma has secured SFDA approval for Diapeptide and this product will be the Company’s third First to Market drug in the PRC. However, the market launch of Diapeptide was delayed due to capacity issues. The Company recently revolved this issue by contracting with another cGMP-certified manufacturer to produce Diapeptide. Sinobiopharma plans to introduce Diapeptide in early FY 2011 and anticipates the sales ramp for this product will be comparable to that of YiTai. Management targets $2.0 million in Diapeptide sales in the first six months of FY 2011 and anticipates peak sales to exceed $20 million annually. Diapeptide should command premium pricing and is expected to deliver 50% net margins on product sales.

Rocuronium is a complementary muscle relaxant to Cisatracurium. Sinobiopharma is close to completing the New Drug filing research for API and Injection certifications and anticipates SFDA approval to market Rocuronium in late 2011. This product is faster-acting than Cisatracurium (i.e. one minute versus three minutes) but has more side-effects, so will likely be administered as part of a cocktail consisting of an initial dose of Rocuronium and subsequent injections of KuTai. Muscle relaxants are only effective for 30 minutes so it is not uncommon for six or more injections of muscle relaxants to be required during a major surgery. As part of a muscle relaxant cocktail, Rocuronium should help drive additional demand for KuTai.

Eplerenone treats hypertension and vascular disease. The structure of this drug closely resembles compounds found naturally in the body so Eplerenone has relatively few side-effects. Pfizer introduced a patented version of this drug three years ago in Europe and the US but did not patent its product in the PRC. Because this drug is not currently marketed in the PRC, SFDA is requiring Eplerenone clinical trials. Sinobiopharma was the first PRC company to secure approval for clinical testing and is conducting concurrent Phase II and III Clinical Trials which started in December 2009. The Company owns 60% of the PRC license for Eplernone and is collaborating with an industry partner who is funding the clinical trials. Sinobiopharma anticipates commercial



sales of Eplerenone will commence in late 2011. Compared to the Pfizer drug, Sinobiopharma’s API and formulation has a much lower cost. Sinobiopharma is also developing a third cardiovascular drug candidate, Clevidipine butyrate, which is a calcium channel blocker used to reduce blood pressure when oral therapy is not feasible or desirable.

Gantacurium Chloride is an ultra short-acting, rapid onset muscle relaxant. This drug candidate has already completed Phase II Clinical Trials in the US, and Sinobiopharma is working towards negotiating an agreement to license this drug in for the PRC market.

Memantine treats symptoms of Alzheimer’s disease. SFDA has approved this product for Phase II Clinical Trials and Sinobiopharma plans to pursue the further development of Memantine as funding becomes available. Memantine would be another product for the Company with a potential market estimated to exceed $80 million in the PRC and $600 million worldwide.

Distribution Sinobiopharma sells its prescription-based and other pharmaceutical products via regional distributors in the PRC. At present, the Company has approximately 300 sales representatives in the field marketing KuTai and YiTai. Sales are made in all 30 provinces of the PRC and key major cities. Sinobiopharma has relationships with over 1,300 major hospitals and many thousands of physicians across the PRC. The Company intends to add at least 300 large hospitals to its customer base each year over the next three years. Sinobiopharma plans also to expand its distribution capabilities by potentially acquiring another drug distributor. Conclusion Sinobiopharma benefits from its proprietary low cost API synthesis and improved drug formulations, is marketing two high margin, first to market drugs in the PRC and has built a rich drug development pipeline. The Company has already captured a 70% share of the Cisatracurium market with KuTai, which is expected to grow at least 35% annually, and recently introduced YiTai, a hypertension drug expected to achieve peak annual sales in excess of $20 million. Both KuTai and YiTai benefit from premium pricing in the PRC and enjoy marketing exclusivity. The Company has additional First to Market drugs in its pipeline it expects to launch in FY 2011 and beyond. Longer-term, Sinobiopharma plans to leverage its technology by exporting low cost API to the international market, licensing its patented drug formulations overseas and developing new drug candidates. We think Sinobiopharma’s growth prospects are enhanced by its experienced management team, led by CEO and lead scientist, Dr. Lee Huang, who previously led an R&D team at Bayer Pharmaceutical USA. The Company also has a track record of success in dealing with SFDA; cooperative research arrangements with leading institutions in the US and China; cGMP certified manufacturing capabilities and a distribution network encompassing all 30 provinces and major cities across the PRC. Although execution of its business plan is contingent on additional funding and not without risks, we think this management team’s strong operational track record and the Company’s profitable growth are indications this plan has a strong chance of success. If Sinobiopharma is effective in implementing its three-part business strategy, revenue and earnings growth rates are likely to exceed peer levels and the Company will be well-positioned to deliver superior returns to its shareholders. Key Management Dr. Lequn (Lee) Huang, Chairman and CEO, founded Sinobiopharma in 2004 after a 20-year medical research career in the United States. Dr. Huang spent more than 12 years at Bayer Pharmaceutical USA, where he led the team that built a state-of-the-art drug discovery research center in New Haven, CT and served as the research center’s lead scientist. An Adjunct Professor at the Medical School at Nanjing University, Dr. Huang holds numerous patents and has published more than 30 peer-reviewed articles in scientific and medical journals. Prior to joining Bayer USA, Dr. Huang spent five years as a chemist at the Connecticut Agricultural Experiment Station, an affiliate of Yale University. Earlier in his career, Dr. Huang served as a Teaching and Research



Assistant in the Chemistry Department at Iowa State University (1983-1987). Dr. Huang holds a Ph.D. in Analytical Chemistry from Iowa State University and a B.S. in Organic Chemistry from Nanjing University in China. James Mu, Director and CFO, joined Sinobiopharma in 2009 after serving as CFO of Jingwei International Limited, a provider of data mining and marketing services. Mr. Mu previously served as Senior Accountant at Geller and Company, a financial services provider, for two years. Before joining Geller, Mr. Mu was a Senior Accountant at Flightsafety International, a wholly-owned subsidiary of Berkshire Hathaway (1999-2005). Mr. Mu is also a Director of China Infrastructure Corporation. He earned a degree in Chemical Engineering from Hebei University of Science and Technology in the PRC and an MBA from Baruch College of City University of New York. Xuejun Chen, Director and Vice-President (Sales), joined Sinobiopharma in 2007 as Vice-President of Sales after holding a similar position at Nanjing Langkun Medicine Co., Ltd (2005-2007). He previously served as Marketing Director of Jiangsu Province Medicine Co., Ltd. and as Sales Director for Jiangsu province for both Xiamen Beidazhilu Biotech Co., Ltd. and Shanxi Dongshen Medicine Co., Ltd. Mr. Chen holds an MBA from Nanjing University and a B.S. from Lanzhou University. Recent Developments January 2010 Sinobiopharma’s production facility for YiTai, an ACE Inhibitor and solid dosage form of Perindopril, passed SFDA inspection and was approved for production and marketing. As part of the SFDA approval process, the Company was required to conduct large-scale production of at least three batches of the newly approved drug in a Good Manufacturing Practice (GMP) certified production facility. February 2010 The Company’s flagship product KuTai (Cisatracurium Besylate) was approved for coverage under China’s National Basic Medical Insurance, Employment Injury Insurance and Maternity Insurance. Prior to 2010, KuTai was not covered by medical insurance and patients who purchased KuTai did so at their own expense. Despite not being covered by national insurance plans, KuTai was able to gain a 70% share of the market for muscle relaxant of Cisatracurium in the PRC in just 14 months. KuTai is currently sold to more than 1,300 major hospitals across the PRC. Competition At present, the PRC has thousands of small and mid-sized pharmaceutical manufacturers. Since June 30, 2004, SFDA has begun closing down those manufacturers unable to meet upgraded cGMP standards. Foreign companies account for about 10% to 20% of overall pharmaceutical sales in the PRC, depending on the types of medicines included in the count. However, sales for top-tier PRC pharmaceutical companies are growing faster than at Western firms, according to IMS Health.

Even large PRC pharmaceutical manufacturers barely exceed $100 million in sales. Some of the larger pharmaceutical companies in the PRC include Wuxi Pharmaceutical (NYSE:WX), Harbin Pharmaceutical Group (Shanghai 600829.SS), Sinovac Biotech (NASDAQ:SVA) and C&O Pharmaceutical Technology Holding Company (Singapore E92.SI). With sales of $3.8 million in FY2009 and estimated sales of $7.9 for FY 2010, Sinobiopharma would be considered one of the smaller drug companies in the PRC.

Sinobiopharma competes with other pharmaceutical manufacturers across multiple drug categories, even in cases where the Company has exclusive marketing rights, since competitor products may have similar therapeutic benefits if not identical properties. In our opinion, how well the Company can compete in the near-term will depend on the advantages of its technology and products, its ability to build a rich drug development pipeline and its success in launching additional First to Market drugs in the PRC market. We think the sales



success achieved with KuTai, which captured 70% of the market in just 14 months, bodes well for the future of SNBP, and we are optimistic this success can be replicated with other First to Market products. Longer-term, as the financial resources of the Company strengthen, we expect Sinobiopharma to pursue sales opportunities outside the PRC by exporting low cost API overseas and licensing its proprietary formulations that improve existing drugs. Other Risks The Company’s growth plan is based in part on raising additional capital, which is needed to fund clinical trials and for acquisitions. We think it likely that the Company will be able to raise the necessary capital for its business plan. However, if capital markets worsen and Sinobiopharma can’t secure additional capital and make acquisitions, then the Company’s growth will likely fall short of our projections. If this event occurs, the probable result will be that the Company commands a lower multiple of sales and earnings than it otherwise would. Given Sinobiopharma’s already modest valuation, we see this as only a minimal risk.

Financial Performance Sinobiopharma’s sales rose 100% during the nine months ended February 2010 to $5.4 million from $2.7 million one year earlier, mainly as a result of strong KuTai sales, which more than doubled. Gross margins improved to 79% of sales from 67% because of reduced per unit costs on volume gains and increased sales prices. Operating expenses declined 45% during the nine-month period of FY 2010 to $1.9 million from $3.4 million a year earlier because of a $1.6 million reduction in stock-based compensation, and operating margins improved to 45% from negative margins in the same period one year ago. Net margins rose to 42%, reflecting the benefits of a low effective tax rate. Net income increased by $3.9 million during the first nine months of FY 2010 to $2.3 million from a net loss of $1.6 million for the same period one year earlier and EPS rose to $0.03 from $(0.02). For full-year FY 2010, Sinobiopharma anticipates revenue growth exceeding 100% and revenues of $7.7 million. The Company targets FY 2010 net income at $3.5 million or $0.03 per share.

Sinobiopharma’s working capital turned positive for the first time since the Company went public through a reverse takeover of Buzz Media in 2008 and cash from operations totaled $986,716 for the nine-month FY 2010 period. As of February 28, 2010, Sinobiopharma had cash balances of $790,142, shareholders’ equity of $8.7 million and total assets of $11.4 million. The Company raised $1.5 million through a January 2010 private placement of 15 million shares and used the proceeds to repay a bank loan and reduce the total outstanding loan balance to $220,050. Sinobiopharma plans to pursue an additional $10 million in financing over the next few months, which will be used for acquisitions, R&D and general corporate purposes.



Valuation and Investment Opinion We think Sinobiopharma is clearly undervalued at current levels. We project greater than 70% sales growth in FY 2011 to $13.6 million, which will result from high double-digit growth in KuTai sales, an increasing contribution to revenues from YiTai and modest sales contributions from other new products. We believe we are conservative in assuming an improvement to FY 2011 operating margins to 50.5% and are projecting 86% growth in net income to $6.4 million. The fully diluted share count will increase as a result of financings and we are forecasting 37% growth in earnings per share to $0.05. Due to the five year tax benefit, we expect the Company’s effective tax rate to remain modest at less than 12% through FY 2013. In estimating a reasonable price target for Sinobiopharma based on P/E and P/S, we considered the valuations and expected growth rates for other PRC pharmaceutical companies with share listings on US exchanges. Wuxi Pharmaceutical is the largest and also the most richly valued, trading at 16.8x estimated 2011 EPS. The median valuation for this peer group based on estimates of 2011 EPS was 5.2x. Despite having projected growth rates 2-3x higher than its peer companies, Sinobiopharma shares currently trade at only 4.5x estimated FY 2011 EPS, which is nearly a 75% P/E discount to Wuxi Pharmaceutical and a 14% P/E discount to the peer group median. Although we do not believe that Sinobiopharma shares are likely to carry multiples as high as Wuxi, in our opinion, a multiple range of 12x to 14x estimated FY 2011 EPS is reasonable, given the Company’s technology advantage and high double-digit sales and earnings growth.

Therefore, we are setting our 12-month price target at $0.65, which represents a multiple of 13x our FY 2011 estimated earnings per share of $0.05. Furthermore, we believe that as FY 2011 progresses and after the Company secures financing for planned R&D projects and acquisitions, the market is likely to assign 15x – 18x multiples to FY 2011 estimated EPS, suggesting significant upside to our current price target.



Peer Group Analysis – Sinobiopharma (SNBP – OTC:BB)

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Est. Revenue Growth

Price/Sales Estimate (2011)*

Sinobiopharma (SNDP – OTC:BB) 0.225 26.5 4.5 71% 1.9 Wuxi Pharmaceutical (WX – NYSE) 15.95 1,105 16.8 21% 2.9 Sinovac Biotech (SVA – NasdaqGM) 4.17 225.6 8.95 -17% 2.76 China Sky One Medical (CSKI – NasdaqGS) 9.61 161.4 3.2 25% 0.8 China Pharma Holdings (CPHI – AMEX) 2.76 119.5 5.2 22.7 1.3 *Market Data as of 7/7/10 Conclusion Sinobiopharma is a profitable, rapidly-growing specialty pharmaceutical manufacturer. The Company introduced KuTai, a muscle relaxant and First to Market drug in 2006 and has already captured 70% of the market for muscle relaxant of Cisatracurium in the PRC. The Company introduced YiTai, a hypertension treatment and second First to Market drug in October of last year and targets YiTai sales reaching peak levels of $20 million within three years. Sinobiopharma’s business plan leverages the advantages of its proprietary technology for low cost API synthesis and improved drug formulations. Initially, Sinobipharma plans to focus on developing additional high margin, First to Market drugs in the PRC. Longer-term the Company plans to commence exporting low cost API to overseas markets and developing new drugs based on Traditional Chinese Medicines. We believe that the Company will deliver robust revenue and profit growth from YiTai and other new products. With growth rates likely to exceed those of the overall PRC pharmaceutical market, we look for the multiple on SNBP shares to expand from current “fair value” levels of only 4.5x our FY 2011 EPS estimate of $0.05 to a range of 12x – 14x forward earnings. We thus rate SNBP shares a Strong Buy, and set our 12-month price target at $0.65 per share.



Our Rating System We rate enrolled companies based on the appreciation potential we believe their shares represent. The performance of those companies rated “Speculative Buy” or “Strong Speculative Buy” are often highly dependent on some future event, such as FDA drug approval or the development of a new key technology.

Explanation of Ratings Issued by Harbinger Research STRONG BUY We believe the enrolled company will appreciate more than 50% relative to the general market

for U.S. equities during the next 12 to 24 months. BUY We believe the enrolled company will appreciate more than 30% relative to the general market

for U.S. equities during the next 12 to 24 months. STRONG SPECULATIVE BUY

We believe the enrolled company could appreciate more than 50% relative to the general market for U.S. equities during the next 12 to 24 months, if certain assumptions about the future prove to be correct.

SPECULATIVE BUY We believe the enrolled company could appreciate more than 30% relative to the general market for U.S. equities during the next 12 to 24 months, if certain assumptions about the future prove to be correct.

NEUTRAL We expect the enrolled company to trade between -10% and +10% relative to the general market for U.S. equities during the following 12 to 24 months.

SELL We expect the enrolled company to underperform the general market for U.S. equities by more than 10% during the following 12 to 24 months.

Analyst Certification

I, Lisa Springer, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.



Disclaimer This report was prepared for informational purposes only. Harbinger Research, LLC (“Harbinger”) was paid in the amount of US$7,500 for the preparation and distribution of this research report. All information contained in this report was provided by Sinobiopharma, Inc. (“Company”). To ensure complete independence and editorial control over its research, Harbinger has developed various compliance procedures and business practices including but not limited to the following: (1) Fees from covered companies are due and payable prior to the commencement of research; (2) Harbinger, as a contractual right, retains complete editorial control over the research; (3) Analysts are compensated on a per-company basis and not on the basis of his/her recommendations; (4) Analysts are not permitted to accept fees or other consideration from the companies they cover for Harbinger except for the payments they receive from Harbinger; (5) Harbinger will not conduct investment banking or other financial advisory, consulting or merchant banking services for the covered companies. Harbinger did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company is relying solely upon information provided by the companies for the accuracy and completeness of all such information. The information provided in the Report may become inaccurate upon the occurrence of material changes, which affect the Company and its business. Neither the Company nor Harbinger is under any obligation to update this report or ensure the ongoing accuracy of the information contained herein. This report does not constitute a recommendation or a solicitation to purchase or sell any security, nor does it constitute investment advice. This report does not take into account the investment objectives, financial situation or particular needs of any particular person. This report does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance. Harbinger cannot and does not assess, verify or guarantee the adequacy, accuracy, or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. Harbinger and its clients, affiliates and employees, may, from time to time, have long or short positions in, buy or sell, and provide investment advice with respect to, the securities and derivatives (including options) thereof, of companies mentioned in this report and may increase or decrease those positions or change such investment advice at any time. Harbinger is not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. ALL INFORMATION IN THIS REPORT IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, HARBINGER EQUITY RESEARCH, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, HARBINGER EQUITY RESEARCH, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.



Harbinger Research is an independent equity research firm with a focus on providing coverage to small-cap companies. Our mission is to help our clients achieve fairer market valuations, an expanded shareholder base, improved liquidity, and easier access to capital markets. We do this by providing insightful, in-depth research reports and by making sure those reports are widely distributed and made available to both institutional and individual investors. We strive to deliver superior research coverage and the result is compelling – consistent coverage from industry-expert analysts that is well written and consists of insightful analysis, cogent arguments, and in-depth financial models. To learn more about Harbinger Research and view our research reports, we invite you to visit our website located at www.harbingerresearch.com.

Analyst Highlight

Lisa Springer, CFA Research Analyst

Ms Springer is an equity research analyst with nearly 20 years of investment research experience. She began her career in investment research in 1987 as part of the equity research team at Kemper Financial Services. In 1989, she joined a large investor relations firm as Director of Financial Analysis.

During her tenure at the investor relations firm, Ms Springer served as a consultant to numerous Fortune 500 companies, including Boston Market, MGI Pharma and Devon Energy. In 2000, Ms Springer left to become Director of Investor Relations for a NYSE-listed REIT, serving in that position until the REIT was acquired by a private real estate company in 2004. Since then, Ms Springer has worked as an equity research analyst for independent research providers, investment newsletters and financial websites.

Ms Springer earned an MBA in Finance from the University of Chicago in 1987 and has been a CFA (Chartered Financial Analyst) charter holder since 1991.

Sinobiopharma (OTC:BB) Profit and Loss Model(In thousands, United States Dollars) 2008A 2009A Q110A Q210A Q310A Q410E FY2010E FY2011E FY 2012ERevenuesTotal revenues 1,810 3,850 1,294 2,137 1,993 2,540 7,964 13,640 21,000 Year‐over‐year growth rate 112.7% 138.9% 120.0% 145.1% 123.8% 106.9% 71.3% 54.0%

Cost of sales 1,229 1,312 331 417 381 481 1,593 2,592 3,570Gross profit 581 2,538 963 1,720 1,612 2,059 6,371 11,048 17,430Gross Margin 32.1% 65.9% 74.4% 80.5% 80.9% 81.1% 80.0% 81.0% 83.0%SG&A expense 143 533 172 333 503 620 1,629 2,732 4,200 % of Sales 7.9% 13.8% 13.3% 15.6% 25.2% 24.4% 20.5% 20.0% 20.0%R&D expenses 64 197 64 222 31 50 367 1,227 2,105 % of Sales 3.5% 5.1% 4.9% 10.4% 1.6% 2.0% 4.6% 9.0% 10.0%Depreciation & Amortization expenses 112 100 110 41 59 50 260 200 200Stock based compensation 2,917 324 % of Sales 2.6% 8.5%

Operating income (757) (2,231) 292 1,124 1,019 1,320 3,760 6,889 10,720Operating margin ‐41.8% ‐57.9% 22.6% 52.6% 51.1% 52.0% 47.2% 50.5% 51.0%Total other income (expense) 251 77 (55) (51) 19 0 (50) (50) (70)Income before income taxes (506) (2,154) 237 1,073 1,038 1,320 3,710 6,839 10,650Provision for income taxes 0 0 0 0 97 120 259 615 1,090 Implied Tax Rate 0% 0% 0% 0% 9% 9% 7% 9% 9%

Net income (506) (2,154) 237 1,073 941 1,200 3,451 6,410 9,560Net margin ‐28.0% ‐55.9% 18.3% 50.2% 47.2% 47.2% 43.3% 47.0% 45.5% Net income year‐over‐year growth rate

Foreign currency translation adjustment 29 14 17 5 5 5 32 30 35Total comprehensive income (477) (2,140) 254 1,078 946 1,205 3,483 6,440 9,595Net income per common share, fully‐diluted (0.01) (0.03) 0.003 0.013 0.009 0.011 0.037 0.05 0.07Wtd. average shares outstanding, fully diluted 79,900 79,903 79,978 80,020 104,117 110,000 93,529 130,000 130,000

Sinobiopharma (OTC:BB) Balance Sheet Feb 2009(In thousands, United States Dollars)Assets Current assets Cash and cash equivalents 790Accounts Receivable, net 1,132 Notes receivable 0Inventories 836Advance payments 211Other receivables 298Total Current Assets 3,267

Advance payment for intangible asset 988Property, plant & equipment, net 2,772Intangible assets,net 4,388

Total Assets 11,415

Liabilitiies & Equity

Accounts payable 369Short‐term bank loan 220Loans from government 1,421Amounts due to shareholder 257Advances from customers 103Income tax payable 97Other payables 290 Total current liabilities 2,757

Long‐term debt 0 Total liabilities 2,757

Stockholders' Equity Common stock,2,500M auth, 117.6M issued and out. 12 Additional paid‐in capital 13,853Accumulated deficit (5,459) Accumulated other comprehensive income 252 Total Stockholders' Equity 8,658Total Liabilities and Stockholders' Equity 11,415

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