HONG KONG – With the release of first quarter earnings reports from three major Chinese biopharmaceutical companies, a variety of different opportunities and challenges in the mainland market were highlighted, as well as the growing importance of mergers and acquisition (M&A) to the bottom lines of companies in this increasingly competitive market.

Shanghai Fosun Pharmaceutical (Group) Co. (SS:66019, HK:02196) reported its first quarter earnings, with net profits up 17.6 percent year-on-year to ¥413.91 million (US$66.15 million). Fosun's total revenue in the first quarter of this year was ¥2.65 billion, an increase of 29.24 percent over the same period in 2013. Shanghai-based Fosun's short-term debt rose to ¥2.04 billion, with long-term debt at ¥330 million, up 48 percent and 161 percent, respectively.

Jessica Li, of Jefferies & Co., told BioWorld Today that Fosun's first quarter earnings report was "solid."

"We view the company's aggressive growth strategy in hospitals and pharmaceutical business favorably," said Li, managing director of China health care research at Jefferies. Li maintained her rating for Fosun at "buy," with a target price of HK$33 (US$4.26).

On Wednesday, Fosun was trading at HK$26.20 in Hong Kong, up 3.35 percent for the day, and at ¥18.92 in Shanghai, up 1 percent.

For Fosun, a key driver of growth going forward will be its recent M&A activity.

A week before its earnings announcement, Fosun signed an amended merger agreement with private equity firm TPG to acquire Chindex, a provider of high-end health care services and operator of China's first foreign-invested hospital and clinic network United Family Healthcare. The amended agreement provided an increase in the merger consideration from $19.50 per share in cash to $24 per share in cash.

"Fosun Pharma delivered robust sales growth of 29 percent in Q1 2014, comparing favorably to our estimate of 27 percent for H1 2014 revenue growth," Li noted. "We believe strong sales performance was driven by much higher hospital sales."

'Favorite Chinese Distributor'

Beijing-based Sinopharm Group Co Ltd. (HK:01099), China's largest drug distributor, also received a "buy" recommendation from Jefferies after posting healthy first quarter earnings. First quarter net profit this year jumped 31 percent from the same period in 2013, reaching ¥701.5 million.

Li characterized Sinopharm's sales and profit growth as "impressive" and its operating cash flow as "solid," recommending it at a target price of HK$28.

"Sinopharm remains our favorite Chinese pharmaceutical distributor, capable of driving 20 percent earnings CAGR in the next three years," said Li in a note. "Trading at 14 times forward P/E, valuation is attractive."

Sinopharm's earning per share (EPS) for the quarter were ¥0.27.

"Strong earnings performance was driven by solid revenue growth of 20 percent and improved margins," Li added.

Sinopharm's revenue in Q1 was ¥45.8 billion, "significantly outpacing a strong direct competitor," according to Li.

"With increasing penetration into the attractive lower-tier markets, Sinopharm should continue to sustain organic growth that is 3 to 5 percent above the industry average, in our view," said Li. "We remain optimistic about the growth outlook for the Chinese pharmaceutical market at high-teens percent in 2014."

Sinopharm's net margin increased to 2.4 percent, compared with 2.2 in the first quarter of 2013 and 2 percent in the fourth quarter of 2013. This was driven by both improved gross margin and operating margin.

Sinopharm ended Wednesday trading in Hong Kong at HK$20.40, up 2 percent.

SHANGHAI PHRAMA MISSES

Not all companies had rosy returns to report. Shanghai Pharmaceuticals Holding Co Ltd. (HK:2607, SS:601607) total revenue in the first quarter of this year was ¥21.3 billion, a 9 percent increase, but short of its projection of ¥22.7 billion. EPS also failed to meet estimates of ¥0.24, coming in at only ¥0.22. Profit attributable to shareholders slid 6 percent year-on-year in the first quarter, dropping to ¥586 million from ¥651 million during the same period in 2013.

Shanghai Pharma also struggled with higher working capital requirements and lower profitability, as evidenced by its deteriorating operating cash flow. Operating outflow jumped to ¥568 million in the first quarter of this year from ¥258 million in the first quarter of 2013.

Shanghai Pharma ended April 30 trading at HK$14.20, up 0.71 percent for the day. The company's Shanghai-traded shares ended the day at ¥11.97, up 0.59 percent for the day but down from above ¥13 just a few days earlier.

"First quarter weakness was seen in both pharmaceutical and distribution segments," Li said in her analysis of Shanghai Pharma. "We are cautiously optimistic in the new incentive plan."

Li rated Shanghai Pharma as "hold."

But despite recent setbacks, Li said Shanghai Pharma's prospects for the second half of this year are not necessarily bleak and, as with Fosun, M&A activity could also shore up Shanghai Pharma's bottom line.

"The company is looking for M&A opportunities in the west and the south to further broaden networks," she noted. "We anticipate potential significant M&A news to drive upside in the second half of 2014."