SciClone Pharmaceuticals (SCLN)

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Lawrence Gu

SciClone Pharmaceuticals (NASDAQ: SCLN) is a global specialty pharmaceutical company that specializes in cancer and infectious diseases. The company makes money off its two in-licensed products that are part of its international commercial growth strategy. Though it claims itself as international, the company's core markets is in China where it has built a solid reputation through marketing ZADAXIN. With the Chinese pharmaceutical markets growing by annual growth rates of more than 20% annual over the next few years, SCLN hopes to leverage its brand name to secure a stronger foothold in the market.^[1] SCLN believes it may do this through its sales organization of more than 200 medical representatives, of which they have developed a good reputation and relationship with over 500 hospitals in major cities of China.^[2]

Business Growth

Since SCLN's 1996 launch of ZADAXIN in China, the medication reached worldwide sales of $85 million by 2010 in worldwide sales, 96% of which is coming from China. ZADAXIN is currently one of the largest imported pharmaceutical product in China by revenue, and its volume market share of thymalfasin is approximately 5%.^[3] Going forward, China will still be an inseparable market place for SCLN, though it is headquartered in California.

China Remains an Important Market for SCLN

SCLN has an established business in China with growing product revenue and positive cash flow. SCLN continues to build this base and introduce additional pharmaceutical products. As China state leaders have agreed about a new health care reform plan which, among other things, is seeking to expand patient access to pharmaceuticals, SCLN will be able to capitalize on the growth going forward.

In China, orders for ZADAXIN for example are filed largely by distributors and sub distributors who purchase ZADAXIN from their selected, established, government-licensed importing agents. As China accounted for approximately 96% of total product sales, China will remain a very important target for SCLN.

Increased Support for Generics Wear Down SLCN's Profits

Traditionally, a pharmaceutical company such as SLCN makes money by investing heavily in R&D in hopes of a high payout. A blockbuster drug such as Lipitor for example can easily make over $1 billion in sales per year. Unfortunately, increased competition within generics as well as support for generics push down the profit margins. Usually, a branded drug's sales falls 80%, eaten up by generics competition, within the first year of patent expiration. Once these patents expire, generic companies receive the authorization to develop same or similar products that often dilute the market share of the first developer. Because the Food and Drug Administration (FDA) give special privileges to the first generic manufacturer to submit an application, called Abbreviated New Drug Application (ANDA), for approval in order to encourage the generics industry, generics are highly incentivized to rush into drug as soon as the medicine is off-patent. Unfortunately, this prompts extremely high competition which erodes the profitability quickly such that generics have a tougher time to sustain the same gross profit margins experienced by the same pharmaceuticals under patent.

Competition

Though OSIR operates in a niche segment, it still competes in the pharma sphere for drug applications and approvals. The company also feels pressure from generics as it must time its patent wisely. As such, OSIR's competitors include:

• Wockhardt DS (BOM:532300) is an India-based integrated pharmaceutical, biotechnology and healthcare company, that covers lifestyle diseases such as diabetes and nephrology.
• Endo Pharmaceuticals Holdings (ENDP) is a specialty pharmaceutical company in pain management, as it researches diseases that cover pain, overactive bladder, prostate and bladder cancer and central precocious puberty.
• Impax Laboratories Inc (IPXL) is a technology-based, specialty pharmaceutical company.

References

1. ↑ FORMA Therapeutics Grants Genentech Exclusive Rights To Acquire A Pre-Clinical Cancer Program
2. ↑ FY2010 Form 10-K SCLN, Pg 24
3. ↑ FY2010 Form 10-K SCLN, Pg 45