Dragon’s New Production Process to Cut Costs
by Richard Daverman, PhD
ChinaBio Today
Dragon Pharmaceutical Inc. (DRUG) has developed a new biotech production process for 7-ACA, an intermediate for Cephalosporin antibiotics. The new process replaces a chemical manufacturing technique that involved solvents, toxic waste and extreme temperatures.
Traditionally, formulating 7-ACA involved methylene chloride, N,N-dimethylaniline and trimethylchlorosilicane. These caused toxic wastes that are difficult to recycle and costly to clean up. To create the proper conditions for some of the chemical reactions, the old procedure also required temperatures between negative 40 degrees C and negative 60 degrees C, another high-cost production item.
It was, in short, an expensive procedure that escalated costs. Because so many of these expenses are no longer necessary, Dragon forecasts its product will now be more competitive than before.
The biotech method uses enzymes to catalyze reactions, eliminating expensive solvents and toxic reagents, and causing less waste. The process is also conducted at moderate temperatures.
Dragon put the first biologic line into operation last month, adding to its existing production capacity. The new line can produce 10 tons per month or 120 tons per year. This brings Dragon’s total capability to 720 tons per year. Over time, Dragon will switch all of its production to the new process.
Dragon took the opportunity afforded by the announcement to say that it is also involved in researching ways to upgrade its fermentation technology. Working with the East China University of Science and Technology, Dragon is seeking to improve its fermentation yields, particularly with Cephalosporin C. The undertaking has been named a key project under the China National High-Tech R&D Program, which is tasked with developing important technologies in the biopharma arena.
Company Snapshot
Although its corporate offices are in Vancouver, BC, Dragon’s manufacturing operations are entirely in China. The company has three separate lines of business: a Chemical Division, which manufactures APIs and pharmaceutical intermediates; a Pharma Division for producing generic drugs (especially Cephalosporin antibiotics and freeze-dry injectables); and a Biotech Division for constructing biologics, currently Erythropoietin or EPO.
In January 2005, Dragon acquired Oriental Wave Holding Ltd., which took the company from a single-product enterprise to its present state as a diversified enterprise.
Dragon is approved to produce 47 drugs by the China SFDA. It has four production facilities: one each for freeze-dry injectables, a biotech plant for EPO, a chemical plant for Clavulanic Acid (an antibiotic adjuvant), and the bulk 7-ACA plant. All of these are GMP certified, except for the bulk 7-ACA line, which as an intermediate does not require GMP approval. The company aims to sell 50% of its 7-ACA to manufacturers in India.
In the first half of 2007, revenues were up 40% at $37.9 million. Of these, 33% were generated from international sources. The Chemical division produced the bulk of the revenues, 82%, while Pharma contributed 15% and Biotech 3%. Cost of sales was $29.8 million, creating a gross profit margin of only 21.2%. Dragon earned $1.3 million on these revenues (after a non-cash charge of $1 million for stock-based compensation), which equates to 2 cents per share for the first six months of the year.
Dragon has some problems with its balance sheet. The company has just $1.2 million in cash, and its current liabilities of $42.5 million are far in excess of its $24.8 million of current assets. Part of the problem is $16.3 million in short-term loans that come due in the next year. But even fixing that difficulty would only change a horrendous situation to a merely bad one.
Dragon says it will seek additional capital through private placements and sell off some of its assets. In the last year, Dragon received $1 million from selling the rights to market its EPO product in Europe.
Moving in the direction of greater liquidity, at the beginning of Q3, Dragon exchanged 3.5 million shares of stock at a price of $.429 each, canceling debt of $880,000 and receiving $620,000 in cash. Dragon has also pre-announced that its revenues improved in Q3, taking advantage of a shortage of antibiotics that resulted in greater sales and higher prices for its Cephalosporin products and intermediates.
Dragon has 62.9 million shares outstanding. It is currently trading at $1.13 per share (12 cents higher on the session), giving the company a market capitalization of $71 million – about one times its annual sales.
In comparison to many of the small China biopharmas, Dragon has very solid revenues -- $100 million per year looks like it will soon be reached. But Dragon is not at present able to make much money on those revenues. Smaller China biopharmas are often paradoxically able to boast of huge margins while the much larger Dragon is just eking out a profit. Hopefully, the new manufacturing process will allow Dragon to improve its financial performance – chemicals, after all, are responsible for the majority of the company’s revenue (82%). So an improvement in margins in its chemical division would have a large impact on the company overall.
ChinaBio Today is a regular contributor to BioHealth Investor
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ChinaBio Today
Dragon Pharmaceutical Inc. (DRUG) has developed a new biotech production process for 7-ACA, an intermediate for Cephalosporin antibiotics. The new process replaces a chemical manufacturing technique that involved solvents, toxic waste and extreme temperatures.
Traditionally, formulating 7-ACA involved methylene chloride, N,N-dimethylaniline and trimethylchlorosilicane. These caused toxic wastes that are difficult to recycle and costly to clean up. To create the proper conditions for some of the chemical reactions, the old procedure also required temperatures between negative 40 degrees C and negative 60 degrees C, another high-cost production item.
It was, in short, an expensive procedure that escalated costs. Because so many of these expenses are no longer necessary, Dragon forecasts its product will now be more competitive than before.
The biotech method uses enzymes to catalyze reactions, eliminating expensive solvents and toxic reagents, and causing less waste. The process is also conducted at moderate temperatures.
Dragon put the first biologic line into operation last month, adding to its existing production capacity. The new line can produce 10 tons per month or 120 tons per year. This brings Dragon’s total capability to 720 tons per year. Over time, Dragon will switch all of its production to the new process.
Dragon took the opportunity afforded by the announcement to say that it is also involved in researching ways to upgrade its fermentation technology. Working with the East China University of Science and Technology, Dragon is seeking to improve its fermentation yields, particularly with Cephalosporin C. The undertaking has been named a key project under the China National High-Tech R&D Program, which is tasked with developing important technologies in the biopharma arena.
Company Snapshot
Although its corporate offices are in Vancouver, BC, Dragon’s manufacturing operations are entirely in China. The company has three separate lines of business: a Chemical Division, which manufactures APIs and pharmaceutical intermediates; a Pharma Division for producing generic drugs (especially Cephalosporin antibiotics and freeze-dry injectables); and a Biotech Division for constructing biologics, currently Erythropoietin or EPO.
In January 2005, Dragon acquired Oriental Wave Holding Ltd., which took the company from a single-product enterprise to its present state as a diversified enterprise.
Dragon is approved to produce 47 drugs by the China SFDA. It has four production facilities: one each for freeze-dry injectables, a biotech plant for EPO, a chemical plant for Clavulanic Acid (an antibiotic adjuvant), and the bulk 7-ACA plant. All of these are GMP certified, except for the bulk 7-ACA line, which as an intermediate does not require GMP approval. The company aims to sell 50% of its 7-ACA to manufacturers in India.
In the first half of 2007, revenues were up 40% at $37.9 million. Of these, 33% were generated from international sources. The Chemical division produced the bulk of the revenues, 82%, while Pharma contributed 15% and Biotech 3%. Cost of sales was $29.8 million, creating a gross profit margin of only 21.2%. Dragon earned $1.3 million on these revenues (after a non-cash charge of $1 million for stock-based compensation), which equates to 2 cents per share for the first six months of the year.
Dragon has some problems with its balance sheet. The company has just $1.2 million in cash, and its current liabilities of $42.5 million are far in excess of its $24.8 million of current assets. Part of the problem is $16.3 million in short-term loans that come due in the next year. But even fixing that difficulty would only change a horrendous situation to a merely bad one.
Dragon says it will seek additional capital through private placements and sell off some of its assets. In the last year, Dragon received $1 million from selling the rights to market its EPO product in Europe.
Moving in the direction of greater liquidity, at the beginning of Q3, Dragon exchanged 3.5 million shares of stock at a price of $.429 each, canceling debt of $880,000 and receiving $620,000 in cash. Dragon has also pre-announced that its revenues improved in Q3, taking advantage of a shortage of antibiotics that resulted in greater sales and higher prices for its Cephalosporin products and intermediates.
Dragon has 62.9 million shares outstanding. It is currently trading at $1.13 per share (12 cents higher on the session), giving the company a market capitalization of $71 million – about one times its annual sales.
In comparison to many of the small China biopharmas, Dragon has very solid revenues -- $100 million per year looks like it will soon be reached. But Dragon is not at present able to make much money on those revenues. Smaller China biopharmas are often paradoxically able to boast of huge margins while the much larger Dragon is just eking out a profit. Hopefully, the new manufacturing process will allow Dragon to improve its financial performance – chemicals, after all, are responsible for the majority of the company’s revenue (82%). So an improvement in margins in its chemical division would have a large impact on the company overall.
ChinaBio Today is a regular contributor to BioHealth Investor
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