Oppenheimer has initiated coverage on China’s ShangPharma with an “outperform” rating and price target of $17. shangpharma

Oppenheimer has initiated coverage on China's ShangPharma (SHP) with an outperform rating and price target of $17, saying the company is well positioned to benefit from the rising Chinese clinical/contract research organization (CRO) industry.

We believe ShangPharma is poised to outperform the mid-teens Chinese market growth, driven by its reputable integrated service offerings and expanding capability in the downstream service, analyst Katherine Lu wrote in a note to clients.

The company is also set to benefit from Chinese government's support to CROs and growing focus on biologics R&D worldwide, the analyst said.

Facing declining R&D productivity, major patent expirations, rising pricing pressure and increasing generic substitution, biopharma companies have strong incentives to increase outsourcing to improve pipeline productivities, cost savings and efficient resources management.

In this scenario, China offers a large talent pool, a still-attractive cost structure, increasing breadth of R&D service offerings, coupled with growing domestic pharmaceutical market.

We expect China to lead global CRO industry growth, leveraging its proven track record in providing high-quality/low-cost preclinical CRO services and MNCs' strategic focus shift to China, Lu said.

The analyst said the competitive advantages of ShangPharma, China's second-largest CRO, include an established reputation, a growing customer base, improving operating efficiency and expanding integrated service offerings.

ShangPharma, which offers chemistry and biology services to help clients develop new drugs, made its debut on the New York Stock Exchange (NYSE) in mid-October. The company's two largest customers are Eli Lilly and Co (LLY) and GlaxoSmithKline PLC (GSK).

ADRs of Shangai-based ShangPharma closed Monday's regular trading session at $12.20 on the NYSE.