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Two China Pharma Plays

Secondly, China is encouraging pharmaceutical companies to educate and provide Hepatitis treatment to the neglected rural regions where the disease is much more prevalent.

Biostar intends to respond to this significant market opportunity by being an early entrant in the rural areas. The company is utilizing this sales strategy to sell its products into small rural health clinics, where it currently has coverage for 3,512 sales outlets in Shaanxi Province, with plans to expand to 10,000 in several provinces by the end of 2010.

Finally, the company recently completed a capital raise enabling it to construct a raw materials processing facility. This vertical step helps to facilitate progress in several areas.
  • Biostar's goal is to utilize 25% of raw material production internally for better quality control.
  • The company aims to generate another source of revenue as it will sell the remaining 75% externally.
  • Margins should improve.
  • Supply disruption risks are being mitigated.

As exciting as those developments may be, we felt that investors would want to know how Biostar plans to grow with its current product pipeline and an existing mature product line. The 2010 pipeline consists of three over-the-counter drugs and eight prescription drugs. CEO Ronghua Wang addressed this issue stating that Biostar has

"a conservative management structure that is concerned primarily with quality and not quantity of products. There are several ways we can still enjoy rapid growth with our current structure. First, we don't have full province China which we expect to gain within two years.

"Second, our penetration into the rural areas offers a whole new avenue of growth for new and seasoned products. Third, we can consider making acquisitions of distributors to increase our market presence into areas we are not serving. Finally we also have three to five nutraceutical products we may consider launching in 2010."

It was also encouraging to learn that it takes Biostar as little as one month to push a product through a distribution network.

As far as its capacity potential goes, Biostar could reach a capacity of $100 million in annual production output. The company is currently operating at 60% with the goal of reaching 80% in 2010.

In summary, what we have is a conservative management team with aggressive goals to grow via market penetration, emphasizing product quality and control of its raw material supply.

Investors may begin to notice BSPM if it continues to build on the EPS momentum established in the previous two quarters of 2009, boasting growth in excess of 100%. Income from operations targets of $15.9 million for 2009 and $21.1 million for 2010 affirms that Biostar may continue to post solid earnings gains in the upcoming year.

With implied 2010 EPS of 71 cents per share and a current price of $3.35 (as of the close of Dec. 9, 2009), BSPM is selling at a P/E of 4.7 in a sector that is gaining steam. In light of these statistics, both value and growth investors may find the BSPM story intriguing.
At the time of publication, Soueidan was long Tianyin Pharmaceuticals and Biostar Pharmaceuticals.

Maj Soueidan founded The Market's Edge, Ltd. in 1994, The Markets Edge Hedge Fund in 2006 and GeoInvesting, LLC in 2007. Through his involvement with the equity markets, he developed the strategies that are now at the core of the hedge fund and He currently leads a team of researchers and analysts (the GeoTeam) that help investors identify opportunities in today's volatile stock market. The team uses fundamental criteria to analyze stocks in the micro-cap to small-cap arena.
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