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Biostar: Best Small-Cap Pharma Stock

Stocks in this article: BSPM TCM AOB

The best small-cap pharma stock I have found is Biostar (BSPM), which has a market cap of approximately $100 million. From a growth and fundamentals standpoint the stock is stellar. But of equal importance, the stock has been beaten down to very cheap levels due to investors' misunderstanding of recent financial results. I recently bought the stock because I think these current low levels are unsustainably cheap and Biostar has the potential for a significant pop in the very near term.

Before buying, I addressed three questions: What does Biostar do? Why is the stock so undervalued? What is the catalyst for the stock to move upward?

Biostar's main product is Xin Aoxing Oleanolic Acid Capsules, a very cheap and effective treatment for chronic hepatitis B. The company has the only approved OTC product in China, a country where hepatitis B is a massive problem. The extent of this problem and the size of the population in China create a massive opportunity for Biostar.

From a financial perspective, Biostar's performance is compelling. 2009 revenues grew 57% to over $53 million. Gross profit increased by over 90% and net income increased by approximately 57% to over $10 million. That would put Biostar on a trailing P/E of only 8-9x at current prices.

But of much greater significance, Biostar recently issued its 2010 guidance, projecting net income of $18-20 million. This places Biostar on a forward P/E of only 4.5x, for a company with high growth, huge margins and a current ratio of 5:1. In fact right now the company trades at only 2x book value.

In short, from a financial perspective Biostar is a no brainer at current prices. But if Biostar is such a great opportunity, then why does it trade so cheaply?

First, Biostar is not yet listed on the Nasdaq and so it lacks a strong institutional following. However the company has already implemented all of the corporate governance measures required to list on the Nasdaq and has already applied to the Nasdaq for listing. The only thing I can see holding Biostar back from a Nasdaq listing is the share price, which must have a closing bid price above $4 for seven consecutive days in order to meet Nasdaq requirements. Given the current undervalued state of the company, and a share price hovering around the $4 mark, I see this as being no problem in the near future.

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