Chinese Pharma Firm Ramps Up Production

Editor's note: This article was updated to reflect comments from the company's CFO, who clarified some information in the story.

I recently met with Travis Cai, the chief financial officer of China-Biotics(CHBT) in Shanghai. The company is the largest provider of probiotic bacteria in China -- a segment of biopharmaceutical research that's often misunderstood and under-recognized by investors.

Travis, a well-spoken CFO, just joined the company in February. It's clear he's here to help the company cultivate its image in front of Western investors. He did his undergraduate work at Tsinghua University in Beijing and has a master's degree from the Stern School at New York University.

So, what are probiotics? You might have seen them mentioned in Activia commercials with actress Jaime Lee Curtis. They are live micro-organisms which, when administered in adequate amounts, confer a health benefit on the host (user). They can play an important role in immunological, digestive and respiratory functions.

Some of the uses for probiotics include improving the health of your gastrointestinal tract, stimulating your immune system, helping to break down nutrients properly, reducing the creation of toxins, and reducing symptoms of lactose intolerance. They get added to nutritional products (supplements/powders), dairy products, food additives, animal feed additives, and pharmaceuticals.

The key thing for investors to understand about probiotics is that the market is large and underserved in China. The Asian market for probiotics is expected to reach $9 billion by 2014. Asians, especially women, have a higher need for this type of bacteria to help their digestive systems.

The biggest area in the Chinese market is dairy, which isn't fully served by Chinese producers and still relies on European suppliers. China-Biotics hopes to exploit its current position as the largest Chinese producer of probiotics.

China-Biotics, founded in 1999, has its headquarters in Shanghai. It has been growing like a weed. Its top-line revenues have a CAGR of 35% for the last three years. The company, which had a trailing 12 months revenue of $71 million, recently guided a 50% increase in its top line for this year.

It sells its supplements and powder to retail customers through over 100 outlets in 13 cities (mostly in or near Shanghai) under the "Shining" brand. It certainly has an expansion opportunity in retail to the rest of the country. However, China-Biotics biggest opportunities are in dairy and animal feed, not retail. It wants to provide the additives to yogurt-based drinks and infant formula sold in China, as well as to the $58 billion Chinese animal feed market.