China Sky Sinks; Brocade Gets Pop

Updated to reflect Global Hunter Securities has dropped coverage of China Sky One Medical.

NEW YORK (TheStreet) -- Shares of China Sky One Medical(CSKI) were plunging in afterhours action late Friday after the Chinese drug developer lowered its outlook for the rest of the year, citing the loss of a number of distribution partners.

The problem could be significant for the company, which also announced the resignation of its CFO Stanley Hao who had been on a leave of absence for health reasons since July. The distributors severed their relationships with China Sky because the company's disclosure of their business information in its filings with the Securities and Exchange Commission had supposedly led to "increased scrutiny of their financial performance by government authorities within China."

While China Sky contended the problem would be temporary, the news raises questions about the company's ability to effectively sell its products, mainly over-the-counter drugs including a camphor cream and an acne prevention ointment, in China as other distributors could balk as well.

The company had booked total revenue of $70 million for the first six months of the year. On its Web site, China Sky says its distribution network in China covers 22 provinces and 125 municipalities, but it also exports products to more than 20 countries, including the U.S. and Germany.

The stock was tumbling 28% to $7 in extended trading, according to Nasdaq.com, making it the biggest percentage decliner after the bell. Volume of 170,000 was significant for the shares, whose daily churn is typically less than 160,000 in a regular session. Year-to-date, the stock is down about 58%.

China Sky said it now expects adjusted earnings of $26 million to $31 million in fiscal 2010 on revenue of between $128 million and $136 million. Its prior outlook was for a profit, excluding the impact of derivative warrant liabilities, of $40 million to $41 million on revenue ranging from $160 million to $164 million.

"We are disappointed with the decision by several of our larger distributors to end their cooperation with China Sky One," said Yan-Qing Liu, the company's chairman and CEO, in a statement. "We expect to recoup this lost business over time by building new relationships with reputable provincial and national distributors."

The company reported its second-quarter results on August 10, posting an adjusted profit of $10.2 million, or 60 cents a share, on revenue of $40.8 million. The results were well ahead of Wall Street expectations for earnings of 53 cents a share on revenue of $37.3 million, although China Sky was covered by only two analysts at the time.