On the other hand, prices for its most important raw material, barrenwort, did not adversely affect the outcome for Tongjitang. There were worries that the demand for the herb would outstrip supply. Because the prices for drugs are set by the government, a rise in raw material prices would put a squeeze on Tongjitang.
Investors were not particularly impressed with the report. After the announcement, the stock price of Tongjitang dropped 11% to approach its all-time low. In mid-session, Tongjitang was down $1.16 at $9.38. As before, Tongjitang remains heavily dependent on its osteoporosis drug, Xianling Gubao, which provided 78% of the revenue. Sales for XLGB were up 11%. This was overshadowed by its other core drugs, which climbed 193%. Still, the other core drugs contributed just 17 million RMB ($2.2 million) to overall revenues.
XLGB was recently granted national trade secret status by the Ministry of Science and Technology and the National Administration for the Protection of State Secrets in China. It is one of very few modernized TCM drugs to earn this honor, which brings with it manufacturing exclusivity and pricing protection.
Management reiterated that it expects revenues for 2007 of 600 million RMB, while gross margins will be in the mid-sixties percentage.
In March, Tonjitang made its IPO on the NYSE at a price of $10 (see story). Originally, the company was seeking a valuation in the range of $15 to $17. Because of its reliance on traditional Chinese medicine, the company is not in the forefront of science, which gave investors some pause, though its business is very profitable. Gross margins were at the 66% level, and net margins were almost 40%. The net profit works out to an earnings-per-ADS of 22 cents.
And the business is growing. So far in 2007, the company is seeing results that are modestly higher, but analysts predict revenues for Tongjitang will grow 25% in 2008. Tongjitang currently has a historical P/E of just 12, which is low for a company that is growing at this pace, especially given that profit margins are running close 40%.
Tongjitang says its IPO gave the company a stock that is a usable currency for making acquisitions in China’s highly fragmented biopharma industry. Tongjitang estimates that there are about 1,500 drug manufacturers in the country, each with an average revenue of less than 100 million RMB ($12.5 million). The company expects a major consolidation in the industry over the next three to five years. At the end of the second quarter (and after its IPO), the company reported cash levels of $101.5 million.
Management has put its osteoporosis drug into a Phase IV test in the U.S., with hopes of increasing its international sales. Data is expected from the trial before the end of 2007. At present, the vast majority of Tongjitang’s revenues come from China. Tongjitang produces and markets 48 products, including 11 modernized traditional Chinese medicines and 37 Western medicines. Its four principal products are modernized traditional Chinese medicines, including:
Xianling Gubao for the treatment of osteoporosis, osteoarthritis, ischemic necrosis and bone fracture for its prescription indications, and for the treatment of osteoporosis for its OTC indication; Zaoren Anshen Capsules for the treatment of insomnia to improve sleep quality; Moisturizing and anti-itching capsules for the treatment of severe itchiness caused by multiple conditions; Dianbaizhu syrup is for the treatment of vertigo or dizziness.
Disclosure: none.
