Tongjitang Reports Yet Another Low Quarter

| About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE:TCM) released another in a year-long series of disappointing earnings reports. In its Q3, Tongjitang’s revenues dropped 13% to 110 million RMB ($16.3 million), and net income fell 86% to 7 million RMB ($1.1 million), which is equivalent to earnings per ADS of 3 cents. The company also lowered its official revenue guidance for 2008 to 450 million RMB, down from 596 million RMB last year.

There was a small measure of good news in the earnings announcement. Income of the company’s mainstay product, the osteoporosis treatment Xianling Gubao (XLGB) slipped only 4% lower to $11.6 million. In last year’s third quarter, XLGB gave the first sign that its future sales might experience problems by turning in a flat performance over the 2006 numbers. A 4% decline is less negative than we have seen in the previous two quarters.

Tongjitang also reported that, earlier this month, well after the end of Q3, the company was successful in winning a legal injunction against a counterfeit version of XLGB. Tongjitang clearly hopes the successful suit will increase revenues of its most important product. XLGB accounted for 71% of all Tongjitang’s revenue for the quarter. The company also announced that it has completed a restructuring of its OTC sales force, a move undertaken to promote sales of XLGB.

Various attempts to increase XLGB sales, such as advertising and dedicated retail space, have not worked out, according to the post-release company call. Management said it still needs to determine the best plan for promoting the drug. Perhaps, the company will position XLGB as an effective treatment for various kinds of bone-muscle ailments, such as back, shoulder, neck and knee pain. These ailments are felt by the patient rather than diagnosed by a doctor, as is the case with osteoporosis.

The relatively good performance of XLGB turned out be a positive, because revenue from the company’s other products fell by a larger 51% in Q3. They produced $1.8 million in net sales, while Tongjitang’s newest acquisition, Guizhou Long-Life Pharmaceutical Company Limited, contributed just 4.6% of net revenues, down from 8.5% in Q2. Another announced acquisition, Qinghai Pulante Pharmaceutical Co., a company that makes Tibetan TCM drugs, has not yet closed.

In the first nine months of 2008, Tongjitang’s revenues are 19% lower at $49.5 million. Net income has fallen a much larger 82% to $4 million. The company’s cash position has also declined to $85.3 million at the end of Q3, down from $117.5 million at the end of Q2. Tongjitang appears to have made a large $22.7 million deposit on “property, plant, equipment and intangible assets,” though it is not clear what the investment is. Even the Qinghai Pulante acquisition, if it is completed, will cost only $3.5 million.

In the analysts’ conference call, Tongjitang management said it remains committed to making acquisitions, though so far since the company’s IPO early last year, its acquisitions have been small.

In early November, shareholders of Tongjitang gave the company the right to buy back $20 million of the company’s ADSs, a worthy investment since Tongjitang seems reluctant to make transformative M&A deals with other China biopharmas. Fosun Pharmaceuticals in also picking up the company’s stock, announcing a 5% position.

Investors sent the ADSs of Tongjitang 5% lower after getting the lackluster news. They fell 13 cents to $2.34. In the last 52 weeks, Tongjitang has traded in a range from $1.97 to $9.96. At the current price, Tongjitang has a market capitalization of $79 million, which is about $6 million lower than its cash on hand.

Disclosure: none.