China Sky One Medical: Still Priced Low Despite Bright Prospects

China Sky One Medical, Inc (CSKI), as we are reminded almost weekly, is a tornado of activity, acquiring companies and bringing out new products at a pace unmatched in China biopharma. Last week, The China Perspective published an interview with Mr. Yan-qing Liu, CEO of China Sky One Medical (see article), an interview that reinforced the company-in-a-hurry theme. Nevertheless, despite its success, the stock remains priced very low relative to its prospects, probably due to the worldwide economic crisis. Using Mr. Liu’s latest interview as an excuse, we would like to take another look at the whirlwind that is China Sky One.

Top-line numbers are a good place to start. Recently, China Sky One increased its guidance for 2008 revenue by almost 10% to an $82 to $89 million range. On the top end, that level of revenue represents an 80% increase over 2007, which was, in turn, a 148% increase from 2006. China Sky One is certainly experiencing a large expansion in sales.

It is also solidly profitable, with net income constituting an enviable 31% of revenue. Cash flow is strong, running at almost $27 million for the first nine months of 2008. That cash flow is derived from $66 million of revenue. The company reports a significant 31% return on assets, which is overshadowed by its even more astonishing 46% return on equity. So the company is not only growing quickly, but growth is not being achieved at the expense of profitability.

The balance sheet is just as strong as the rest of the company, with plenty of cash. China Sky One floated a secondary offering in February, which netted $23 million, and it left the company with a cash balance of $51 million at the end of the third quarter – about $3 per share. That is enough to fund several of the fairly low-cost acquisitions (under $10 million) in which China Sky One seems to specialize. When making an acquisition, China Sky One mainly uses cash, a praiseworthy practice for a company whose stock price is undervalued.

So far this year, China Sky One has bought two companies, Heilongjiang Tianlong Pharmaceutical, Inc. and Peng Lai Jin Chuang Company. Peng Lai Jin Chuang, which carried with it the rights to produce and market twenty drugs (though actual production had not begun), will contribute $3-$5 million in additional revenues during 2008.

The China Perspective interview included a handy description of the twenty drugs being produced by Peng Lai Jin Chuang:

Naftopidil Dispersible Tablets
Sertraline Hydrochloride Capsules
Banlangen Granule
Ganmao Tuire Granule
Kete Ling Capsules
Oyster Shell Calcium Tablets
Guanxinsuhe Capsules
Vitamin B1Tablets
Paracetamol, Caffein, Artificial Cow- bezoar and Chlorphenamine Maleate Capsules
Banlangen Granule
Banlangen Syrup
Angelica Root Syrup
QiangLi Loquat Syrup

M&A will continue as a part of China Sky One’s business plan. CEO Liu said the company continues to see a lot of acquisition opportunity in the current landscape. At the moment, China Sky One is talking with “potential candidates,” according to Liu, though neither names nor numbers were disclosed.

The other part of China Sky One’s rigorous growth program is R&D. For a China biotech, China Sky One spends a greater than average percentage of revenues on its research and development program, about $7.5 million this year or 9% of revenue.

CEO Liu also said the company wants to become China’s largest manufacturer of products for eye diseases, with the widest portfolio of products. By being the largest, the company can engender brand awareness that stimulates sales throughout the product line. In addition, “Our R&D focus will be on clinical medicines for first-line disease treatment, including those that treat cardiovascular diseases and antibiotics that treat infections,” he said.

The following is a list of products currently in development, though sharp-eyed readers will realize that Nasal Aqua, the first named product, was approved for marketing last week, reducing the number of products in development to “only” 26.

1. Nasal Aqua for nasal congestion symptoms
2. Methionine Vitamin B1 for Injection for liver related diseases, such as chronic hepatitis, Cirrhosis; has efficient effects for fatty liver
3. Doxofylline Injection for asthma
4. Pantoprazole Sodium for Injection for stomach diseases such as gastric ulcers
5. Paeonol Gel Anti-allergic, anti-itching
6. Aloe Gel Anti-itching caused by eczema
7. Diclofenac Sodium Suppositories Anti-inflammatory, pain relief drug used for arthritis or after an operation
8. Compound Naphazoline Spray for nasal diseases such as rhinitis, sinusitis
9. Chlorhexidine Gluconate Gargles for oral diseases such as gingivitis etc.
10. Hemorrhoid Lotion Pain relief, used for hemorrhoids
11. Kun Jing Suppositories for Women for vaginal infection
12. Cetylpyridinium Chloride Gargle for oral diseases
13. Pediatric Ibuprofen Suppositories Pain relief for children
14. Sulfasalazine Suppositories for intestinal diseases such as colitis
15. Tinidazole Suppositories for vaginal infection
16. Sodium Ferulate for Injection Adjuvant therapy for cardio-cerebral vascular disease
17. Compound Chlorhexidine Gargle Adjuvant therapy for teeth and oral diseases such as gingivitis
18. Calcium Folinate for Injection Antidote
19. Boric Acid Ointment Anti-itching, pain relief for frostbite
20. Moschus Ointment for bone injury, rheumatism
21. Policresulen Vaginal Suppositories for vaginal infection
22. Podophyllotoxin Tincture for male and female reproductive organs diseases such as Condyloma
23. Antipyretic Suppositories for cough
24. Forsythia Suppositories for cold, fever, cough
25. Aciclovir Gel for virosis
26. Nitrofurantoin Suppositories for colon infection diseases

China Sky One had a good day in the market Monday: it was up $1.05 (9%) at $12.67. Given its performance over the past 12 months, the company is selling at a 7.6 P/E ratio. With a prediction of a 50% increase in 2009 revenues and earnings per share of $2.20, that is just a 5.7 P/E ratio for 2009. All this for a company that is growing quickly, with very high profit margins and a lot of cash in the bank. In sum, China Sky One is an extremely strong company whose stock price has been battered by worldwide conditions, not any weaknesses of its own business plan or execution.

The following is a reprint of part of a China Sky One review we did in early 2008 containing an analysis of the long-term initiatives undertaken in 2007:

Internal Growth Initiatives

China Sky One signed an agreement in Q2 of 2007 for land on which to build a biotech engineering facility. The center will include a workshop, R&D facility and offices. It is expected to be completed in June 2008, and China Sky One has already invested almost $8 million just to acquire the land.

China Sky One has also established partnerships with universities. It has built a genetic medicine laboratory in collaboration with Harbin Medical University, established a cell laboratory with North East Agricultural University, and founded a monoclonal antibody laboratory with Jilin University.

The genetic medicine collaboration has resulted in an anti-cancer product known as Endothelin-1, currently under development. China Sky One is applying to begin clinical trials of the drug.

Much of China Sky One’s business revolves around diagnostic kits. Its present research is divided into four areas: (1) the development of an enzyme-linked immune technique to prepare extraneous diagnostic kits; (2) the development of an enzyme-linked gold colloid technique to prepare an extraneous rapid diagnostic test strip; (3) the development of a gene recombination technique to prepare genetic drugs; and (4) the development of a biology protein chip for various tumor diagnostic applications.

Ten biological products are currently under development: a human urinary albumin elisa kit; an AMI detection kit (for myocardial infarction); an HIV detection kit; a uterus cancer diagnostic kit; a breast cancer diagnostic kit; a liver cancer diagnostic kit; a rectum cancer diagnostic kit; a gastric cancer diagnostic kit; a gene recombination drug; and a multi-tumor marker protein chip detection kit. China Sky One expected some of these projects to complete development in 2007, while others should finish up in 2008 or later.

Disclosure: none.