Genesis Pharma Boosts Product Portfolio with Purchase of TCM Manufacturer

Genesis Pharmaceuticals Enterprises (GNPH.OB) will pay $12.2 million to acquire most of the assets of Shandong Chinese Traditional Medicine College and its wholly owned subsidiary, Hongrui Pharmaceuticals, Ltd. Hongrui brings with it a portfolio of 22 TCM drugs that produced revenues of 80.6 million RMB ($11.8 million) in the first eight months of 2008. The company’s net income margin was more than 10%.

In the first twelve months after the acquisition closes, Genesis expects the Hongrui products will increase revenues by 150 million RMB ($19.2 million). Net income should climb by about 24 million RMB ($3 million) during the same period.

Genesis, through its China operating subsidiary, Laiyang Jiangbo Pharmaceutical Co., will acquire Hongrui's production and distribution facility, office buildings, land, equipment and inventories. All tangible assets are included in the purchase. Genesis will pay $9.6 million in cash and an additional 643,651 shares of its stock to make up the $12.2 million.

The initial payment will be $2.9 million. A second payment of $6.7 million will be made once the SFDA transfers ownership of Hongrui’s TCM portfolio. If that transfer does not take place, the transaction will be nullified and Genesis will be refunded its original payment. The last payment, which consists of stock only, will be made within one year.

Genesis gives the transaction a value of 110 million RMB ($16 million). To get this number, it considers the 643,651 shares in the purchase each worth the nominal amount of $10, instead of their current market value, which is $4.12. At $4.12 apiece, the stock portion of the transaction is worth $2.6 million. Added to the cash of $9.6 million, the stock portion makes the purchase price equal to $12.2 million.

Hongrui produces a number of traditional Chinese medicines in tablet, capsule, syrup, pill and cream form. They are used to treat gynecologic diseases, fevers, colds and coughs, pediatric diseases, and for daily health care. Hongrui has also developed a drug used to treat bone and bone marrow inflammations for which it owns the intellectual property rights and is the exclusive manufacturer in China. Hongrui, which was founded in 1971, has approximately 120 employees.

At the outset, Genesis will produce and distribute the 11 Hongrui products with the highest sales volumes and profit margins of all of Hongrui's products. The products will be marketed under Genesis’ brand name, Jiangbo.

The transaction will increase Genesis’ portfolio from 6 to 28 products. Until now, 67% of Genesis’ revenues have come from western-style drugs, and the remainder derives from traditional Chinese medicines. Its top four products in fiscal 2007 were Clarithromycin sustained-release tablets (antibiotic), Itopride Hydrochloride granules (a digestive aid), Ciprofloxacin Hydrochloride tablets (bacterial antibiotic), and Paracetamol tablets (analgesic for flu).

Genesis, which completed its fiscal 2008 on June 30, reported revenues for 2008 of $99.5 million, a 31% increase. Net income was $22.5 million. That means the acquisition will more than double the company’s revenues, though the effect on the bottom line will be less significant.

Disclosure: none.