Tongjitang Continues Pattern of Small Acquisitions Like Itself

| About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE: TCM) will acquire Anhui Jingfang Pharmaceutical Co. Ltd., a privately owned company, for 60 million RMB ($8.8 million). Like Tongjitang, Jingfang is a TCM drug company with products in the orthopedics and geriatrics markets.

Jingfang's product portfolio includes more than thirty Western and traditional Chinese medicines. The company is profitable, producing revenue of 56 million RMB in 2007, which fell to 41 million RMB in 2008.

Jingfang’s biggest revenue producers are Fengshi Gutong Capsules, a treatment for rheumatic arthritis pain, and Jingshu Granules, which relieves stiffness and pain caused by degenerative osteoarthritis. Both of these TCM products are prescription drugs exclusive to Jingfang, and both are included in the National Medical Insurance Catalogue. In 2008, they generated 40% of the company’s revenue.

Tongjitang said the acquisition was attractive because the two companies are involved in the same orthopedic market. Tongjitang may offer Jingfang’s products under its own label, and it will use its existing sales force to expand revenues. Jingfang will increase Tongjitang’s presence in the Yangtze River Delta region, according to Tongjitang.

The Jingfang acquisition continues Tongjitang’s pattern of making small acquisitions of companies similar to itself. One year ago, Tongjitang paid 25.5 million RMB ($3.5 million) for Qinghai Pulante Pharmaceutical, which produces Tibetan-sourced TCM products. Its lead product is Chongcao Qingfei Capsules, a treatment for respiratory diseases including Chronic Obstructive Pulmonary Disease, which afflicts smokers.

In 2007, Tongjitang paid 42.2 million RMB ($5.6 million) to purchase Guizhou Long-Life Pharmaceutical Company Ltd. Guizhou’s portfolio consisted of ten over-the-counter and prescription medications that produced 50 million RMB ($6.6 million) in revenue.

Tongjitang’s problem is that its core business is in decline. Its Q4 revenues dropped 36%, and full-year 2008 sales were off by 24%. Its premier product, the osteoporosis treatment Xianling Gubao (XLGB), suffered from competition from counterfeiters, a problem that has been solved in court. However, sales are still depressed.

Tongjitang is cash rich, but its decreasing revenues keep the company’s stock price at very low levels. Following the announcement of the Jingfang acquisition, Tongjitang fell 20 cents to $3.50. At this price, it has a market capitalization of $118 million. Tongjitang ended 2008 with cash of $75.6 million.

Disclosure: none.