American Oriental Reports Mixed Q2

American Oriental Bioengineering, Inc. (NYSE: AOB) reported higher Q2 revenues, though the company’s improved sales did not translate to the bottom line. American Oriental’s revenues rose 21% in the period to $71.2 million, but net income slipped 5% lower to $13.2 million. Earnings per fully diluted share dropped to 17 cps this year from 18 cps in the year-earlier period.

AOB also announced a new product for rhinitis and allergies, Jingwei Capsules, which it compared to Schering-Plough's (SGP) Claritine. The new product is a tricyclic antihistamine that antagonizes peripheral H1-receptors. It is designed to alleviate rhinitis symptoms without the common side effects of antihistamines. As a Loratadine drug, Jingwei is reimbursable under China's national insurance program. The company has high hopes for Jingwei Capsules, saying the product may become its leading revenue producer.

With regard to its financial results, management blamed the earnings shortfall on a number of factors. Sales are decreasing for American Oriental’s long-time lead pharmaceutical product, Shuanghuanglian Injection Powder, a treatment for respiratory disorders. Those revenues are being replaced with lower margin sales of generic products and the company’s newly acquired distribution business.

In addition, American Oriental floated $85 million in convertible notes last year, and the interest cost is having its inevitably negative effect on profits. Without the interest expense, the company said net income would have been 5% higher. However, gross margin fell to 58.4% from 67.9%, reflecting the shift in product mix.

Distribution revenues were just $3.3 million in the quarter. American Oriental paid $39.5 million for distribution company Nuo Hua in Q2 of 2008. At the time, AOB said it expected the acquisition to add $80 million in revenue, but the business’s performance remains far below that goal.

Disclosure: none.