China Biologic: Why I'm Long

1. Company Background

CBPO (China Biological Products Inc.) (CBPO.OB) is the largest non-state owned plasma based biopharmaceutical company. This company engages in plasma collection, production and manufacturing, and R&D.

In order to make those without medical background understand more, I consulted a few professionals in this field. Basically, to make it simple, companies like CBPO collect plasma then use different technologies to purify and separate through biological processes to manufacture some biological products, which then can be applied to medical emergencies, and prevention & treatment various diseases.

Currently, there are a total of around 32 companies in China that have the licenses issued from central government to manufacture plasma products.

Be aware that plasma products are made from plasma. The plasma collection is totally different to those blood donation places. We may see blood drives very often. However, plasma is collected in a totally different system.

In China, there are a total of 125 plasma collection stations. Only those companies with licenses can operate these plasma collection stations. At this point of time, all the licenses have been issued. No more companies can apply for a license in the forseable future. For existing licensed companies, only those with capacity above 300 tons can be approved by the government to build new plasma collection stations.

CBPO’s market share now is about 15%. They own 16 of 125 plasma collection stations. It is the largest of the non-state owned plasma based company and ranks No.3 in the whole industry. Current capacity is 600 tons/year.

Within all these 32 companies, about 23 are actively operating. The top 5 companies take about 50% market share. The major state owned companies are for national strategic reserve only. The plasma products made by them are not for clinical use but for reserves. For example, if H1N1 suddenly spread out to the whole nation, the government will start to use those reserves to control disease. CBPO is the largest in clinical use.

2. Market demand

Since 2006, China has started regulating plasma collection. The collection capacity is around 3000 tons per year. But the demand has increased to 5000 tons in 2008. So the prices of plasma based products have increased a lot.

Human Albumin increased from 260 RMB/10g to 360RMB/10g.

IVIG increased from 50 RMB/10g to 300 RMB/10g.

3. Growth strategy

a. CBPO can build new plasma collection stations because it meets the standard set by the government.

b. M&A. government supports consolidation in this industry

c. R&D. to develop more products.

The leading company in the world now is Baxter (BAX), which can separate 25 products from plasma. Baxter is a global company and has sales in many different countries. Usually due to gene difference, countries have different demands for different plasma products. As CBPO now mainly focuses on the Chinese market, it only separates around 8 products. CBPO has the technology to separate more, but some disease is rarely seen in China, so they are not manufacturing these products for now. However, CBPO now is negotiating with other neighbouring countries to sell products there. It can quickly ramp up manufacturing once their products are approved.

Overall, the market is still a supplier market. More demand than supply. Due to high barrier to entry, I see strong profitability for CBPO ahead.

4. Financial

$49.5m in cash about $2.27 cash per diluted share

72% gross margins in in 2Q 2009..

The past 12 month net income/share (EPS) is $0.88/share. If we back out its cash per share, its P/E now is only 5.68x.

The company’s debt load increased a little bit, which was caused by recent M&A deals. But basically these are short term bank loans and its strong cash position will keep it out of trouble.

Again, like other small cap high growth Chinese companies, I am not building DCF models to forecast its fair value.

Just think about this:

This is the company with an almost monopoly position, high barrier to entry, strong demand, strong cash. It must be a good one. Also, the business of CBPO is hardly affected by the macro economy. Whatever happens, the first thing for people to care about is health.

Disclosure: Long CBPO.OB

Comments

[balabanovj:]

One of the best posts on this company and the sector in general I've seen in a long time. I concurr on everything said. Their recent collaboration with the transfusion instutute also bodes very well for future growth potential and tells me that the company is thinking along the lines of diversification of it's product mix within the sector. This is a long term hold for me.

James Balaban, M.D.

Oct 08 10:22 PM

[Randy Kirk:]

Very interesting firm. Are you concerned at all about supply of plasma? It seems to me donation of blood plasma is voluntary (perhaps in China it's different than in the US)

Nov 30 10:11 PM

[Randy Kirk:]

I did a bit of research on supply of plasma in CBPO's latest 10-Q and 10-k:

Supply from Guanxgi province: 2 collection centers online, waiting on the 3rd

Supply from Shandong Province: CBPO has 5 of the 6 collection centers

I haven't been able to find tons of supply from these existing centers in the 10-k.

New potential acquisitions: waiting on an acquisition of supply centers in Guizhou and Shaanxi provinces.

Do you have an opinion if these acquisitions will come through? Also do you know the supply from Shandong and Guangxi?

Last note, CBPO states it will enact "more advanced collection techniques" at its supply centers, but really it seems to me this is mainly either advertising more or paying the donors more. Also it seems since the supply is voluntary there will be some variation in supply each year, although the co seems not to acknowledge this.

Overall CBPO seems to have pinpointed the fact that supply of plasma is critical and it working pretty effectively towards securing more supply.

Nov 30 11:19 PM