Biostar Pharmaceuticals: Investing in China's Healthcare Stimulus Plan

| About: Biostar Pharmaceutic (BSPM)

Biostar Pharmaceuticals (NASDAQ:BSPM) is a Xianyang-based pharmaceutical company with 15 current products, three more ready to launch and a pipeline of nine new products under SFDA review. While BSPM has done a nice job of expanding its product-line, its flagship product Xin AoXing capsule, a treatment for Hepatitis B, is its primary breadwinner, accounting for 77% of the revenues in its most recent quarter.

To say that Hepatitis B is a chronic problem in China is an understatement. Approximately 130M Chinese are currently afflicted with the disease, with over 1M new cases reported each year. Although none of the drugs are cures for Hepatitis B, some medicines can stop the virus from replicating. What separates Biostar from other drug makers, is that BSPM is the ONLY pharmaceutical company with an SFDA-approved over-the-counter Hepatitis B drug on the market. Furthermore, the drug is easily affordable, with an average patient cost of $1.50 a day.

As part of China’s stimulus plan, the Chinese government is doing its best to extend healthcare to the rural countryside and to the country’s farmers – an essential constituent for China’s long-term economic health. On a basic level, if the China’s farmers are not healthy, they cannot tend to their crops and it will result in a country-wide food shortage. Needless to say, this is a situation the government is anxious to avoid. Thus, it has opened up thousands of new medical clinics throughout the countryside, now enabling farmers to buy medicines locally instead of in cities that are miles away.

Because Hepatitis B is highly prevalent in the Chinese countryside, these new medical clinics have suddenly opened a new avenue of growth for Biostar: the Chinese farmer and rural community. In its most recent quarter, BSPM penetrated 3,500 of these clinics with its Hepatitis B drug. In 2010, the company hopes to reach an additional 7,500 health centers for a total of 10,000. While this demographic accounted for only a small portion of total revenues in its most recent quarter, these add-on sales allowed Biostar to accelerate its top-line and bottom-line numbers. Overall, the BSPM’s most recent quarter were very impressive:

  • Q3 revenue increased 106.3% to $15.6M.
  • Q3 gross margins came in at 77%.
  • Q3 net income increased 459% to $3.1M, with $0.13 EPS.
  • Net income for the first nine months increased 113% to $8.8M, with $0.37 EPS.
  • Revenue for the first nine months increased 52% to $36.2M.
  • Cash flow from operations was $2.9M for the first nine months of the year.

Looking ahead, BSPM has established a “Make Good” provision for both this year and next, pledging to achieve $15.9M in income from operations in 2009 and $21.1M in 2010. When we consider a recent capital raise by the company, these Make Good numbers should equate to $0.50 in earnings in 2009 and $0.62 in 2010 on a fully-diluted share count. As we move into 2010, investors should become more focused on 2010 yearly numbers and adjust the valuation appropriately.

Biostar is represented by a very reputable IR firm, HC International. HC International is a highly-regarded IR organization with a focus on representing Chinese growth stories to investors. RINO and TSTC are just two of the companies this firm represents. Needless to say, HCI’s interest in the name provides further validation to BSPM in our book. Not surprisingly, the market has taken a keen interest in the story since October, pushing up the stock from $1.70 to $3.70 in the last few months.

Looking ahead, we foresee two major catalysts for the stock. First off, we expect analyst coverage on BSPM at some point in the first half of 2010. An exchange listing is also a top priority for management in the near-term. Since BSPM already meets AMEX qualifications and is almost above the $4 minimum for a NASDAQ listing, the stock should see a move to an exchange at some point in the not-so-distant future.

Even with all of its positives, BSPM is not without its risks. First off, this is a bulletin-board stock. We are also concerned about the company’s over-reliance on one product. In terms of GAAP, the company has engaged a lower-tier accounting firm to audit their books. We hope HC International can convince the company to hire a more respectable accounting firm in 2010. Finally, the CFO resides in California. Although she travels to the company’s manufacturing plants in China frequently, in our mind, she should be in China full-time, working side-by-side the company management.

All this being said, we believe the risks in BSPM are well worth the potential reward. After all, this is the stock market, where there is risk in any stock. But any time you can pick up stock in a company on the verge of an inflection point, the potential for an explosive subsequent move, makes it a good bet indeed. We feel BSPM may be one of those special situations.

Disclosure: Author holds a long position in BSPM