Biostar Plunges on Government Suspension Rumors

Apr.27.10 | About: Biostar Pharmaceutic (BSPM)

By Platinum Tiger

On only the second trading day after Biostar Pharmaceuticals (NASDAQ:BSPM) uplisted to the NASDAQ, when investors might have otherwise celebrated the usual price bump that accompanies a move from the bulletin boards to a listed exchange, they were instead surprised on Monday by a 20 percent price drop on massive volume of nearly 2 million shares.

According to rumors that circulated among investors, Biostar was suspended last week from advertising its major hepatitis drug, Aoxing number one Oleanolic Acid Capsules, by the Shanxi provincial bureau of China's State Food and Drug Administration (SFDA) due to "unauthorized" and "exaggerated" advertising practices. The source of these rumors was a "suspension notice" posted on a Chinese website purporting to be an SFDA news site.

Since there was no other news in the Chinese or U.S. press, and no announcement from Biostar, I'm treating this for the moment as a harmful rumor that may or may not prove true. Since the hepatitis drug accounts for as much as 70 percent of Biostar's revenue, any suspension of its advertising, even if limited to Shanxi province, could adversely affect the company's profits, at least until the problem is corrected.

I'm guessing the 20 percent drop may in any case be an overreaction. Even if the rumor is true, it seems unlikely that such a suspension of advertising in a single province would reduce the company's long-term profits by 20 percent. With management's recent guidance indicating 100 percent profit growth, and BSPM trading at a forward PE of around 9x, the stock looks extremely undervalued to me, especially after Monday's plunge.

Some investors took the price drop to be a buying opportunity and acted accordingly. I've held onto my position in anticipation that Biostar will clarify the situation soon with a press release. If this isn't forthcoming in the next day or so I'll interpret that as a bad sign and act accordingly.

Disclosure: Long BSPM.