Tongjitang Chinese Medicines Buyout Update

| About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE: TCM) reported that it is still considering the buyout offer from a JV comprised of its Chairman/CEO and Fosun Industrial, the Hong Kong conglomerate. The JV offered $4.50 per ADS on April 8, 2010 for every share its members do not already own. Mr. Xiaochun Wang, Tongjitang’s Chairman and CEO, now has a 51% stake in the company and Fosun owns an additional 32%.

In reporting its Q2 results, Tongjitang reiterated that Morgan Stanley Asia Limited is advising an independent group of directors on the sale. It also said CITIC Ka Wah Bank Limited has authorized a term loan facility up to $25 million for the share purchase, more than enough for the $20 million worth of stock still outstanding (at $4.50).

Investors do not seem to believe the transaction will take place. Tongjitang is currently trading hands at around $3.50 per share, a 22% discount to the current offer.

Tongjitang made its IPO in 2007 at a price of $10 per ADS. Although the company had been growing at a CAGR of 44% for the three years before the IPO, its growth rate dropped to almost zero after the event. Tongjitang is dependent on XLGB, its barrenwort treatment for osteoporosis, which supplied 77% of the company’s revenue at the time of the IPO.

XLGB has suffered a number of problems since then, but the greatest seems to be that it doesn’t interest the public. In Q2 of 2010, revenues from the QLGB fell 8% from year-earlier numbers to 74 million RMB ($10.9 million), which represents about half of Tongjitang’s total sales.

The company now holds out hope that XLGB, a member of the Essential Drug List, will get a boost from China’s healthcare reform. But Tongjitang complains that local governments are slow to adopt the EDL, and no sales bump has ensued.

Tongjitang’s Q2 revenues rose 3% to 1378 million RMB ($20.3 million). Net income fell to a loss of 4.7 million RMB ($0.7 million) from a year-earlier profit.

The company has made numerous acquisitions to decrease its dependence on XLGB, but none of them has provided game-changing levels of income. Most recently, Tongjitang paid $18 million to acquire Guiyang Liquor Factory. In Q2, the liquor business generated just 2.1 million RMB ($300,000) of business. In China, liquors are applied orally or topically to treat bone-related diseases.

The current funding commitment from CITIC remains viable until September 24, 2010. However, two earlier funding agreements each expired, only to be succeeded by new ones.

Disclosure: none.