Update: China Biologic Products - Strong Q2 Earnings Growth

Aug. 6.14 | About: China Biologic (CBPO)


China Biologic Products reported Q2 earnings on August 5, surpassing expectations on many fronts.

Based on this event, I reaffirm my bull thesis on China Biologic Products.

In my earnings preview report, I expected increasing awareness would have a favorable impact on earnings growth for Q2. The earnings report confirms this assessment.

Before earnings on August 5, I wrote a bullish article on China Biologic Products (NASDAQ:CBPO), with a thesis stating that the company's plasma-based products should benefit from increasing market demand in China for Q2. I argued that the company's efforts to raise cultural awareness of Haemophilia would facilitate additional patient registrations. (See initial report for more details). However, there are underlying risks to an investment in China Biologic, given that the plasma space is home to Baxter (NYSE:BAX) and Novo Nordisk (NYSE:NVO), which market internationally ADVATE and NovoSeven, NovoEight and NovoThirteen, respectively. China Biologic has also struggled with a Q1 decline in albumin import volume, which has directly impacted product pricing. In addition to this issue, the company's overall performance was curtailed largely due to the production suspension of the Guizhou facility. Nevertheless, after Q2 earnings, I reiterate my bull thesis since China Biologic appears on track to match or exceed growth experienced in 1H 2014 for the remainder of the year.

As reported by Seeking Alpha, some key highlights of China Biologic's latest earnings report are as follows:

  • Earnings per share increased to $0.82, up $.09 from the prior quarter and 55% YOY.
  • Total sales increased to $60.1 million, up 12.1%, compared to $53.6 million in Q2 2013, surpassing analyst expectations by approximately $4 million.
  • Operations income increased to $28.9 million, up 14.2% from the same quarter of 2013. Operating margin increased to 48.1% in Q2 2014 from 47.2% in Q2 2013.
  • Gross profit increased to $41.2 million, up 9.9% compared to $37.5 million in Q2 2013.

Why the strong earnings performance? Threefold: first, China Biologics benefited from strong sales growth in several of its core segments. Notably, VIG revenue increased 4.6% to 44.0%, with a 28.2% increase in sales volume of IVIG products. Management stated this was largely due to rising sales to tier-one cities, as well as the recent outbreak of Hand-Foot-and-Mouth Disease. And second, in spite of rising selling and R&D expenses, the company benefited from a 6% to 3% reduction of the value added tax rate (VAT) on many of its plasma-based products, which became effective on July 1, 2014. The VAT reduction should offset rising sales and R&D costs by enhancing sales of the company's plasma-based products moving forward into 2H 2014. And third, in spite of a 9.4% decline in human albumin product revenue as compared to Q2 2013, largely due to the productions suspension at Guizhou, China Biologics saw increased sales volume at Shandong Taibang. With production at Guizhou reportedly resumed, the sales pressure for albumin should be somewhat alleviated. As a result, I reiterate my bullish thesis on China Biologic in the wake of the outstanding Q2 earnings performance, elevated earnings guidance and the full resumption of production at Guizhou.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.