Skystar Bio Pharmaceuticals (NASDAQ:SKBI) is in the process of transitioning from small-scale lab production to large-scale factory manufacturing. Although this is causing some growing pains, the company still increased revenue by 25.6% in Q2 to $14.2 million. The new facility is being built to produce vaccines which have a higher gross margin than veterinary medicine. Part of the growing pains for Q2 include a decrease in vaccine revenue of 99% year-over-year as the transition takes place. Veterinary medicine revenue increased 36.7% to $8.6 million.
The transition did cause a hiccup as net income decreased 26.3% year-over-year. However, this was the result of the gross margin decrease from 52.6% last year to 44.7% in Q2. Since more of the lower margin veterinary medicines were sold than vaccines in Q2 due to the transition, the overall gross margin decreased, thus reducing profitability. However, this is just a temporary condition as the new vaccine facility is still being constructed.
The company's overall revenue growth in the face of the transition reinforces my positive outlook on Skystar. As noted in my original article on Skystar, I pointed out that the new vaccine facility will provide a catalyst for the company as vaccines produce a higher gross margin of about 70% as compared to Skystar's pre-transition gross margin of 51%. Therefore, once the new facility is in place and contributing to sales, I expect Skystar's gross margin to increase, leading to earnings growth in the future.
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