Update: China Biologic Acquires Additional Interest In Guizhou Facility - Shares Rise

Aug.26.14 | About: China Biologic (CBPO)

Summary

China Biologic acquires additional equity in the Guizhou Taibang Facility.

Since this will likely lead to earnings accretion, I reiterate my bull thesis on China Biologic.

This event came as a surprise, since I anticipated that funds from the latest offering would be used to offset rising operating expenses, not to fund a strategic acquisition.

Before Q2 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. Nevertheless, the latest earnings report clearly shows that the demand for China Biologic's plasma-based products is increasing at an optimal rate. Yesterday, the company announced that it plans to increase its equity stake in the Guizhou Taibang facility by approximately 19%, prompting me to reiterate my bull thesis in the wake of likely near-term earnings accretion.

Some key highlights of this equity transaction are as follows:

  • Total value of the equity transaction is approximately $87 million.
  • China Biologic will increase its equity stake in Guizhou Taibang to 76.23%.
  • The company acquires majority ownership and thereby gains control of Guizhou Taibang's long-term strategy and development.
  • A portion of the proceeds from last month's financing will be used to fund this transaction.

Admittedly, I was caught by surprise after China Biologic sold 920,000 shares at $38 a share in spite of its strong cash position. I originally anticipated that the $35 million in proceeds would be used to offset rising operating expenses, because it was the only logical explanation for the offering in lieu of a strategic acquisition. However, a large portion of these funds will actually be used to acquire additional equity in the Guizhou Taibang facility, according to the company's statement. This makes sense considering the significant benefits of the transaction. Specifically, not only will the roughly 20% increase in equity enable China Biologic to dictate the facility's long-term strategy and development, but also it will likely facilitate near-term earnings accretion. Thus, shareholders could be rewarded in Q3 as management expects to complete the transaction next month, leaving me no reason to amend my bull thesis on China Biologic.

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