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Skystar Bio Pharmaceuticals (NASDAQ:SKBI)
January 24, 2007 10:00 am ET
Hi, this is Scott Cramer. I am the Director of Investor Relations and a Director on the Board with Skystar Bio Pharmaceuticals. We are on the title page. The next slide is our disclaimer. The next slide is a table of contents. Today I am going to go over with you the company overview, some investment highlights, our products, our research and development strategy, overview of our market, sales and distribution, competition, production facilities, growth strategy and a little background on our management and our financials.
Skystar Bio Pharmaceuticals, we trade on the OTC as symbol SKBI. We have about 12.7 million shares outstanding. Our float is 1.2 million. We are one of China’s leading manufacturers and distributors of vaccines, medicines for poultry, livestock and domestic pets. We offer more than 70 products and we have more than 50 in development.
We are led by an experienced management team. We have had over 50% growth in revenue each year, and we sell into a market where the demand for our medicines and vaccines far exceed our supply.
Really, to capitalize on our market demand we recently increased our capacity, we built a new plant. We increased capacity by 200%. Our new facilities began operations in July 2006, and we are sanctioned by China’s State Ministry of Agriculture as GMP – that is the Good Manufacturing Processes. We have over 180 people in our four production facilities. We are located primarily in Xi’an City, that is in a Chinese province of the People’s Republic of China.
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We have an extensive distribution network. We have over 400 independent distribution agents. Our distribution network extends over 27 provinces. The reason we are not in the other provinces is the other provinces are not farm producing.
Our customer base is very solid and very diverse. Our three largest customers accounted for about 3% of the company’s total revenues.
Our goal is to be the leader in our field. Our strategy is to expand our production to try to meet existing demand, while aggressively developing new products. All of our products are 100% natural and our core product line includes advanced micro ecological probiotic and antibiotic products. We believe that our product development activities are integral to providing a long-term advantage over existing competition. Part of our strategy is to dramatically increase distribution while developing long-term brand recognition and awareness within and outside of China.
We have real strong revenue and profitability growth. We have a proven record of revenue and net income. From 2003 to 2005 the company achieved 124% compounded annual growth rate, CAGR. That was in revenues; and 346% CAGR in net income. In 2006, we had record revenue and earnings. For the first nine months of ’06 we achieved record revenues of $7.32 million and earnings per share of $0.14. Our projected revenue for all of ’06 is $9.32 million and our EPS should be somewhere around $0.22.
We have four major lines of products. Our biopharmaceutical veterinary vaccine line includes over ten different products. Our veterinary line for poultry and livestock includes over 40 different products. Our feed additives lines includes over 10 different products. Our microorganism line includes over 10 different products.
We have four production facilities, really in Xi’an, China and that is our biopharmaceutical facility, our veterinary medicine facility, our microorganism facility and our feed additives facility.
Our non-pathogenic and microorganism line. This is for the cure and prevention of disease of livestock. It consists of micro ecological probiotic antibiotic products to improve the animal’s health. It really is one of our best-selling product lines. This is where you take a live organism and really give it to the animal, either through an injection or through feed, and it does things like helps aid with digestion, helps fight off disease and things of that nature. Clearly, we want a stronger, healthier animal.
Also we have our DLV avian coccidiosis vaccine. This is the only domestically produced avian coccidiosis vaccine product that is protected by China’s Bureau of Agriculture. The avian coccidiosis is one of the leading causes of death for chickens in China. The company estimates the total demand of avian coccidiosis vaccine reaches about $100 million annually.
We have won a number of accreditation awards from The People’s Republic of China for this. It is safe and easy to administer, it has been proven to save costs by as much as 60% compared with chemical additives. Remember, we only use 100% natural products, so compared to a chemical compound, this really does save on the wear and tear of the animal. It is licensed as a national secondary level veterinary drug, and what that really means is it entitled us to five years of exclusive production, of which we have about two years left. In addition to that, for another company to come in and try to compete with us, they still have a number of years of R&D and approval. We think that we have about another five years of exclusivity on this. With our newly completed GMP facility, we will be able to mass produce this product. This will be one of our highest production, highest revenue and highest net income products.
Our animal feed additives product line. This is a complex enzyme preparation, and we put it in with the animal feed. What it does is it helps the animal to grow bigger and stronger and yield more meat so when the farmer takes the meat to market, they will have more product to take.
Our biopharmaceutical veterinary vaccine line. We make vaccines for the immunization of poultry, the immunization of livestock and the immunization of domestic pets. The domestic pet market is one of the markets that a lot of Chinese folks are neglecting. As the Chinese market becomes more affluent and people make more money, they want to start owning pets. The domestic pet market is one of the fastest-growing markets in China.
We also make medicines. We make medicines for the treatment of poultry, medicine for the treatment of livestock and medicine for the treatment of domestic pets. Clearly, the difference between medicines and vaccines is vaccine is the prevention of diseases and sickness, where the medicine is the treatment of diseases and sickness.
Our microorganism product consists of ten different products. One of the most interesting products that we have is our pigeon line. What a lot of people don’t know is that in China, they have racing pigeons. It is exactly what it sounds like: they race pigeons. They raise these racing pigeons like we would raise here in America horses. A star racing pigeon is worth about $2 million over there. We make a line of products to make this pigeon stronger, faster and have more endurance. Literally, they start these pigeons at one place, they have them home in at another place and they time them. That is what pigeon racing is. It is unique.
Our biopharmaceutical vaccine product line really has ten different products, and we can divide these up into two categories. First is the inactive vaccine. As you may or may not know, vaccines come in two forms: active, and inactive. An active vaccine is where they will give you an active piece – your or an animal – an active piece of the live virus and inject it into the animal or your own body, and as a result your body is supposed to build up immunization to that vaccine so if you actually get it, your body is supposed to build up an immunization to that disease. So if you actually get the disease, your own immunization system can fight it off.
One of the problems with active vaccines is every once in a while, somebody gets sick, even with the flu vaccine here in America; every once and a while somebody gets sick and dies from it. So as a result, whenever possible we want to use an inactive vaccine. This is a dead piece of virus that will still stimulate the immunization system and fight the vaccine. So as you can see on the slide, you can see a list of our inactive vaccines. The next slide is a list of our active vaccines.
This is a quick overview of some of the 41 products among our veterinary drug products. This is a slide of our feed additive product lines, we have 12 products there.
The avian flu vaccine for humans and animals, this is an inactivated vaccine that we are working on. Currently we are in the second stage of development, which is a regional pilot stage. There will be a third stage of supplying to the Ministry of Agriculture for trial production; the fourth stage is clinical verification to test for curing capacity; the final stage is application for approval.
The vaccine which the company is working is an inactivated one. It helps build immunity in humans without actually exposing them to any of the active viral residue. We are working on a new technology that is based on a multi-surface cell propagating system. The reason we are using this is the process is more controllable, and we can keep up with the virus mutations. One of the problems with this virus is it mutates so quickly that it is hard to mass produce. But by using our new, multi-surface cell propagating system we can keep up with the mutation. Secondly, this is much more efficient than other systems.
We expect to have a herbal bird flu treatment ready for production by the end of this year, and a vaccine ready for production by the end of ’08. We have also established a task force to help prevent, respond and control outbreaks of the avian flu virus in Xi'an. Our task force takes a multi-pronged approach to the potential pandemic. Long-term prevention, reinfection prevention, and short-term control.
We have partnered with two of China’s leading research and development institutes to help develop new products. One is the Shanghai Institute of Animal Parisitology. The second one is the Shanxi Microbial Institute. Both of these institutes have a lot of prestige in China. Each of them are the only specialized ones in their field.
China is one of the biggest livestock producers in the world. They are the largest pork producer and sheep/goat meat producer. They are one of the largest chicken producers and they are the fourth-largest beef producers. As you are aware, China has one of the biggest populations in the world. All of these people have to eat. As China has become more affluent, the population of China is demanding more meat because they want meat, they like meat. So as a result, we know that the demand for food is not going away. Our products clearly serve this market.
China has experienced double-digit demand growth for livestock, due to the rapidly increasing living standards. A strictly regulated livestock, veterinary, pharmaceutical and health care industry is needed to boost China’s limited livestock product exporting capacity for worldwide acceptance with the world’s green livestock product trend.
If you are going to make a comparison between the U.S. and China we can see in ’03 the U.S. produced about 92,000 metric tons of sheep and goat meat, where China was at about 3.5 million. In ’06, the U.S. production actually went down to about 87,000 where China increased to 4.3 million metric tons.
If we were to make a comparison between the U.S. and China in pork production, in ’03 the U.S. produced about 9 million metric tons, China 46 million metric tons. In ’06, about 9.4 million for the U.S. and about 50 million for China.
If we were to make a comparison in chicken, we in America eat more chicken, about 15 million metric tons in the U.S., about 9.6 million for China in ’03. And in ’06, the U.S. is up to 16 million and China is up to 10.1 million.
Last but not least, beef and veal production. The U.S. in ’03 had about 12 million metric tons produced in beef and veal; China was about 6 million. In ’06, the U.S. was about 11.3 million and China was at 7.2 million. Clearly the trend for China has been increasing production and demand in all of these categories.
Now if we look at the market overview for pharmaceuticals, China has the fastest-growing major economy in the world, with an average projected GDP of about 8% to 10% per year. In ’06 it was 10.2%. In ’05, the demand in China for veterinary medication and pharmaceuticals was approximately $1.8 billion, and this market is estimated to grow at a rate of 24% annually.
As I alluded to earlier, as of July 1 2006, The People’s Republic of China implemented the GMP requirement, this is the good manufacturing practices in the veterinary medication and pharmaceutical sectors. After July 1, more than 80% of manufacturers had to cease their operations due to their inability to comply with these regulations. Chinese producers supply less than 10,000 tons of microorganism and veterinary pharmaceuticals and medicine annually. That only satisfies 10% of the Chinese market demand.
The reason we are throwing all of these stats at you is we want you to understand that Skystar Bio Pharmaceuticals is competing in a market with increasing demand and decreased competition.
In the veterinary medicine and vaccine market, the demand for veterinary medicines and vaccines in China far exceeds the supply. In ’05, the expenditures in China just on livestock and poultry flu prevention was between $700 million and $1.2 billion, measured in U.S. dollars. In ’05, the expenditures on products to prevent parasitic disease in livestock and in poultry was about $125 million.
The current addressable market in China for veterinary livestock and poultry vaccines is over 70 billion doses. However, the market supply is only about 32 billion doses. The addressable market for micro ecologics is about 3 million tons while the supply is about 200,000 tons. According to statistics by the Chinese Agriculture Ministry, the demands for vaccines in livestock and poultry is increasing 15% annually.
If we look at the future of supply versus demand, since the newly implemented GMP requirement, many unqualified producers had to close and cease operations, making a supply shortage possible and very likely in ’06 through ’07.
If we look at the future, compared to the average gross profit margin of American pharmaceutical companies, there are still large opportunities for Chinese producers to improve. The advanced production facilities, equipment and technology, coupled with a large market demand, will enable people like us to achieve higher gross margins, more efficient operations, and of course, larger profits.
As I alluded to earlier, we have a distribution network covering 27 provinces in China. We have over 400 independent sales distribution agents and 70 direct customers. Some people say, “Scott, why do you have so many of those independent folks?” In China, the farming community is spread over a very large land mass. They don’t have farms like we have, like a Tyson’s Chicken where they have huge mega farms concentrated. So as a result, we sell to independent agents, sales distribution agents, that distribute our product. We do have 70 direct customers, which are the 70 direct largest customers in China.
We continue to build on our network. We want to establish more sales representative offices. We are constantly engaging additional sales distribution agents, and we are selectively expanding to new markets. For example, we are currently exporting products to Vietnam and Taiwan. Just a bit of information here: we did not approach these folks, the independent agents approached us.
We are building a strong brand across China. All of our company products bear a uniform brand, has our name in it, and we have specialized package design to differentiate our product lines. We really are building a strong customer base. Our customer service, we build goodwill and branding. Our packaging includes comprehensive instructions and product information. They can receive, the customers can receive pre- and post-purchase product consulting. We provide onsite visits to provide product usage demonstrations. We continuously collect feedback, analyze that feedback from our customers to see how we can improve our products and improve our service.
We try and compete in unique areas and niche markets. We have a comprehensive array of microorganisms, feed additives and veterinary vaccines and veterinary products. We really do pick and choose our battles as to what products we want to compete on. For example, there is another company out there, as an example, that has a vaccine that will cure ten diseases. However, a specific farmer may only care about two of those diseases. Our product is aimed at those two. As a result, the farmer is not paying for eight other vaccines that they don’t care about; our price point is lower. So the places that we compete is that we pick our niche markets, we compete on lower prices and we really do have a great location in Northwest China in which to have our distribution hub.
In ’03 we received approval from the State Council of China to expand our production facilities. This is where we constructed our new GMP facility. It cost about $12 million, we have been accredited as a high tech enterprise, and the company’s expansion project has gained the full support of both the Shanxi Provincial Government and the Xi’an Municipal Government. Our new plant occupies a little bit more than seven acres and has a total area of about 126,000 square feet.
The expanded production facility, when we get it all done, will have a veterinary medicine factory that occupies an area of about 38,000 square feet; our microorganism factory and probiotics production will have about 9,000 square feet; and our building for quality control, research and development and administration will have about 30,000 square feet.
Our GMP standard biopharmaceutical factory will have a total area of almost 41,000 square feet. We will have three production lines, one is for the active bacteria, one is for the inactivated vaccines and a line just for the coccidiosis vaccine. In addition, we will have an animal laboratory, and that will occupy an area of about 9,000 square feet.
Our facility will be able to produce about 6 billion doses of vaccine products, about 6,200 metric tons of micro ecological probiotics feed additives, 50 million doses of medicines in liquid form, 200 million veterinary tablets, 3,000 metric tons of powder form and other forms of veterinary medicines.
Really to grow, we are targeting the higher margin biopharmaceutical sector. We are continuously improving our product lines by placing great emphasis on R&D. We have a strong emphasis on green products. We are really focused to meet quality-focused market demand and we also want to comply with global “environment-friendly trends” in the veterinary and pharmaceutical industry.
We are strategically focused on high demand sectors and fast-growing niche markets like pet medications, health products, bird flu. Our marketing really is integrated, we have the strategy to maximize our market awareness and to drive increase in the company’s market share. We optimize production process, we keep investing in our advanced facilities and better equipment.
We do have preferential treatment. Because we have our status as a new or high technology enterprise, we are only currently subject to a 15% rate which began in 2006 and will remain so as long as we are one of these new or high technology enterprises. Furthermore, we can apply for a refund of the 5% business tax levied on its total revenues derived from its technological consulting services.
Our management – you can see a picture there of Mr. Lu, he is the Chairman and Chief Executive Officer, and a picture of our management team.
Financial information. You can see that our revenue ending September 30 was about $7.32 million; period-over-period growth, 62%. Our revenue projected for ’06, all of ’06, about $9.32 million and about 57% growth in revenue. Our net income for the nine months ending September 30 was about $2.1 million. Our period-over-period growth was 43% and our net income was about $2.63 million. We had a total growth of about 79%. Our EPS for September 30 of last year was about $0.17 and our period-over-period growth was about 39%. EPS, 22%. Our expected total growth for the year is about 70%.
Revenue per product line here. The trend that you can see here from the graph is that from ’03 and ’04 and ’05 you can see where the main driver of our revenues is. Clearly it was the vet medicine.
This is what I call the octopus falling out of a tree graph. You can follow any one of these lines and see where our trends in product line as a percentage of revenue has been over the last number of years.
This is a comparable analysis of our bird flu vaccine companies. The short version of all of this is if you look at all of these other companies, most of them don’t even have any revenue. If you take our valuation and compare any of the market metrics or company fundamentals that have to do with evaluating a company, you can see that we are tremendously undervalued for any one of these companies.
If you look at the comparable veterinary products at vaccine companies, you will see the same thing. As a PE, earnings value versus revenue or even versus EBITDA, you can see that we are highly undervalued to any of the peers.
Last but not least, if we were to compare the companies to the U.S. listed China-based pharmaceutical companies, you can see that again, we are tremendously undervalued for all of these companies.
Why should you invest in Skystar? Compared to any market metrics, valuation method we are tremendously undervalued. We are addressing drugs to address the potential bird flu virus pandemic. There is a large, growing and addressable market. We are well-positioned, we have a great track record of growing our revenues and our earnings performance and we really have expanded our infrastructure to improve our margins.
We have a substantial technological foundation, we have a strong demonstrated track record of growing revenues and income, great customer base and great R&D relationships.
We do appreciate your interest here in Skystar and if you need any other information, please contact Zack Noory, he is our Investor Relations manager and you can see his name and number up there on the screen. I do appreciate your time. If you have any questions, please do not hesitate to contact us.
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