Aoxing Pharma: An Exercise in Patience

Apr.13.11 | About: Aoxing Pharmaceutical (AXN)

Aoxing Pharma (NYSEMKT:AXN), a U.S. headquartered pharma with China operations in Hebei province, is a company with a lot of promise, but its actual performance has been an exercise in patience. The company has a very rare license to produce narcotics and other pain medications, one of just 13 PRC pharmas to possess one. As the company points out, per capita use of narcotic pain medications in the PRC is less than 1% that of the U.S. And the PRC limits production licenses for manufacturing any particular narcotic drug to just three companies.

So, with all that apparent need and reduced competition, Aoxing ought to be doing well, right? But the company reported just $3.8 million of revenue during the first months of its fiscal year (which ends on June 30). And costs of selling its products rose at a faster rate than its revenues. The market may be wide open for these drugs, but perhaps the market has to be created first.

As for investor patience, the stock has been trading at an uninspiring $2 per share. After hitting a high of more than $10 per share in 2006, it went into a long decline, hitting a low in the last 12 months of $1.44. On Thursday, it ran up to $3.43 on very heavy volume, but today, three trading sessions later, it was off 7% at $2.01. There’s volatility, but not a huge amount of support.

Bank Loans

There are no particular news stories to justify the company’s volatility. However, Aoxing does have two (relatively) large bank loans coming due in the next month: a total of $8.3 million in a company that has just $2.8 million in cash. Needless to say, its current liabilities are almost twice the size of current assets. It could be the stock price volatility was caused by some people who know more about the bank situation than Aoxing has disclosed publicly (which is nothing).

The company reported first half sales of $3.7 million, a gain of almost 23% over the previous year. But cost of goods sold jumped 62% to $1.6 million, leaving little gross profit to pay for administrative costs and R&D. Its loss from operations was $1.5 million.

Partnerships

To leverage its assets (the narcotics license), Aoxing has been very adept at signing up partners. In 2008, American Oriental Bioengineering (AOB) took a 36% stake in Aoxing. As ChinaBio Today reported recently, AOB has a fat $94.5 million in cash on hand, a sum that gives perspective to Aoxing’s $8.3 million in short-term debt. No doubt, if bankers were inclined to make Aoxing’s life difficult by declining to roll over the debt, AOB could figure out a way to make all the players in the transaction comfortable.

In 2010, Aoxing entered two other deals, both of them to develop narcotic drugs in China. In April, Aoxing started a JV with Johnson Matthey Plc (OTCPK:JMPLY) to develop and produce APIs for narcotics and neurological drugs for the China market.

So far, the JV has landed a manufacturing license and a business license for Naloxone Hydrochloride, an opioid antagonist that counteracts the effects of narcotic overdose. The company expects to begin producing the API later this year.

In February 2010, Aoxing Pharma signed an agreement with QRxPharma Ltd. (OTCPK:QRXPF) of Australia to help develop two related QRxPharma drugs that combine morphine and oxycodone. They are used to treat moderate to severe pain. Aoxing Pharma agreed to fund the development of MoxDuoIV and MoxDuoIR for the China market in exchange for exclusive marketing rights in the PRC.

Summary

Although the company has six products currently on the market, 73% of its revenues in 2010 came from a single product: Zhongtongan capsules, a TCM used for dental pain. In other words, although the company builds its future around narcotics drugs, its present depends on a TCM. Another three products have completed their clinical trials and are awaiting SFDA approval. Five more are currently undergoing their clinical tests.

On paper, Aoxing has a good story to tell, but investors are waiting to see whether the company can actually profit off its pipeline of narcotic drugs. It may happen, and it may happen soon, but it seems like it's been a long time coming.

Disclosure: None.