Why Is American Oriental Bioengineering Resissuing Shares, Now?

| About: American Oriental (AOBI)
Mid Cap Watch List member American Oriental Bioengineering (AOB), which will also join the Small Cap Watch List as of Friday afternoon, has announced it will issue a secondary offering for eight million shares:

Pharmaceutical company American Oriental Bioengineering Inc. (AOB.N: Quote, Profile , Research) said in a regulatory filing that it will offer 8 million shares and selling stockholders will sell 500,000 shares.The company expects about $63.8 million in net proceeds from the sale, assuming an offer price of $8.60 per share. It plans to use the proceeds primarily for sales and marketing of products, acquisitions and research and development activities.

It is true that the company is spending $30 million to acquire a Chinese company, but the company already has $90 million in cash on the balance sheet, and no debt. It also has consistently generated enough free cash flow to replenish its account. With the stock down more than a third since the January highs, I am perplexed by the decision to issue shares right now. To me it suggests there is either another very large acquisition in the works, or management is concerned about the future cash flow.

Insiders, by the way, are selling about 7% of the shares being offered, although they will still be significant shareholders.

Disclosure: The author holds put options on Research in Motion (RIMM) at time of publication.

AOB 1-yr chart:
AOB 1-yr chart

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Tagged: , Biotechnology, China
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