Tongjitang Chinese Medicines Company (TCM) reported decent increases in both profits and revenues for its third quarter, but the results were in line with expectations, providing no upside surprises. The report also showed that sales for Xianling Gubao, the company’s flagship product, increased only 2% over the year-earlier quarter.
Investors showed their disappointment in the Q3 report by pushing Tongjitang to a 15% loss. In mid-session, Tongjitang was off by $1.75 at $10.00. That price puts Tongjitang exactly back to the level of its IPO, which took place in March.
Tongjitang is a company that sells modernized forms of traditional Chinese medicine. Xianling Gubao is a formulation of barrenwort -- in tablet form -- that is taken by patients with osteoporosis. As we recently reported, the compound was shown in western-style clinical trials to have a positive effect on patients, though a final determination of its efficacy will not be known until the complete clinical trial report is made public. That had been expected in Q4, but now Tongjitang says it might not appear until the first quarter of 2008. If Xianling Gubao proves to be helpful, Tongjitang will seek FDA approval for the compound in the U.S. as an osteoporosis treatment.
In Q3 of 2007, revenues for Tongjitang moved up 29% to 126.9 million RMB ($16.9 million). Of that, almost two-thirds (82 million RMB or $10.9 million) came from Xianling Gubao. On the other hand, almost all the growth came from a group of ex-XLGB core products, whose sales jumped a spectacular 723% to $3.4 million. This group includes Moisturizing and Anti-itching Capsules, a relatively new product for Tongjitang. Gross margins, across the board, were up to 63.9% from 61.3%.
The profit picture was more impressive than overall revenues. Net income climbed 465% to 50.1 million RMB ($6.7 million), and earnings per ADS came in at $.20. Although the prices for barrenwort increased in late 2006 and early 2007, they have stabilized, and Tongjitang paid the same for its raw materials in the third quarter as it had in the second.
At the end of Q3, Tongjitang had cash of 719.5 million RMB ($96 million) and working capital of 1 billion RMB ($133.8 million). Tongjitang will use that money to make acquisitions. The company says that several candidates are going through the due diligence process currently. Tongjitang is seeking companies involved in traditional Chinese medicine as well as western-style drugs. In addition to their pharmaceutical products, companies are evaluated on the basis of their distribution networks, i.e., on whether Tongjitang can use the new networks to reach new customers for its existing products.
In early September, Tongjitang announced the purchase of Guizhou Long-Life Pharmaceutical Company for 42.2 million RMB ($5.6 million). Guizhou produces and markets more than 10 OTC and prescription traditional Chinese medicines and nutritional products.
Tongjitang reiterated that it expects 2007 revenues to be in the neighborhood of 600 million RMB ($80 million). In the first nine months of this year, revenues are up 25% at 416.3 million RMB ($55.6 million). The company will have to pick up its sales in Q4 to meet its goal, but Tongjitang characterizes the warmer months of the year to be its slow season. So far this year, net income has been 153.1 million RMB ($20.4 million) or $0.66 per ADS. Analysts are calling for full-year earnings per ADS to hit 80 cents, a number that seems low, given current trends. But even at that figure, Tongjitang is selling at a low multiple of 12.5 (2007 expected results) in a company that is growing at 25% this year.