China Aoxing Granted License for Addiction Drug, Still Lacks Firm Financial Footing

China Aoxing Pharmaceutical Company (CAXG.OB) received a license from the China State Food & Drug Administration to develop a maintenance treatment for opioid dependence. The treatment, a combination of buprenorphine and naloxone in a sublingual tablet, has been available in the U.S. since 2002. It is marketed as Suboxone by Schering-Plough (SGP), which was also granted approval by the European Union recently.

China Aoxing's stated aim is the low-risk strategy of bringing narcotic/pain drugs that are available in the West to China. In February 2007, China Aoxing introduced Naloxone Hydrochloride in China as an analgesic to reverse the effects of opioid drugs used during surgery. In June, China Aoxing began clinical trials of codeine-based compound to treat colds and flu. China Aoxing says its GMP manufacturing facility for narcotic drugs is the largest in China with 1.2 million square feet. China Aoxing also has licenses from the SFDA to develop seven more medications, including Oxycodone, Tilidine and Pholcodine. Recently, the company said it expects to launch its pipeline products in China within the next twelve to eighteen months.

In the buprenorphine/naloxone combination, buprenorphine acts as an opioid partial agonist. It causes the usual euphoria and respiratory depression effects of an opioid, but to a lesser extent than heroin or methadone, which are full opioid agonists. At a low dose, buprenorphine causes a sufficiently profound response so that addicts do not experience withdrawal. But its effects plateau at moderate doses, a feature that works as a disincentive to over-use the drug. Naloxone is added to the drug to discourage the diversion of the medication to street sale as an IV drug.

China Aoxing has been collaborating on the compound since April 2005 with Beijing University.

China Aoxing plans to put buprenorphine/naloxone into a clinical trial in 2008, with approval expected in 2009. The company expects to have seven years of market exclusivity in China following approval. Because opioid drugs are highly regulated in China, China Aoxing further predicts that only one or two licenses for other buprenorphine/naloxone combinations will be granted in the future.

In 2006, 1.2 million individuals were registered in China as addicted to opioids, a number expected to grow at 10% per year. The number of non-registered addicts is thought to be much higher.

Recent Financial Results and Company Background

Although the company seems on track to market pain drugs in China sometime in the future, it has some near-term liquidity issues to deal with.

For example, last week, China Aoxing reported revenues of $1.4 million for the most recent quarter, the first quarter of the company’s fiscal year. That was a 33% increase from the previous quarter, which China Aoxing attributed to the increasing sales of Naloxone Hydrochloride. It also markets Shuanghuanglian, a traditional Chinese medicine treatment for cough and cold. However, net loss for the period was $1 million. At the end of the quarter, China Aoxing has just $1 million in cash, and a significant working capital deficit of $9.7 million and debt of $15.2 million. The company currently has 40.5 million shares outstanding.

China Aoxing came into being through a reverse merger. Its operating subsidiary, Hebei Aoxing, was 60% owned by a corporation called Ostar Pharmaceutical (the other 40% belonged to Hebei Aoxing’s Chairman and CEO, Zhenjiang Yue). Ostar was merged into the forerunner of China Aoxing in April 2006. The previous operations of the corporation were sold off to the former operating officers, leaving China Aoxing and its 60% stake in Hebei Aoxing as the assets of the company.

In September 2006, Zhenjiang Yue agreed to sell 35% of Hebei Aoxing for $3.08 million to China Aoxing, once the company raised $5 million by selling equity. This was supposed to have taken place by September 14, 2007. If not completed by then, the deal would fall through.

Just before the drop-dead date, on September 4, 2007, Zhenjiang Yue and the company agreed that the purchase price would be paid by a junior subordinated note paying 5%, due December 31, 2012. The company agreed to prepay accrued interest and principal equal to any positive cash flow from operations. Also, both sides have now agreed that if the closing has not taken place by September 14, 2008, the agreement will be null.

Clearly, China Aoxing needs some sort of liquidity event to get itself on a firmer financial footing.

China Aoxing is currently trading at $3.45 per share, giving the company a market capitalization of $140 million.

Disclosure: none.