China Aoxing Receives Manufacturing Exclusivity for Cancer Pain Drug

China Aoxing Pharmaceutical Company (CAXG.OB) received “designated manufacturer status” for Tilidine, an opioid pain medication, from the China State Food & Drug Administration. The designation means China Aoxing will have five years of manufacturing exclusivity for Tilidine. Under present rules, China allows only 13 companies to produce narcotic drugs such as Tilidine, and even more important, only one to three companies are permitted to produce the active pharmaceutical ingredients of the medication.

Tilidine is a low-to-moderately powerful synthetic opioid medication used for cancer pain. It is especially popular in Europe, and is not currently available in China. An oral prodrug, it converts to the active analgesic metabolite, nortilidine. In April 2007, the SFDA gave China Aoxing permission to begin testing Tilidine in cancer patients to prove both efficacy and safety. The trial, which began in the second half of 2007, will enroll 400 patients.

The low-risk business plan of China Aoxing is to introduce Western-style pain drugs to China. Last week, the company announced the SFDA gave marketing approval to its buprenorphine/naloxone combination for maintenance therapy of addicts, an alternative to methadone. At the end of Q3, the company marketed mainly Naloxone and Naloxone Hydrochloride. Naloxone is an opioid antagonist that is administered as a treatment for alcoholism and acute opioid poisoning.

China Aoxing has two additional drug candidates in the pipeline: the company has the technology to produce oxycodone, and it has asked the SFDA for permission to begin testing its oxycodone medication. It has also begun a trial for a codeine-based drug for colds and flu.

China Aoxing said it expects to launch the new Tilidine product in late 2008. The company points out that cancer is a growing problem in China as people begin to eat Western-style diets. Cancer is now the largest cause of death in China with 1.5 million deaths per year.

Although the company’s business plan seems like a sure-fire winner, money remains a problem for China Aoxing. To produce Tilidine, it will have to build a production line, though it claims to have the largest narcotics facility in China (at 1.2 million square feet), and one of the few narcotics GMP-certified facilities in China. The company had only $1 million in cash at the last reporting date (September 30, 2007), and there are several disturbing financial notes in its filings.

In the fall of 2006, China Aoxing floated a $1.989 million convertible debenture offering. The offering included 63,500 shares of common stock and warrants for 4.232 million shares that were given a theoretical value of $11 million, according to the Black-Scholes formula. The debentures must be paid off on January 9, 2009, and the $11 million, currently carried as deferred interest, must be expensed by that time. The company has $15.7 million in bank debt.

Currently, the 40.5 million shares of China Aoxing have a market value of $105 million. China Aoxing major holding is a 60% stake in its operating subsidiary, Hebei Aoxing. The remaining 40% of Hebei Aoxing is owned by its Chairman, who has agreed to sell a 35% ownership of Hebei Aoxing for $3 million, once China Aoxing raises $5 million in a new stock offering. So far that hasn’t happened.

The company is also in arrears on a loan from the Bank of China in the amount of $3,125, 859, which was due on December 31, 2006. China Aoxing expects to renegotiate this loan, though it has no assurances the restructuring will be successful.

In its most recent quarter, China Aoxing reported a loss of $1 million on revenues of $1.4 million. The majority of its revenues came from Naloxone Hydrochloride, though some sales were also recorded for Shuanghuanglian, a traditional Chinese medicine for coughs and colds. China Aoxing has agreed to pay $10 million for Shijiazhuang Le Ren Tang Pharmaceutical Ltd., a maker of traditional Chinese medications. Payment will be half in stock (at $4 per share) and half in cash. China Aoxing expects the transaction to close in the fourth quarter of calendar 2007.

Trading in the shares of China Aoxing is very thin. In what seems to be a single transaction Tuesday, 5269 shares sold at a price of $2.60, a loss of 85 cents or 25% from Monday’s close. The 5269 shares are about five times the average volume for China Aoxing.

China Aoxing says it plans to offer additional shares in the near future to raise capital.

Disclosure: none.