3 Reasons Why Benda Pharmaceutical's Share Price Is Depressed

In its recent Q3 results, Benda Pharmaceutical (BPMA.OB) achieved impressive gains: sales were up 61% yoy, while net income improved 50%. Indeed, most exciting of all, BPMA's subsidiary SiBiono has made headlines as the only company in the world to commercialize a gene therapy medicine for cancer, called Gendicine.

In fact, at a conference in September, the company sold $3.9m worth of Gendicine in one day. The anti-cancer drug is now being commercialized in India and SiBiono is also working with a Japanese partner to develop an anti-AIDS gene therapy drug.

So why is BPMA's share price in the doldrums, falling from a high of $2.69 in less than a month to the current $0.81? There are a few things to consider:

1) Overhang. In 2006, the company issued approx. 26m shares in a private placement. These shares are now (as of 11/15) becoming tradable after the expiration of the lock-up period. However, these investors may only sell up to 1% of the company's total outstanding shares per quarter, and given there are currently 99.8m shares out, it would theoretically take 26 quarters (i.e. 6.5 years) to fully cull the overhang. Under Rule 144 however, sale of these shares would be unrestricted after four years, but that is still a long time to wait.

2) Limited Exposure to SiBiono. While SiBiono is owned by BPMA, the company's stake in its subsidiary only amounts to approx. 61%. The company has previously projected sales from SiBiono of $16m in 2008. Based on this, I am estimating that SiBiono is contributing no more than $0.02 to the company's bottom line on a fully-diluted basis. In fact, my expectation is for the company to return an EPS (fully-diluted) of $0.06 for FY 2008. That works out to a forward P/E of 13.5, which is not particularly cheap.

3) Potential Legal Issues. Finally, there has always been the persistent rumor that Gendicine infringes upon patents held by U.S-based Introgen (INGN), a gene therapy company. While this would probably not be material for the company's operations in China, BPMA may find itself in a potentially sticky situation should it decide to apply for FDA approval. In other words, the international commercialization of Gendicine may be limited because of legal issues with respect to Introgen. Whatever the reality and eventual outcome, the existence of this situation alone will give pause to serious investors.

So is BPMA's share price unduly depressed? My view is that even with its current (and seeming very low) price of $0.81, BPMA is pretty much fully valued.

My Position: None.