China Sky One Medical's Acquisitions Will Open Up Still More Business Directions

China Sky One Medical (CSKI.OB) successfully placed $25 million worth of stock in a secondary offering. The company sold 2.5 million shares at $10 each and included 30% warrant coverage as a sweetener. The warrants have a $12.50 exercise price and a three-year life. China Sky One closed last Friday at $12.10.

China Sky One said that it would use the proceeds for acquisitions, working capital and sales and marketing for new products. The company is tremendously active developing new products, which are discussed below. Its acquisition initiative will apparently open up still more new directions for China Sky One’s business.

The company was doing very well, even before the new cash infusion. At the end of its third quarter, China Sky One had almost $7 million in cash and a very solid balance sheet. In the first nine months of 2007, the company reported revenues of $36.6 million, more than double the year earlier. China Sky One made a profit of $11.2 million, which represents a 31% margin and was more than six times its 2006 nine-month earnings.

China Sky One seems on track to make a profit of $1.35 per share in 2007, which puts its PE ratio at 9, a very low multiple, especially in light of its growth rate. With 12.5 million shares outstanding, the company has a market capitalization of $151 million. Part of the reason that the company is priced less than its peers may be that the company had to restate its prior financial reports, a process that is now complete.

These numbers mean that the institutional investors who paid $10 per share and received 3/10 of a warrant in addition seem to have been given a very good deal.

One reason China Sky One is doing better this year is that it entered a deal with Takasima Industries under which Takasima is distributing China Sky One’s Slim Patch product line in Malaysia. Takasima promised to bring in sales of at least $1 million per month, and so far, has been meeting that goal. China Sky One says the sales result in net profit of 20%, which is below its other initiatives, but a decent profit nonetheless. Takasima has the right of first refusal to perform the same distribution service in other Southeast Asian countries.

Through its operating subsidiaries in China, China Sky One distributes ex-China medical products in China. It also makes and sells over-the counter non-prescription health care products, mostly diagnostic tests, and it has also developed a line of branded nutritional supplements and OTC drugs. The company also manufacturers external use traditional Chinese medicines that are sold through pharmaceutical chain stores.

Internal Growth Initiatives

China Sky One signed an agreement in Q2 of 2007 for land on which to build a biotech engineering facility. The center will include a workshop, R&D facility and offices. It is expected to be completed in June 2008, and China Sky One has already invested almost $8 million just to acquire the land.

China Sky One has also established partnerships with universities. It has built a genetic medicine laboratory in collaboration with Harbin Medical University, established a cell laboratory with North East Agricultural University, and founded a monoclonal antibody laboratory with Jilin University.

The genetic medicine collaboration has resulted in an anti-cancer product known as Endothelin-1, currently under development. China Sky One is applying to begin clinical trials of the drug.

Much of China Sky One’s business revolves around diagnostic kits. Its present research is divided into four areas: (1) the development of an enzyme-linked immune technique to prepare extraneous diagnostic kits; (2) the development of an enzyme-linked gold colloid technique to prepare an extraneous rapid diagnostic test strip; (3) the development of a gene recombination technique to prepare genetic drugs; and (4) the development of a biology protein chip for various tumor diagnostic applications.

Ten biological products are currently under development: a human urinary albumin elisa kit; an AMI detection kit (for myocardial infarction); an HIV detection kit; a uterus cancer diagnostic kit; a breast cancer diagnostic kit; a liver cancer diagnostic kit; a rectum cancer diagnostic kit; a gastric cancer diagnostic kit; a gene recombination drug; and a multi-tumor marker protein chip detection kit. China Sky One expected some of these projects to complete development in 2007, while others should finish up in 2008 or later.

Disclosure: none.