New Product Purchases May Light Fire Under Tongjitang's Stock Price

| About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE:TCM) will pay 25.5 million RMB ($3.5 million) to buy Qinghai Pulante Pharmaceutical Co. Ltd. Tongjitang will make unspecified additional payments over the next three years, based upon the sales of Pulante’s products. Both companies focus on traditional Chinese medicines.

The business plan for Pulante is based on Tibetan-sourced recipes for TCM. Its lead product is Chongcao Qingfei Capsules, an OTC medication indicated for respiratory diseases, including Chronic Obstructive Pulmonary Disease, which afflicts smokers.

Pulante made a profit in 2007 on revenues of 40 million RMB ($5.5 million), though further details were not provided. Included in the deal is Pulante’s GMP-certified manufacturing facility. The company, located in Xining in the Qinghai province of China, was founded in 2000.

Last week, two of Tongjitang’s insiders, including the Chairman/CEO, offered to buy the outstanding shares of the company for $10.20 each. The offer caused a positive bounce to the stock price, which had been languishing, though the shares remain at a considerable discount to the $10.20 offer.

Tongjitang makes excellent margins on its sales, and the company’s product line produced a decent year-over-year increase in revenues in 2007 – it was respectable at 23%, but not huge. A few adroit purchases of new products, which Tongjitang could sell through its distribution system, increasing sales for both the products and Tongjitang, might light a fire under the stock price – more than the buyout offer did.

Disclosure: none.