Lotus Actively Increasing Its Share of China’s Pharma Market

In The Odyssey, the lotus-eaters were a tribe of people who were addicted to the lotus plant, a plant that left them in an opium-like state of blissful apathy. It does not seem like an appropriate name for Lotus Pharmaceuticals (LTUS.OB), because the company is anything but apathetic. Instead, it seems intent upon increasing its share of China’s pharmaceutical market.

Lotus Pharmaceuticals reported it made a profit of $11.2 million on revenues of $56.9 million in 2007. For the year, profits almost tripled, while revenues increased 57%. Without one-time items, net income would have been $8.5 million. Even at the lower figure, net earnings were 19 cents per fully diluted share, a jump of 34% over 2006.

On December 31, 2007, Lotus had $4.6 million in cash and $24.7 million in working capital. Already in 2008, Lotus has floated a $4.6 million offering of Series A Convertible Redeemable Preferred Stock. The company used $2.6 million to repay its 14% secured convertible notes, and the rest will be added to working capital.

Lotus’s Revenue Producers

In 2007, the majority of Lotus’s revenues came from the wholesale manufacturing and distribution of its own drugs. This item was $41.6 million or 73% of the total. Its 10 Beijing drug stores contributed a relatively small $3.5 million, and “Other” added in $11.8 million. The “Other” was largely contract manufacturing ($9.5 million), in which a drug company supplies the raw material to Lotus and Lotus processes the material into the final product.

The following is a list of the company’s principal drugs:

• Valsartan is a vasoldilator that treats high blood pressure. Valsartan is the most prescribed drug in its class; it competes directly with Novartis’ (NYSE: NVS) Diovan.

• Brimonidine Tartrate constricts adrenaline receptors, as a treatment for glaucoma. Lotus East, its China subsidiary, sells Brimonidine Tartrate eye drops under its brand name Muxin, and the drug is comparable to Allergan’s (NYSE: AGN) Alphagan. Muxin was proved to be as effective as Alphagan, but with fewer side effects.

• Levofloxacin is an anti-bacterial drug for the treatment of mild, moderate, and severe infections such as acute maxillary sinusitis, acute bacterial exacerbation of chronic bronchitis, community-acquired pneumonia, and others.

• Nicergoline for Injection is a national medical insurance product. It is an a-receptor blockage nerve system blood-brain medicine which improves blood flow. It is used to treat senile dementia, migraines of vascular origin, transient ischemia, platelet hyper-aggregability and macular degeneration.

Lotus East also acts as a wholesale distributor to distribute various pharmaceutical products manufactured by third-party manufactures. The revenue from wholesale distribution in 2007 was approximately 28% of Lotus East's wholesale revenue.

As a distributor, Lotus East sells drugs through approximately 70 distribution agents and drug distribution companies in China.

Hospital Drug/Construction Agreement

In October 2006, Lotus East entered into a venture that would be unusual in an American company. It agreed to extend a five-year $3.8 million loan to Wu Lan Cha Bu Emergency Hospital to construct a hospital ward in Inner Mongolia, China.

In return, Wu Lan Cha Bu Emergency Hospital agreed that Lotus East would be its exclusive provider for all medicines and disposable medical treatment apparatus for a period of 20 years. Then, Dr. Liu Zhong Yi, Chief Executive Officer, CEO and principal stockholder of Lotus East, loaned the $3.8 million to Wu Lan Cha Bu Emergency Hospital for Lotus East.

For the loan, Lotus East agreed to pay Dr. Liu $1,150,000 in five equal annual installments of approximately $230,000. Lotus expects the hospital construction project will be completed in 2009; once completed, the project will begin sending revenues to Lotus East. Lotus has not estimated its eventual revenues from this project.

Big R&D Pipeline

Lotus has a more active R&D program than other companies in its class. Much of it is outsourced. In the third quarter of 2007 Lotus East spent $3.2 million to enter a number of R&D agreements with third parties. These third parties are responsible for conducting pharmaceutical projects for Lotus East, though Lotus East will be the primary owner of the results. Lotus East spent $2.4 million in 2007 on R&D of Isosorbide Monoitrate-Sustained Release Tablets, Dilthiazem-Controlled Release Tablets, Glicclazide-Controlled Release Tablets, Salbutamol Sulfate-Controlled Release Tablets, and Felodipine-Controlled Release Tablets.

As a result, Lotus has a very extensive pipeline, and it is heavily tilted toward late-stage projects.

Pipeline Drugs Currently Awaiting SFDA Approval:

• Calcium Dibutyryl Adensine Monophosphate for Injection -- angina and acute myocardial infarction

• Rabeprazole Sodium raw material and Rabeprazole Sodium Enteric-coated Compound Allantoin Dispersible Tablets -- gastric ulcer, duodenal ulcer stomach ulcer, reflux esophagitis, Zollinger-Ellison symptom complex and gastrinoma

• Gatifloxacin Lactate for Injection -- acute nasosinusitis, chronic bronchitis, pneumonia, gonorrhea, and rectum

• Sodium Aescinate for Injection -- hydrocephalus, swelling caused by wounds or surgery operation and for venous return disorder

• Candesartan Pills -- essential hypertension

• Nicergoline Pills – dullness feelings, impaired concentration, memory deterioration, gloom and restlessness caused by cerebral infarction sequela

• Isosorbide Mononitrate-Sustained Release Tablets -- angina (chest pain) caused by heart disease.

Clinical trial pipeline:

• Dilthiazem-Controlled Release Tablet -- cardiovascular related disease

• Gliclazide-Controlled Release Tablets hyperglycemia in gliclazide responsive diabetes mellitus of stable, mild, non-ketosis prone, maturity onset or adult type

• Salbutamol Sulfate-Controlled Release Tablets -- bronchospasm in asthma and chronic obstructive pulmonary disease

Development stage pipeline:

• Felodipine-Controlled Release Tablets -- high blood pressure

Valuation

Lotus has 41.6 million shares outstanding and a current price of $.97, giving the company a market capitalization of $40.3 million. That is less than one times sales, and it yields a P/E ratio of 4.7. Those ratios are cheap for any company whose outlook is even vaguely positive. Because Lotus is expanding quickly and, furthermore, has a raft of drugs awaiting SFDA approval, the current price seems like an outright bargain.

Disclosure: none.

Comments

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