American Oriental Sets Sights on Being China's Biggest Pharma

In comments to analysts following release of its 2008 Q1 earnings report, American Oriental (NYSE: AOB) noted that it recorded in the first quarter a $16 million item for deposits on acquisition targets. The payments, which are refundable, are for multiple targets. However, until the deals are finalized, American Oriental refused to discuss them further, giving no details on either the number of companies involved or their products.

In general comments on the current state of China healthcare, American Oriental said it sees the increasing regulation of pharmaceuticals as a good thing for the company, because it rewards the companies with the highest quality. At the same time, China’s government is increasing its healthcare spending, a second boost for companies like American Oriental.

American Oriental believes that being the biggest and the best pharmaceutical company will increasingly bring rewards, allowing strong companies to dictate standards and build barriers that will prevent smaller companies from entering the pharmaceutical market. American Oriental has set the goal for itself of being the biggest pharmaceutical company in China.

American Oriental said that its proven ability to incorporate acquisitions in the world of plant-based products now gives it the ability to acquire companies in other areas, including Western medicine. The recent purchase of a 37% stake in China Aoxing (CAXG.OB) was the first move in that direction. China Aoxing is developing generic versions of Western-style narcotic pain drugs. American Oriental said that, because China Aoxing is a foreign-owned, publicly held enterprise, it could not simply acquire all the assets of the company, as it usually does, but was forced to make a strategic alliance instead. It may, however, increase its percentage of ownership in the future. Also, revenues from China Aoxing will not appear on the American Oriental’s top line, though its share of profits or losses will be recorded.

Management of American Oriental also said that its revenue guidance of $245 million for 2008, a 50% increase over 2007, does not include revenues from any additional acquisitions. The number does, however, include some revenue from drugs for which American Oriental expects approval from the SFDA later this year. For the most part, the growth will come from increasing demand for its own products and already completed acquisitions.

On that front, American Oriental said that its two most recent additions, CCXA and Boke, contributed $10 million in revenues during Q1 – $4.3 million from CCXA, and $5.7 million from Boke. The combined figure also represented a 35% increase from Q4 of 2007. Including the CCXA and Boke acquisitions, American Oriental’s OTC drug sales climbed 138% from the year-earlier numbers in Q1 to $21.2 million. Organic growth of its non-acquisition products provided only a modest 12% increase.

Disclosure: none.