Tongjitang Announces Buyback in Effort to Create Excitement

Sep.10.08 | About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE:TCM), which makes and markets traditional Chinese medicines, announced a plan to buy back up to $20 million of its shares. The move could have a significant effect on Tongjitang, because the company has a market capitalization of only $128 million at its current price of $3.80. The buyback does not require management to purchase the full $20 million, and it remains subject to shareholder approval.

Tongjitang needs to do something to create excitement. When its stock fell on hard times in March of this year, its CEO and a director offered to take the company private at a price of $10.20 per share. That was a large 55% premium to the prevailing stock price, but it was a mere 20 cent (2%) premium to the year-earlier IPO price of $10. The offer was subsequently rescinded and Tongjitang’s stock price found its way to new lows.

At the end of the second quarter, Tongjitang has $106.6 million in cash on its books, which means that the market is placing a value of less than $20 million on the company’s ongoing business. The company expects to book approximately $78 million in revenues in 2008, with gross margins in the 65% range. Tongjitang is solidly profitable, but did not predict its 2008 net income level.

If all of this seems to be slightly askew, that Tongjitang is a well-financed company with substantial revenue and profits but no respect from investors, there is an additional consideration: Tongjitang’s revenues are in decline. The company derives the majority of its sales (68% last quarter) from a single product, the osteoporosis treatment Xianling Gubao. And Xianling Gubao is facing competition from counterfeit versions of its patented formulation. Tongjitang has pursued legal remedies to the problem, but that takes time.

Meanwhile, Tongjitang has dispensed small amounts of its IPO cash hoard by making small acquisitions, though none of the deals has been really transformative. The company touts its internal pipeline and its ability to market its acquired products, but so far, those advances have served only to prevent the company’s financial performance from being worse.

In the absence of a significant acquisition, should Tongjitang increase its buyback from $20 million to, maybe, $50 million?

Tongjitang’s shares exhibited a tepid reaction to the buyback news. They moved up 1 cent to $3.79 in average volume. During the past 12 months, Tongjitang has traded in a range from $3.51 to $12.39.

Disclosure: none.