by Zou Soueidan, GeoTeam Member
It's about that time of year again. After a lull in the immediate public concern over a swine flu outbreak, the media has once again made us aware that a potential epidemic is not to be taken lightly. As we enter a rather social time of year with kids starting school and college followed by a period of indoor holiday gatherings, the stage is set for an indiscriminate spread of the 2009 H1N1 virus. While people can do various things to reduce the probability of getting infected or infecting others, there will still ultimately be random clusters of infected populations across the world.
At the heart of the matter is the uncertainty associated with the magnitude of an outbreak and the length of time that it will remain a thorn in our sides. There is some speculation that an epidemic can last for up to half a decade. As with any situation that is moderately but not fully predictable, healthcare facilities must take the appropriate precautions to be able to meet the demands that result from widespread disease. The medical community will be dependent on various products that facilitate how the flu is dealt with. They need to administer the appropriate vaccines and develop products that treat the disease should it become an issue, all the while doing this in a protective environment conducive to the safety of everyone involved.
Intravenous Injection & China Bio Products
This GeoBargain’s bottom line has been reaping some benefits from increased flu awareness. The Company develops plasma-based biopharmaceutical products that prevent and treat various diseases. Specifically, one of the products that China Bio manufactures is called human immunoglobulin for intravenous injection, or "IVIG". Because it is predominantly used for acute infection associated with diseases such as the flu virus, IVIG accounted for a large portion of China Bio's revenues in the 2nd quarter of 2009. It is a higher gross margin product because there is much less competition associated with it when compared to the human albumin products made by CBPO and its peers. For this reason, IVIG accounted for 42% of revenues for the 2nd quarter of 2009. Although the demand for the product will likely increase as we head into the winter, China Bio will only be able to keep up the same pace as long as the plasma supply needed for production remains abundantly available, a variable that poses as much uncertainty as the flu itself.
Big News for Sinovac Biotech
After the State Food & Drug Administration's assigned board of experts optimistically evaluated Sinovac's H1N1 vaccine, the product is slated to obtain a production license by the end of this week. Investors have perceived this development as huge news for Sinovac, a company whose shares had been quietly rising over the past few months perhaps in anticipation of a situation just like this. This week’s spike in price is obviously a reaction to this positive news. However, it will be interesting to see how the market will embrace Sinovac's stock in the long term once the excitement of this news has worn off and especially as other companies get similar approvals effectively dispersing the availability of certified vaccines. Ideally, the Company will soon follow yesterday's news with a release outlining their expectations.
Alpha Pro Tech Masking the Problem
The GeoTeam recently posted its evaluation of this GeoBargain. Alpha Pro Tech generates stable operating cash flow from its protective apparel division. This division is currently benefiting from face masks it manufactures in response to the swine flu which is forecast to be a problem for the next two to five years.
Out of the three companies mentioned above, it appears that China Bio currently offers the most compelling valuation with a Geo-calculated trailing tax-adjusted non-GAAP EPS of $0.68. Please see our recent valuations based on 2009 implied company EPS guidance. Because the Company is traded on the OTCBB, China Bio’s visibility is still limited to those who follow the smaller cap stocks. It is the GeoTeam’s belief that it will continue to fly under the radar and is a bargain that will flourish as more investors begin to see the connection between the Company’s products and the H1N1 virus.
In comparison, as of yesterday’s closing prices, with Alpha Pro Tech’s P/E at 31 (based on trailing GAAP EPS of $0.16) and Sinovac’s P/E already at 42 (based on Geo-calculated trailing tax-adjusted non-GAAP EPS of $0.23), these companys’ rich valuations are not as attractive.