Public filings show that Cosimo Patti, a director of American Oriental Bioengineering, Inc. (NYSE: AOB), received compensation not disclosed by AOB through consulting fees paid to Technology Integration Group, Inc. ("TIG"), a penny stock company where Mr. Patti was the 91% owner and sole employee. Mr. Patti has been an AOB director since September 27, 2004, and serves on the AOB board's audit, compensation, and nominating and corporate governance committees. Mr. Patti is presented as an "independent" director.

Five of these companies appear to be indirect subsidiaries of AOB, but only one of them has been listed as a subsidiary in AOB's SEC filings. All of AOB's subsidiaries should be disclosed in SEC filings. The absence of adequate disclosures raises questions about why the company has subsidiaries not disclosed to investors. Liu has disclosed ownership interests in two of the companies. His role and duties in these companies, and any possible conflicts, are also not disclosed in AOB's filings.

China biopharma is very different from its western counterparts, and for foreigners, its high rate of change further complicates the difficulty of understanding the sector (see story). That was the common theme that ran through four presentations at this week’s ChinaBio Workshop, “Leveraging China to Build a Global Biotech.” Each of the four presenters used their expertise to shed light on one facet of the world of China biopharma.

The purpose of the Workshop was to provide an overview of China biopharma. But for companies already involved in the sector, last week served as a time to solidify their relationships with cross-border deals.

American Oriental Bioengineering (NYSE: AOB) is adding a new laryngitis product to its portfolio of OTC traditional Chinese medicine offerings. YuYeQingHuo Capsules (YYQH) are used to alleviate pain and inflammation related to laryngitis, acute pharyngitis and acute aphonia. They will be manufactured by American Oriental’s Boke subsidiary.

American Oriental paid $40 million in 2007 to buy Guangxi Boke, a company that, like AOBO, develops TCM products. In the year preceding the acquisition, Boke’s revenues totaled $12 million.

This week’s news from the world China life science included an important step forward: a first FDA approval to begin clinical trials of a China-discovered, synthesized drug. Also, experts estimated the size of this year’s China pharmaceutical sales; vaccines figured prominently in the news, and a new relationship was established between a China biopharma and a university.

Jiangsu Hungrui Medicine (SHA: 600276) is the company behind the first the drug given FDA approval to begin clinical trials (see story). The drug, Retagliptin, is an improved version of Merck’s (NYSE: MRK) Januvia, a member of the DPP-4 inhibitor class of drugs prescribed for type 2 diabetes patients who are not on insulin. No trials have begun with Retagliptin in China. The other China drugs in US tests are derived from TCMs. Unlike metformin and pioglitazone, two drugs widely used by the same patient population, DPP-4 drugs do not cause weight gain.

American Oriental Bioengineering (NYSE: AOB) reported it has SFDA approval to produce 61 of the products included in China's newly announced Essential Drug List, though the company is currently producing only six of them. American Oriental markets 60 pharmaceutical products, and it has another 400 products that have been approved by the SFDA, but aren’t being produced at this point.

The company said it will consider actively producing and marketing some of the 55 products on the Essential Drug List that are not part of its current portfolio.

Making short term market predictions is a fool's game, but I have some observations that I think give reason for concern.

There is a chart that I started looking at recently. It's called the NYSE Bullish percentage index. It's the percentage of stocks giving buy signals on point and figure charts. It gets updated daily. You can find it on stockcharts.com with the symbol being $BPNYA.

The current issue of the 10x45 Bargain Hunter stock screening report, published on August 9th, includes a table of the Top 45 "Magic Formula" Stocks, based on current consensus analyst estimates of next year's earnings per share. This "Magic Formula" screen is based on a methodology advocated by "superinvestor" Joel Greenblatt, author of The Little Book That Beats The Market.

In a slight departure from the screen popularized by Greenblatt on the website MagicFormulaInvesting.com, the 10x45 Bargain Hunter screen featured below screens for stocks based on next year's earnings rather than earnings for the trailing twelve months. The use of forward earnings may be advantageous, as a screen based on trailing earnings would likely include many companies whose recent performance has been strong but whose prospects are weak. On the other hand, a screen based on forward EPS runs the risk of including companies with "stale" analyst estimates of such earnings, i.e., companies whose earnings estimates may have to be revised downward. Nonetheless, we find the screen shown below to be a useful tool for value-oriented investors seeking to uncover "good" companies trading at low prices.

Last week, there was news from the world of China life science of a prospective cross-border clinical trial. Also during the week, China life science reported progress in other areas: new deals were announced, expanded facilities were opened, one company reported its Q2 financials, and an early report was issued on a swine flu vaccine.

Access Pharmaceuticals (ACCP.OB) of Texas revealed plans for a clinical trial of its solid tumor cancer drug, ProLindac, in China (see story). The trial will be conducted by Access Pharma’s China partner, Aosaikang Medicinal Group (ASK), a company that is also responsible for manufacturing scale-up of ProLindac. Access plans to use the China trial, along with a similar one conducted in South Korea by JCOM of Seoul, to help gain regulatory approval of ProLindac in the US and Europe. For its part, ASK is seeking to gain regulatory approval of the cancer drug in China.

American Oriental Bioengineering, Inc. (NYSE: AOB) reported higher Q2 revenues, though the company’s improved sales did not translate to the bottom line. American Oriental’s revenues rose 21% in the period to $71.2 million, but net income slipped 5% lower to $13.2 million. Earnings per fully diluted share dropped to 17 cps this year from 18 cps in the year-earlier period.

AOB also announced a new product for rhinitis and allergies, Jingwei Capsules, which it compared to Schering-Plough's (SGP) Claritine. The new product is a tricyclic antihistamine that antagonizes peripheral H1-receptors. It is designed to alleviate rhinitis symptoms without the common side effects of antihistamines. As a Loratadine drug, Jingwei is reimbursable under China's national insurance program. The company has high hopes for Jingwei Capsules, saying the product may become its leading revenue producer.

4:15 PM, Aug 7, 2009 --

• NYSE up 69.03, or 1.1%, at 6,586.
• DJIA up 113.9, or 1.2%, at 9,370.
• S&P 500 up 13.4, or 1.3%, at 1,010.
• Nasdaq up 27.09, or 1.4%, at 2,000.

GLOBAL SENTIMENT

Results reported this morning fell slightly short of Wall Street expectations, posting revenue of $71.2 million (+21% Y/Y) and diluted earnings per share of $0.17 compared to expectations of $74.9 million (+27% Y/Y) and $0.18, respectively. Operating margins declined to 25.7% in the quarter compared to 31.7% in the year ago period on higher selling/marketing expense (+22% Y/Y) and higher depreciation & amortization expense (+83% Y/Y, related to real estate purchase and plant expansion). AOB maintained its 2009 revenue target for growth of +30% Y/Y, but lowered net income guidance to $55 million from $65 million (excluding interest expense related to convertible preferred stock), citing the following reasons:

• Fannie asks for cash after loss. Fannie Mae (FNM) posted a heavy Q2 loss of $14.8B (see details below), its eighth quarterly loss in a row, prompting the mortgage lender to ask the government for a $10.7B capital injection. Fannie's cumulative losses over the last two years now stand at $101.6B, and the company has drawn $44.9B from the Treasury since April. The company said "we do not expect to operate profitably in the foreseeable future. We expect that we will experience adverse financial effects" during the fight against foreclosures. Shares fell 12.7% in after hours trading. Shares -11.4% premarket (7:00 ET).
• Greenberg settles SEC charges. Hank Greenberg, former CEO and chairman of AIG (AIG), agreed to pay $15M to settle SEC charges accusing him of improper accounting transactions between 2000 and 2005. The SEC also charged former CFO Howard Smith, saying the two men 'were responsible for material misstatements' that created a 'false impression' of AIG's financial results. Smith settled with the SEC for $1.5M. (Read the SEC's statement)
• Broker admits lying in fraud case. Julian Tzolov, a former Credit Suisse (CS) broker, testified before a jury that he and former partner Eric Butler lied to clients and sent them inaccurate information to cover up risky investments. In one of the first criminal trials connected to the credit crunch, Tzolov said he and Butler told clients certain securities were backed by government-guaranteed student loans when this was not the case, and that they did so in part to receive higher commissions. Butler is on trial for fraud, and Tzolov was called as a witness after pleading guilty to securities fraud, wire fraud, conspiracy and bail jumping last month.
• NYT looking to sell Globe. The New York Times (NYT) confirmed for the first time that it has hired Goldman Sachs to help sell its Boston Globe and Worcester Telegram & Gazette newspapers, as well as their websites. In a regulatory filing, the company said the possible sale is part of a strategic restructuring in response to a heavy downturn in advertising and the migration of readers to the internet.
• RBS posts loss on bad loans. Royal Bank of Scotland (RBS) posted a loss of £1.04B in H1, falling far short of the £1.1B profit consensus, after setting aside £7.52B ($12.62B) to cover bad loans. The bank expects impairments to remain at 'elevated levels,' and "there is every sign that our financial performance over the next two years, at a group level, will be poor due to the severe economic downturn in 2008 and 2009 and consequent impact on impairments and funding costs." Shares -14% premarket (7:00 ET).
• FDIC chided for lax supervision. An agency watchdog found the FDIC failed to act in a timely manner to limit the commercial real estate losses that caused the collapse of two banks in Washington and Georgia. The watchdog's report said the FDIC could have exercised 'greater supervisory concern' after finding weaknesses in the banks' loan portfolios. (Read reports I and II (.pdf))
• Twitter falls silent. Twitter and Facebook suffered outages and delays yesterday after denial of service attacks, raising the possibility of 'a single, massively coordinated attack' on social networking sites. Both services have been restored. Google (GOOG) managed to fend off a similar attack yesterday.
• Exchanges back away from flash. The Nasdaq stock exchange and BATS exchange announced separately that they're both voluntarily ending the flash trading they started this year, effective September 1. The moves come amid an SEC investigation into the practice and ahead of a likely ban. Direct Edge, a fast growing rival that has used flash trading since 2006, continues to defend the practice.
• Morgan leaves TARP behind. Morgan Stanley (MS) paid $950M to repurchase the warrant it issued the government, bringing Morgan's total payment to the government, including dividends, to $1.268B. CEO John Mack struck a positive note, saying "we appreciate the critical role that the U.S. government played last fall in helping stabilize the banking industry and financial markets at a moment of unprecedented crisis."
• AmEx sees loan loss improvement. American Express (AXP) said write-offs tied to bad credit-card debt fell sharply for the second straight month, to 9.2% in July from 9.7% in June, and CEO Kenneth Chenault said he's seeing internal credit metrics improve for the first time in 18 months. Despite the positive improvements, analysts warned it's too soon to call a sector recovery, with many attributing the drop in charge-offs to a seasonal trend. In the specific case of American Express, Chenault was very clear that the improvements of the last two months are 'not seasonality.'
• Clunkers gets new funds. As expected, the Senate approved an additional $2B for the 'Cash for Clunkers' program. The measure passed 60-37.
• Jobless claims drop. Initial jobless claims came in at 550K, down 38K from a week ago (revised), and better than the 575K consensus. Continuing claims rose 69K to 6.31M.
• Same-store sales slide. Retailers reported monthly same-store sales yesterday, with most falling short of consensus estimates. July sales were hurt by the continued trend of shoppers cutting back and waiting for discounts, and by a later start to the back-to-school shopping season.

Earnings: Friday Before Open

• AIG (AIG): Q2 EPS of $2.57 vs. consensus of $1.67 (may not be comparable). Revenue of $29.5B (+48%) vs. $26B. Shares +3.6% premarket (7:10 ET). (PR)
• American Oriental Bioengineering (AOB): Q2 EPS of $0.17 misses by $0.01. Revenue of $71M (+21%) vs. $75M. (PR)
• ATP Oil & Gas (ATPG): Q2 EPS of -$0.10 beats by $0.09. Revenue of $81M (-58%) vs. $83M. (PR)
• Cimarex Energy Co (XEC): Q2 EPS of $0.46 vs. $0.41 consensus (may not be comparable). Revenue of $223M (-64%) vs. $219M. (PR)
• Magna International (MGA): Q2 EPS of -$1.29 misses by $0.28. Revenue of $3.7B (-45%) vs. $4.1M. (PR)
• Mirant Corp. (MIR): Q2 EPS of $1.12 vs. consensus of $0.49 (may not be comparable). Revenue of $496M vs. $546M.
• Senior Housing Properties Trust (SNH): Q2 FFO of $0.44 in-line. Revenue of $69M (+32%) vs. $68M. (PR)
• Warner Chilcott (WCRX): Q2 EPS of $0.44 beats by $0.04. Revenue of $251M (+7%) vs. $252M. (PR)

Earnings: Thursday After Close

• Alkermes (ALKS): FQ1 EPS of $0.01 beats by $0.09. Revenue of $47.5M (-41%) vs. $46.4M. (PR)
• Assured Guaranty (AGO): Q2 EPS of $0.46 beats by $0.10. Revenue of $115M (-3%). (PR)
• Beazer (BZH): FQ3 EPS of -$0.72 beats by $0.81. Revenue of $225M (-51%) vs. $226M. (PR)
• CBS (CBS): Q2 EPS of $0.08 beats by $0.01. Revenue of $3B (-11%) in-line. (PR)
• Chiquita (CQB): Q2 EPS of $1.95 beats by $1.13. Revenue of $955M (-4%) vs. $873M. (PR)
• Computer Sciences (CSC): FQ1 EPS of $0.85 beats by $0.34. Revenue of $3.9B (-12%) in-line. Raises full-year EPS guidance to $4.80-5.00 from $4.20-4.30, vs. $4.18. (PR)
• Crocs (CROX): Q2 EPS of -$0.06 beats by $0.15. Revenue of $198M (-11%) vs. $150M. Sees Q3 EPS of -$0.14 to -$0.16 vs. -$0.20. Sees Q3 sales of $150M-160M vs. $141M. (PR)
• DCT Industrial Trust (DCT): Q2 EPS of $0.12 misses by $0.01. Revenue of $60M (-3%) vs. $61M. (PR)
• Emulex (ELX): FQ4 EPS of $0.09 beats by $0.05. Revenue of $79M (-30%) vs. $78M. (PR)
• EOG Resources (EOG): Q2 EPS of $0.73 beats by $0.31. Revenue of $861M (-21%) vs. $966M. PR)
• Fannie Mae (FNM): Q2 EPS of -$2.67. Revenue of $5.6B (+41%). (.pdf)
• Hansen Natural (HANS): Q2 EPS of $0.60 in-line. Revenue of $300M (+6%) vs. $309M. (PR)
• Intrepid Potash (IPI): Q2 EPS of $0.19 misses by $0.04. Revenue of $73M (-30%) vs. $72M. (PR)
• Leap Wireless International (LEAP): Q2 EPS of -$0.89 misses by $0.59. Revenue of $597M (+26%) vs. $636M. Net customer additions of 203,000 (+19%). Churn of 4.4%. Reduces guidance on full-year net customer addition to 1.5M. (PR)
• Maxim Integrated Products (MXIM): FQ4 EPS of $0.11 beats by $0.10. Revenue of $395M (-21%) vs. $368M. Sees Q1 revenue of $415M-445M vs. $388M. (PR)
• Microchip Technology (MCHP): FQ1 EPS of $0.15 beats by $0.02. Revenue of $193M (-28%) vs. $190M. Gross margin in Q1 of 51.4%. Sees Q2 EPS of $0.18-0.20 vs. $0.17. Sees Q3 revenue of $206M-214M vs. $200M. (PR)
• Nvidia (NVDA): Q2 EPS of $0.07 beats by $0.09. Revenue of $777M (-13%) vs. $710M. Sees Q3 revenue up 5-7% over Q2. (PR)
• Pepco Holdings (POM): Q2 EPS of $0.11 misses by $0.13. Revenue of $2.1B (-18%) vs. $2.7B. (PR)
• Public Storage (PSA): Q2 FFO of $1.25 beats by $0.04. Revenue of $347M (-4%) vs. $394M. (PR)
• Rovi Corp. (ROVI): Q2 EPS of $0.38 beats by $0.10. Revenue of $120M (+64%) vs. $110M. (PR)
• Sapient (SAPE): Q2 EPS of $0.10 beats by $0.04. Revenue of $148M (-11%) vs. $144M. (PR)
• SandRidge Energy (SD): Q2 EPS of $0.25 beats by $0.12. EBITDA of $144M (-18%). (PR)
• Sequenom (SQNM): Q2 EPS of -$0.33 misses by $0.06. Revenue of $9M (-28%) vs. $8M. (PR)
• VeriSign (VRSN): Q2 EPS of $0.31 misses by $0.01. Revenue of $257M (+6%) vs. $255M. (PR)
• Westar Energy (WR): Q2 EPS of $0.35 in-line. Revenue of $468M (+4%) vs. $501M. (PR)

Today's Markets

Asian markets closed mostly down. European markets and U.S. futures are trending down too.

American Oriental Bioengineering, Inc. (NYSE: AOB) stated in a Form 8-K filed on January 7, 2009 that it had paid US$69.98 million in cash to purchase buildings and land from Beijing Century East Fuel Power Science & Technology Research and Development Co. ("Beijing Century East"). The buildings and land were reportedly located in the "Beijing New Economic & Technology Development Zone."

Xian-Janssen, a division of Johnson & Johnson (NYSE: JNJ), announced the China launch of Dacogen (decitabine), a novel treatment for myelodysplastic syndrome (see story). Dacogen received SFDA approval through the Green Channel, an expedited approval process that the SFDA introduced in January 2009. In Dacogen’s case, the SFDA allowed Xian-Janssen to begin marketing the drug in China based on trials done ex-China because MDS remained an unmet need and the incidence of MDS in China is small.

GlaxoSmithKline (NYSE: GSK) has partnered up with Dr. Reddy's Laboratories (NYSE: RDY) in a deal that will allow GSK to sell Dr. Reddy’s generic pharmaceutical products in emerging markets (see story). The targeted countries include China. GSK has the right to select products from Dr. Reddy’s portfolio of over 100 branded pharmaceuticals, which GSK will distribute through its established sales infrastructure.

The article is up-front about Mr. Buffett's primary investment rules:

American Oriental Bioengineering, Inc. (NYSE: AOB) was selected as one of the "Top 20 Most Competitive Public Pharmaceutical Companies in China." The honor came after American Oriental was chosen from 132 China public pharmaceutical companies whose shares are traded on exchanges in China, the US or Singapore. Criteria for the selection included the companies' management capabilities, brand recognition, financial strength, resource accessibility and quality of key team members.

The award was given at an event organized by two of China's healthcare industry associations: the Chinese Pharmaceutical Enterprise Association together with its publication, Healthcare Executive Magazine, and China's Center for Pharmaco-economics and Outcomes Research (CCPOR) at Beijing University. The awards ceremony was held Tuesday at CCPOR.

Like the U.S., China's healthcare costs have soared in recent years. Outpatient costs were 12 times higher in 2007 than in 1990 though incomes increased by only 5-7 times during the same period. Spending on healthcare amounted to about $185 billion or 5.67% of China's GDP in 2007, yet healthcare investments have clearly not kept pace with China's miraculous economic growth.

In April of this year, Goldman (GS) raised its forecast for China’s economic growth to 8.3 percent for 2009 and 10.9 percent for 2010. In May, Morgan Stanley (MS) raised its forecast to 7-8 percent for 2009.