Biostar Pharmaceuticals, Inc. (BSPM)

[GorillaGorilla]

BSPM Summary v1.1

- New
- Empahsise OTC drug not the only Hep B drug (Bobwins)
- Completion of Raw material processing facility (Runncoach)
- Removed unlikely event of double counting revnues between urban and rural outlets (Bogus)

- To Do
- Allow for 2% Gross Margin Increase
- Find out about affects of reform on sales of Xing OAC's in hospitals.

The Business

BSPM is a biotechnology firm based in china. They have a number of successful drugs but one drug is generating significant growth Xing Oleaonic Acid Capsule and is, by Chinese standards, a potential block buster.

The presentation below [1] is worth a read for all new investors but the essence is that Hepatitis B afflicts 10% of the Chinese population, 130 million, there is no cure, viruses are notoriously difficult to cure, but by taking medication you can suppress the virus burden and limit the damage - the drug is SFDA approved.

There is a vaccine available but it hasn't been used consistently enough - and even if it used on all new borns and proves 100% effective it would still leave 130 Million potential customers in China.

If you look at the report [2] you will see that not only is Xing Oleonic Acid Capsules the only drug that will be available over the counter (OTC) in China but China is not issuing anymore OTC hepatitis licenses. Finally, China is limiting the advertising campaigns for prescription hepatitis manufacturers.

In addition to growth from the Hep B drug BSPM has a merger and acquisition strategic plan and is looking at the acquisition of four or five pharmaceutical manufacturers and they have also bought an unnamed medical supply and nutritional company.

In the cities they will be using distribution chains and direct to pharmacies and in the rural areas they are opening outlets to sell the drug.

Rural Health care has become unaffordable to the poorer agricultural based Chinese.

Hospital visits often include unnecessary revenue generating drug sales. The Chinese introduced a rural health initiatives that allowing ways to avoid expensive hospital vists [3]. More health care through pharmacies and indeed BSPM's outlets provides one such way of accessing drugs without the expense of a hospital visit.

As of December, 2009, BSPM's rural supply network reached 5,010 sales outlets and currently supply their 5 main drugs to these sales outlets. A sales outlet is a small pharmacy with average 300 square feet in a rural village which supplies the most commonly used drugs. Rural outlets are in the following provinces: Shaanxi, Gansu, Henan, Hebei, Liaoning, and Shandong.

Business Summary


Hepatitis B is a disease that afflicts 130 Million people in China. BSPM has the only Hepatitis B supressing drug you can properly advertise and the only one you can sell over the counter. This restriction provides a significant moat to protect their business.

BSPM will use this drug and aquisitions to grow their business in urban and rural China.


Valuation

Valuation from Make Good Provisions

They recently got financing which will be used to grow the business. In doing so they set certain provisions that they were comfortable with. They said they would aim to do $16M ish Income from operations - which should work out around $12 ish net Income and using 26 Million shares that works out around $0.46.

In 2010 the make good provision is $21.1 M and assuming the same margins and tax rates works out around $0.61.

2010 Earnings

P/E 10 $6
P/E 15 $9
P/E 20 $12


Valuation of the parts

Another, way of valuing the company is the growth in the different sectors

- Rural Outlets
- Urban areas

- Rural Outlets

- during 2009 the number of outlets has been increasing rapidly - we don't know the exact pace of opening but we have been given numbers of outlets at different times of the year.

Outlets by end:
April '09 1320
Sept'09 3,512
Dec '09 5,010
By 2011 10,000 - (Assuming this means by Jan 2011)

By November 2009 outlets have provided $7.4 M [4] - assuming a constant increase of outlets between the above dates this year they would have been doing $13 ish a day. Projecting forward and assuming the sales remain constant at each outlet we should see:

Outlet Revenue
2009 $11.6 Million
2010 $37 Million
2011 $49 Million - (Assuming this means by Jan 2011)


2009 Revenue $37 Million
Net Margin 23%
Net Income $8.5M
EPS $0.33


- Urban areas

I am estimating around $54 M for FY 2009 so backing out the outlet revenue the rest of the business in 2009 was around $42 Million. The income growth from 2005 to 2009 is in the 100% region.In 2010 BSPM are beginning to sell into new cities - in particular they intend to sell into Beijing and Shanghai - where they are targeting 9 million in revenue in 2010 [5].

Gross margins are 72% and assuming 29% net margins this will bring in $3.4 Million EPS $0.13

In the press release they also announced that they had just entered Tianjin municipality and had made 0.5 Million in 1 months, so, 6 Million a year, say. Tianjin has 11.5M population while Beijing has 17.4M and Shanghai 18.5M - so the potential of the market is 3 times Tianjin or $18 M once they scale their sales marketing up.

So, assuming the core does not increase revenue and we add in Beijing, Shanghai and Tianjin we have $40M + $9M + $6M = $55M.

Revenue $55 M
Net Margin 23%
Net Income $13M
EPS $0.49


- New Drug

Zushima Analgesic Aerosol Spray
Management Gudiance [6]
Revenue $2M
Net Margin 20% (Net is my guess)
Net Income 400K
EPS $0.02

-- Acquired Xi'an-Based Medical Equipment and Nutrients Manufacturer

Revenue $3M
Net Margin 10% (Net is my guess)
Net Income 300K
EPS $0.01


- Completion of Raw material processing facility (End of 2009 & update in 2010)

- Growing and processing herbs.
- Increases Gross margins by 2% according to latest Conference call [8]
- $7.4M in revenues when BSPM is taking 40% of capacity
- This was not discussed but I assume that more demand for BSPM drugs will decrease the herb revenues that they can sell - eventually to $0.
- Taking 8% Net Margin (my lowball guess), gives net income 600K EPS 0.02


Estimated Earnings 2010

$0.33 + $0.49 + $0.02 + $0.01 + $0.02 = $0.87

P/E 10 $8
P/E 15 $13
P/E 20 $17

Two valuation methods management and pieced together valuation using P/E 15 gives us $9 - $13 which should be possible when they uplist given the strong growth over the last 5 years as income has been doubling over that time.


Upsides:
- I'm using Revenue Core growth (non outlet), beyond the new cities, of $0 even though previous years has show strong growth - upside is possible.
- More revenues due to Hep B drug which means net margins likely to increase
- Uplisting - the company has plans to uplist within the next few months and this usually

results in companies holding higher multiples - they already have independent directors.
- As outlets are opened longer it's possible they become better known and have more

customers.
- New drugs have a ready distribution chain
- Acquisitions have a ready distribution chain

Downsides:
- Most of the revenue will be coming from Xing Oleaonic Acid Capsule - although they seem to be the only ones allowed to sell this in China - clearly losing this monopoly or losing the license would be a large blow from BSPM.


Conclusion

The company is still holding a cheap valuation in $4 and change. The risk from this investment comes from being overly reliant on one drug for growth, however, the drug has a considerable moat.


[1] http://www.hcinternational.net/pdf/BSPMInvestor%20Presentation.pdf

[2] http://geoinvesting.com/companies/bspm_biostar_pharmaceuticals/research/special_situations/0023354

[3] http://www.umich.edu/~ipolicy/china/1%29%20Access%20to%20Health%20Care%20in%20Rural%20China,%20A%20Policy%20Discussion.pdf

[4] http://finance.yahoo.com/news/Biostar-Pharmaceuticals-Inc-prnews-260900339.html?x=0&.v=55

[5] http://www.biostarpharmaceuticals.com/newsdisp.asp?id=78

[6] http://finance.yahoo.com/news/Biostar-Pharmaceuticals-Inc-prnews-1484717356.html?x=0&.v=68

[7] http://finance.yahoo.com/news/Biostar-Pharmaceuticals-Inc-prnews-1302818426.html?x=0&.v=74

[8] http://viavid.net/dce.aspx?sid=00006CE5