Bohai Pharmaceutical (fka BOPH)

[dfh]

Why should investors pay attention to Bohai?
Zack's Investment Research

May 03, 2011
BOPH

Grant Zeng, CFA

Why should investors pay attention to Bohai?

Bohai Pharmaceuticals Group adds 200 hospitals and 10 new drug store chains to its national distribution network for Lung Nourishing Syrup

On April 25, 2011, Bohai Pharmaceuticals Group (BOPH - Analyst Report), announced that during the fiscal third quarter of 2011 ending March 31, 2011, the company added 200 level 2 hospitals and10 new drug store chains to its national network of retail locations in China currently selling the company's Lung Nourishing Syrup. As a result, the Company now sells Lung Nourishing Syrup in approximately 1,600 level 2 hospitals and 36 drug store chains across China.

As a reminder, Lung Nourishing Syrup, one of Bohai's leading products, is a novel formulation of a liquid product similar to cough syrup that is swallowed. Bohai holds a patent on Lung Nourishing Syrup for the treatment of Lung Qi Deficiency Cough and Chronic Bronchitis, which was approved by the State Intellectual Property Office of the PRC on June 23, 2010. The patent was awarded for a period of 20 years starting from the day of its application on September 12, 2007. In addition, Lung Nourishing Syrup, together with two other of Bohai's lead products, Tongbi Capsules and Tongbi Tablets, are eligible for reimbursement under China's National Medical Insurance Program, which enhances the marketability of the product.

It’s our belief that strong demand for Lung Nourishing Syrup will continue due to increasing concerns about respiratory and lung health caused by pervasive national air pollution in China.
Bohai’s goal is to target 600 hospitals in 100 locations throughout China for direct marketing of its products. We have seen that these efforts have begun to show positive results with the strong adoption by hospitals and national drug stores of Bohai’s Lung Nourishing Syrup, along with other key TCM products.

What are the implications of this sales network expansion for Bohai?

Lung Nourishing Syrup is Bohai’s top selling product. In fiscal year 2010 ended June 2010, Lung Nourishing Syrup generated sales of $15.5 million, accounting for 26.2% of total revenue of $59.3 million. In the first and second quarter of fiscal 2011 ended September and December 2010, sales from Lung Nourishing Syrup were $4.7 and $5.7 million respectively, accounting for 27.7% and 25.7% of total revenue respectively.

We expect sales from Lung Nourishing Syrup will increase by 35% in the fiscal year of 2011 ending June 30, 2011. As the Company approaches the date to report its third quarter financials and operations, we have reasons to expect a strong third quarter financial performance from Bohai. We estimate Bohai’s total revenue will reach $21.1 million, an increase of 40% over the same period of last year. EPS will reach $0.15, an increase one cent over $0.14 for the same period of last year. For the fiscal year of 2011 ending June 30, 2011, total revenue will reach $79.9 million, a 35% increase compared to $59.3 million in the fiscal year of 2010. EPS for 2011 will be $0.56 compared to $0.45 for fiscal year of 2010.

Why should investors pay attention to Bohai?

For investors who are new to Bohai, here is the background of the Company. Bohai is a well-established specialty pharmaceutical company in China engaged in the production and commercialization of traditional Chinese medicine (TCM). The Company is operating in a favorable environment for the pharmaceutical, especially TCM, industry in China. China’s GDP will continue to grow at about 8% in the coming decade. Government spending in healthcare will also increase dramatically. China’s goal to achieve a universal health insurance is on track with at least 90% of population is covered by 2011. Government supports the development and use of TCM for various health problems. And TCM has its advantages over chemical drugs through promoting wellness and prevention of diseases and fewer side effects. This favorable environment creates huge opportunity for Bohai in our view.

Bohai’s product portfolio targets a wide range of disease categories such as respiratory disease, rheumatoid arthritis, digestive disorders, and women’s health. Collectively, these disease categories represent a huge market for the Company.

Bohai has many advantages over its competitors. On top of that is the patented or “protected” status for its top products for exclusive or near-exclusive marketing rights. Also important are the insurance coverage of a large percentage of its products including its key products, low R&D costs, strong distribution network and pricing power.

We have an Outperform rating on Bohai’s shares with a price target of $7. We think current valuation is low, which does not reflect the Company’s strong fundamentals. We believe Bohai is well positioned to grow its business in a unique way and are poised to deliver shareholder value in the coming years.

For a free copy of the research report, please email [e-mail] with BOPH as the subject.
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