American Oriental Bioengineering (NYSE: AOB ) a Shenzhen-based manufacturer and distributor of plant-based pharmaceutical and nutraceutical products, reported its fourth quarter and full year 2007 earnings yesterday.
For the fourth quarter, revenues were US$57.3 million, up 39% from the fourth quarter in 2006. Net income rose 39.7% to US$15.2 million for a net margin of 27%. Earnings per diluted share came in at US$0.20. Revenue for the fiscal year 2007 increased 45.7% to US$160.5 million from US$110.2 million in 2006. Net income for 2007 increased 48.3% to US$43.3 million, or US$0.61 per diluted share, compared to US$29.2 million, or US$0.46 per diluted share, in the prior year.
Prescription pharmaceutical products generated US$22.2 million in revenue in the fourth quarter, accounting for 39% of revenues. OTC pharmaceutical products brought in US$25.6 million or 45% of revenues, and nutraceuticals brought in US$9.6 million or 17% of revenues. Prescription pharmaceuticals and OTC pharmaceuticals showed growth rates of 48.9% and 54.6%, while nutraceuticals dropped slightly.
“We are pleased with our fourth quarter and full year 2007 results, and we are particularly encouraged by the synergies we are starting to realize from our recent acquisitions, Boke and CCXA,” said Tony Liu, Chairman and CEO. “These transactions round out our product portfolio nicely, and we believe this strengthens our positioning to achieve our goal of building a leading pharmaceutical business in China. We will continue to seek acquisitions that allow us to drive growth through product diversification, brand strength and distribution reach.”
An area of continued concern is in operating margins, as margins in the fourth quarter fell to 32.8% from 33.1% from Q4 2006. Management attributed the margin decline to previously anticipated expenses associated with Boke and CCXA acquisitions.
Investors will be watching margins closely, due both to materials cost increases that have occurred across the Chinese pharma industry as well as costs incurred in consolidating recent and future acquisitions. The company will need to demonstrate an ability to squeeze greater operating efficiencies and margins out of its acquisitions in order to keep moving forward on its business plan. Also, new quality-related regulations from the Chinese government have the potential to increase operating costs for all Chinese pharma manufacturers.
Following the report, Piper Jaffray reiterated a ‘Buy’ rating on the company and raised the target price from $16 to $17. Analyst,Gur Roshwalb said, “We remain encouraged that AOB is on track with both its organic growth and acquisition strategies. We believe that AOB’s roll-up strategy will be successful in the high growth, highly fragmented TCM China market.”

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