After hitting an intra-day high of $.94, China Yongxin Pharmaceuticals Inc. (OTCBB: CYXN) shares settled back down to $.82 on Monday for gains of more than 17% or $.12.
Given the company’s recent financial and operational achievements, we feel that CYXN represents a very compelling play on China’s rapidly developing pharmaceutical industry.
Will They Become China’s Walgreens?
With aspirations of soon becoming one of China’s leading drugstore operators and pharmaceutical distributors, CYXN already operates more 90 retail outlets in the country with plans to open 108 more during 2008.
During the years ended December 31, 2007 and 2006, their retail drugstores served an average of 4,652 and 3,318 customers per day, respectively. In addition, the company is one of only approximately 17,000 pharmaceutical product wholesalers in China that have received State Food and Drug Administration approval and Good Supply Practices, or GSP, certification.
First Quarter Revenues Up Nearly 50%
The company released a stellar Q1 financial report, pre-market today that proves without a shadow of a doubt that it is making significant progress in its quest to gain market share in China’s high-growth pharmaceutical space.
Before we get into 2008, let’s take a quick look back at some of the company’s past financial highlights:
1. Net Revenue of $47.9M in ‘07 Vs. $38.9M in ‘06
2. Gross Profit of $7.9M in ‘07 Vs. $3.2M in ‘06 (147% increase)
3. Net Income of $4.5M in ‘07 Vs. $1.8M in ‘06
Key 1st quarter financial highlights:
# Net Revenues: Increased approximately 49% from $10,076,930 to $14,993,597
# Gross Profit : Increased approximately 60% to $2,526,906
# Operating expenses: Increased approximately 79% from $719,961 to $1,286,421
# Net income: Increased approximately 53% $767,356
# Cash on Hand: $1,763,459
* all comps on a quarterly, y-o-y basis
China Pharma Increasingly Adopting the Western Sales Model
From what we’ve read, China’s pharmaceutical market is forecast to become the world’s fifth largest by 2010 – and the largest by 2050. In addition, the number of Chinese with disposable income is expected to balloon to 600 million in 2010 from 300 in 2007. Moreover, the market is transitioning towards a western pharmacy sales model.
For years, hospitals have been the primary source of medication for the Chinese, with some generating between 25%-60% of revenues from sales of prescription drugs. This however, appears to be changing and in turn creating new opportunities for retailers.
Thanks to support by the government, China has seen its number of retail pharmacies grow exponentially in recent years. According to an article that I came across in China Business Review “Under planned reforms, China’s retail pharmacies will begin selling a much higher volume of prescription drugs, and hospital pharmacies will eventually be restricted to dispensing prescriptions for inpatient use.”
Key Growth Drivers for CYXN
* China’s massive human population
* Improved standard of living in China
* Improved consumer acceptance of western medicine
* China’s adoption of a western pharmaceutical sales model
* The aging of China’s population
* Government support of retail pharmacies
* Current and future expansion of China’s economy
* High number of uninsured Chinese citizens
* Expansion of China’s many rural areas
* Improved overall education of Chinese people
Many Key Trends Driving Unprecedented Growth in China
With a population of about 1.3 billion, China is reportedly home to nearly 150 citizens over the age of 60. This number is expected to reach 437 million by 2050. As the country’s population ages, so will demand for retail pharmacies. An aging population has also helped China’s Over The Counter market become the world’s 4th largest.
This is extremely positive for both China’s pharmaceutical industry and also emerging drug wholesalers such as CYXN.
Another force currently driving increased demand for Over The Counter meds in the country is the consumer class becoming more educated regarding the importance of health care and the benefits of self-medication in addition to traditional a daily regimen of herbs and organic eastern medicine. Since many workers are not yet eligible for compensation under the public health care system, they must pay for medical attention themselves making Over The Counter drugs and retail pharmacies a logical alternative.
Net-Net:
Now accounting for nearly one-fourth of the world’s population, but less than 2% of the global drug market, China represents an enormous opportunity for growth. In our opinion, CYZN is extremely well-positioned to capitalize on that opportunity and its financials are already reflecting it.
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