Jiangbo Pharmaceuticals, Inc. [[JGBO.OB]], a U.S.-based company developing pharmaceutical products in China, began the year with a restructuring effort that could start paying big dividends. Revenues and net income figures were lower following restructuring charges, but a sharp increase in operating income and non-GAAP adjusted net income show promise.
In January 2009, Jiangbo restructured its distribution and sales systems to concentrate on using 28 large independent regional distributors. The independent distributors agreed to take on higher direct marketing and sales expenses if they received lower unit prices for the company’s products. The predictable result is lower revenues, but less expenses and greater income.
Jiangbo’s discounts amounted to approximately 26% during their fiscal third quarter, which led to a drop in revenues. However, expenses fell 63.1% during the same period as advertising costs were shifted to the independent distributors. As a result, operating income increased 53.6% during the period, and the strategy appeared to pay off handsomely.
Despite the positive results, some investors remained concerned over Jiangbo’s net loss. However, a closer look reveals that these losses can be attributed to discontinued operations, a gain on trading securities, and amortization of debt. When these are taken out of the equation, the company reported non-GAAP adjusted net income of $10 million, or $0.97 per share.
Jiangbo has also managed to keep a robust balance sheet, with $86.1 million in cash and working capital of $85.6 million. Meanwhile, current liabilities stood at just $27.4 million with convertible debt, net of $29.8 million discount, was $5.0 million. Finally, shareholder equity ended the quarter at $113.9 million, compared to $95.5 million as of June 30, 2008.
Meanwhile, strong cash flow generation of $41.4 million during the first nine months of fiscal 2009 will sustain its future working capital needs and successfully implement its growth strategies, which include the expansion of manufacturing facilities. This reduces the risks that the company will need to raise additional debt or equity capital in the near future.
In April 2009, the Chinese government unveiled its “Guideline of Deepening the Reform of Health Care System” – a blueprint for health care over the next decade. By 2020, the world’s most populated nation plans to have a basic health care system that can provide “safe, effective, convenient and affordable” health care services to urban and rural residents. The State Council also announced an investment of 850 billion Yuan (US$124 billion) to implement the health care reform plan in China.
In the end, Jiangbo’s restructuring plan appears to be effective in increasing operating income and should help increase revenue growth rates down the road. Meanwhile, a strong balance sheet and cash flow generation should help it preserve and increase shareholder value over the long-term. Combined with China’s rapidly growing pharmaceutical industry, this is a stock that investors may want to investigate closely over the coming months