American Oriental Bioengineering’s (AOB) fourth-quarter earnings per share (EPS) came in at 14 cents surpassing the Zacks Consensus Estimate of 12 cents and 10 cents reported in the year-ago period. For 2009, the company reported EPS of 53 cents, compared to last year’s 61 cents.

The company derives revenue from two operating segments–Manufacturing and Distribution. During the quarter, Manufacturing accounted for more than 95% of the company’s total revenue. The company generated $3.6 million from its Distribution business, Nuo Hua, during the reported quarter.

For the full year and the fourth quarter of 2009, American Oriental generated total revenue of $296 million (up 12%) and $100 million (up 3.9% year over year), respectively.

American Oriental records Manufacturing revenues from two sources – Pharmaceutical and Nutraceutical products. Both recorded an increase of 4.8% to $85 million and 18.7% to $11.4 million, respectively, compared to the fourth quarter of 2008.

Revenue from prescription pharmaceutical products increased 56.2% to $44.6 million during the quarter, primarily driven by increased sales of Jinji capsule, Boke and CCXA products. We believe prescription drug sales should continue their growth trajectory as China is aiming a reform in the health care sector to incorporate the previously unaddressed rural markets.

Although prescription pharmaceutical products recorded a robust growth during the quarter, revenues of OTC pharmaceutical products declined to $40.4 million, compared to $52.6 million in the year-ago period. Lower revenues resulted from lower sales of Jinji Yimucao, a drug included in China’s Essential Drug list. Distributors have reduced orders anticipating price reductions in government tenders.

While American Oriental recorded an increase in revenues, both gross profit and margin deteriorated during the quarter. Gross profit was $52.6 million compared to $60 million in the fourth quarter of 2009 while gross margin was 52.6% compared to 62.4% in the prior year period. A shift in revenue mix to CCXA’s generic product sales, rising raw material prices and lower margin distribution business from Nuo Hua brought down the margin.

Although the company witnessed a decline in gross margin, operating margin increased 234 basis points to 15.81%. Operating expenses came down led by lower selling and marketing and advertising costs, partially offset by higher general and administrative and research and development expenses.
American Oriental exited 2009 with $91.1 million in cash and cash equivalents, up from $68 million at the end of 2008. We have an Underperform rating on the stock.

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