We regret to relay that American Oriental Bioengineering's (AOB, $4.18)
3Q09 results missed expectations and prior guidance as key risk factors came to bear. The company also announced a relatively small restatement to prior results following the
engagement of Ernst & Young as its auditor (some minor housekeeping is okay, in our view). We noted in
our post last week that short interest was elevated, but we hoped the shorts would be wrong this time.
Key figures:
- 3Q09 revenue increased 11.7% Y/Y to $78.8 million, well below a Wall Street consensus expectation of $89 million and full-year revenue guidance for +30% Y/Y implying 2H09 revenue of $228 million (+95% H/H). Last year's 2H revenue was up 70% H/H and 2H is typically stronger with normal seasonality.
- Gross profit was $44.1 million (56.0% gross margin) compared to $47.2 million (66.8%) in 3Q08, "reflecting continued revenue mix shift to CCXA's generic product sales, increasing raw material prices and lower margin distribution business from Nuo Hua."
- Operating income was $15.0 million (19.0% operating margin) compared to $21.6 million in 3Q08 (30.6%).
- Net income attributable to controlling interest for the third quarter of 2009 was $10.0 million, compared to $16.3 million in the prior year period. Adjusted for certain items, EPS was $0.13 per diluted share versus a consensus expectation for $0.17 and $0.21 in 3Q08.
Revenue mix:
- Revenue from pharmaceutical products increased 6.3% to $66.0 million.
- Revenue from prescription pharmaceutical products increased 22.7% Y/Y to $29.8 million.
- OTC pharmaceutical products decreased 4% Y/Y to $36.2 million.
- Nutraceutical products increased 8.7% Y/Y to $9.2 million.
Management attributed the top-line weakness to the following: "we are witnessing uncertainty around product pricing related to healthcare reform, and this has caused select disruption in purchasing patterns."
However, we wonder whether necessary price reductions (forced or otherwise) are also eroding revenue and margins. Further, we expected management to have a better handle on revenue performance, especially after reiterating guidance at the recent investor
conference in mid-September. Or, even better, given market uncertainty, management should have pulled guidance earlier this year as it had a "free pass" to do so with the stock already under pressure.
