AOB American Oriental Bioengineering, Inc.

American Oriental Bioengineering’s (AOB) first quarter 2011 earnings per share came in at $0.01 per share, lower than both the Zacks Consensus Estimate and the year-ago earnings by $0.03.

Earnings in the first quarter of 2011 were hurt by lower revenues.

Revenues in the reported quarter declined 3.2% to $52.0 million. Weakness in the manufacturing segment (down 3.6%) was responsible for the decline in revenues. Revenues were below the Zacks Consensus Estimate of $57 million.

American Oriental, based in Beijing, earns revenues from two operating segments: manufacturing and distribution. While the manufacturing business accounted for 93.6% of the company’s total revenue, the distribution business – Nuo Hua – generated $3.3 million in sales, accounting for the balance.

American Oriental records manufacturing revenues from two sources: pharmaceutical and nutraceutical products. Sales from the pharmaceutical product line declined approximately 4.7% to $39.0 million. Sales of nutraceutical products increased 1.2% to $9.8 million in the reported quarter. The change in product mix impacted revenues.

Gross margin declined to 48.2% from 52.5% in the year ago quarter. Increased raw material prices, higher sales of generic products in rural areas as well as implementation of new taxes and surcharge brought down the margin.

Operating expenses in the reported quarter declined 10.7% to $19.5 million in the first quarter of 2011. American Oriental’s cost cutting initiatives resulted in the decline. Research and development (R&D) expenses were flat at $2.7 million. General & administrative expenses increased marginally to $11.2 million in the reported quarter. Advertising expenses plummeted 43% to $3.8 million due to reduced promotion of over-the-counter drugs following the company’s shift in strategy.

Our Take & Recommendation

American Oriental currently carries a Zacks #4 Rank (Sell rating) in the short-run, reflecting near-term pressure on the stock. We are concerned about the dependence of the company on a few products to generate the bulk of its revenues. Furthermore, the excessive competition confronting the company’s products is also a concern.

We prefer to remain on the sidelines till further visibility is obtained on the growth of the Chinese pharmaceutical industry and its impact on American Oriental. Consequently, we remain Neutral on the stock in the long- run.

American Oriental Bioengineering, Inc. (NYSE:AOB)
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