American Oriental Bioengineering 3Q Results Show Signs Of Improvement

American Oriental Bioengineering's AOB 3Q results actually showed signs of improvement. While pricing concerns remain a major headwind and lack of acquisitions in the past 12-18 months will limit the company's growth, at least the worst is behind us, in Oppenheimer's view. It looks for new product launches to drive growth in 2011, leveraging AOB's expanded sales and distribution network, as well as China's growing drug consumption driven by the implementation of EDLs. Further, it views Jinji as a valuable OTC brand for women's health. Risks include drug pricing pressure, raw material increases and rising labor costs. With AOB trading at 8.7x, its revised 2011E EPS, downside appears limited. It is lowering the PT to $3.00 from $5.00. Prescription drug sales increased an impressive 25.1% y/y to $37.3M driven by the Jinji capsule, SHL, YYQH and CCXA generics, leveraging AOB's expanded distribution network in rural areas. Oct revenue was $10.3M, up 10.1%. Nutraceuticals totaled $9.2M, up 11.4%, while distribution recorded $4.1M. Gross margin was 51.7% vs. 2Q's 51.5%. Pharmaceutical segment GM was 54.6%, flat from 2Q, while nutraceutical segment gross margin slightly declined to 49.1% vs. 2Q's 49.4%. While price pressure remains, mix control led to an encouraging stable gross margin. AOB closed Wednesday at $2.60