Lotus Restructuring Efforts & Long-term Outlook
Lotus Pharmaceuticals, Inc. (LTUS) may not be as popular as Teva Pharmaceuticals (TEVA) or Johnson & Johnson (JNJ), but this profitable under-the-radar pharmaceutical company is profiting handsomely in China’s growing market.
Lotus Pharmaceuticals, Inc. [[LTUS.OB]], a China-based drug manufacturer and distributor, is trading at just two times earnings despite posting incredibly strong growth rates last quarter. Meanwhile, the pharmaceutical company’s restructuring efforts have led to improved profit margins and a decrease in accounts receivable aging days.
Demand for prescription drugs in China remains strong despite the global economic crisis. Lotus’s top three drugs – Valsartan, Brimonidine Tartrate, and Octreotide Acetate – are quickly growing as a larger number of consumers gain access to affordable pharmaceuticals. Meanwhile, a proposed Chinese healthcare reform could help improve access to even more citizens.
During the second quarter, Lotus saw its revenues jump approximately one percent to $11.82 million, but net income gains of around 258% at $3.57 million. These gains were primarily attributable to gross margins that improved from 33.7% to 56.2% during the quarter, due to better purchase price management and more efficient production cost controls.
Meanwhile, Lotus’s balance sheet remains robust with $1.2 million, or $0.02 per share, in cash and equivalents, and a healthy quick ratio of 4.21. However, the company’s current ratio stands at a subpar 0.77 due to a decrease in accounts receivables. Since this decrease is due to a strong collections effort, the problem should resolve itself as current liabilities are paid off with the proceeds.
Lotus’s restructuring efforts have also involved a switch from retail drug sales to wholesale drug sales. While margins may suffer from lower selling prices, many investors expect the affects to be offset by improved cost of goods sold. At the same time, the company hopes to ramp up its sales in order for the move to be accretive to net income over the long-run.
In the end, Lotus’s restructuring efforts led to a one-time jump in net income, but could have long-lasting effects. The stock is priced cheaply due to slow revenue growth, but improved margins and higher sales could help it grow more quickly in the future. Meanwhile, the company’s balance sheet issues appear to be one-time setbacks due to a drop in A.R.
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