Biostar Pharmaceuticals (NASDAQ:BSPM)

Notes from Brean Murray, Carret & Co. China Growth Conference on November 19, 2009

Our second interview of the day was with the CEO of Biostar Pharmaceuticals (OTCBB:BSPM). The Company demonstrated that it has a coherent understanding of its markets and the steps necessary to accelerate growth.

Biostar is a pharmaceutical company that manufactures & distributes 15 nonprescription, prescription and nutraceutical products.

Biostar's Appeal

We are most excited about three aspects of Biostar's story.

First of all, BSPM flagship Hepatitis drug is the only-over-counter option available in China. According to the BSPM two other companies have the license for such a drug, but failed to compete due lack of market of awareness. For example, one of its competitors, in an effort to cut costs, chose to market tablets versus Biostar's choice to produce capsules. In the end the less effective tablet product failed to garner favor, and Biostar's choice to first focus on quality obviously paid off.

We asked management if this favorable insulation from competition can continue.

Answer:

First, the Chinese government is not issuing anymore OTC hepatitis licenses and is also limiting advertising campaigns for for prescription hepatitis manufacturers.

Secondly, China is encouraging Pharma companies to educate and provide hepatitis treatment to the neglected rural regions where Hepatitis is much more prevalent. BSPM intends to respond to this significant market opportunity by being an early entrant into the rural areas.

Finally, the Company recently completed a capital raise enabling it to construct a raw materials processing facility. This vertical move may help Biostar achieve the following benefits:

• The Company's goal is to utilize 25% of raw material production internally.
• BSPM may generate another source of revenue as it will sell the remaining 75% externally.
• Margins should improve.
• Supply disruption risks may be mitigated.

Answer:

"We have a conservative management structure that is concerned primarily with quality and not quantity of products. There are several ways we can still enjoy rapid growth with our current structure. First, we don’t have full China coverage which we expect to gain within two years. Second, our penetration into into the rural areas offers a whole new avenue of growth for new and seasoned product portfolio. Third, we can consider making acquisitions of distributors to increase our market presence into areas we are not serving."

We were also pleased to learn that it takes BSPM as little as one month to push a product through a distribution network.

Our last inquiry touched upon the status of Biostar's capacity utilization?

Answer: At 100% capacity Biostar can approach a $100 million annual revenue run rate. "We are currently operating at 60% with goals of reaching 80% in 2010."

In summary, what we have is a conservative management team with aggressive goals to grow via market penetration, emphasizing product quality and control of its raw material supply.

Investors may begin to notice BSPM if it continues to build on the EPS momentum established in the previous two quarters of 2009, boasting growth in excess of 100%. Income from operations targets of $15.9 million for 2009 and $21.1 million for 2010 affirms that Biostar will continue to post solid earnings gains in the upcoming year.

With implied 2010 EPS of $0.71 and a current price of $3.15, BSPM is selling at a P/E of 4.4 in a sector that is gaining steam. Thus, both value and growth investors may find the BSPM an intriguing play.

Excerpt From GeoBargain & GeoSpecial Review article, November 17, 2009.

Biostar Pharmaceuticals (OTC BB:BSPM) Closing Price Nov. 16, 2009: $3.16

• Added to the GeoSpecial List on August 17, 2009 at $3.80.
• Has yet to perform

Biostar Pharmaceuticals announced the closing of a $3.6 million equity financing on November 6, 2009. The proceeds will be used to fulfill Biostar’s vertical integration strategy to “manage and control a large portion of its production which includes harvesting, raw material processing, pharmaceutical ingredient synthesizing and finally medicine manufacturing in our current facility.”

The GeoTeam is speculating that the end result should lead to increased sales and margins. The Company also reaffirmed its income from operations make-good targets of $15.9 million for 2009 and $21.1 million for 2010. At a share price of $2.95, the stock is selling at a meager P/E of 5.67 on the GeoTeam’s calculated 2010 fully taxed EPS of $0.52. This is a situation that value investors may find favorable.

Biostar Pharmaceuticals (OTC BB:BSPM), GeoSpecial

The Company reported a sharp increase for its 2009 third quarter financial results.

On November 6, 2009, BSPM announced that is on track to meet its make-good provisions, which call for income from operations of $15.9 million for 2009 and $21.1 million for 2010.

BSPM has reported 2009 nine months net income of $8.8 million. This implies that fourth quarter net income will be around $3.0 million (with a 25% tax rate) and EPS of around $0.11

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