American Oriental Bioengineering’s (AOB) third quarter earnings per share came in at 13 cents, well below the Zacks Consensus Estimate of 19 cents and 21 cents in the year ago period. The company derives revenues from two operating segments – Manufacturing and Distribution. During the quarter, Manufacturing accounted for more than 95% of the company’s total revenues.

Total revenues increased 11.7% year over year to $78.8 million. American Oriental records Manufacturing revenues from two sources – Pharmaceutical and Nutraceutical products. Both sources recorded an increase of 6.3% to $66 million and 8.2% to $9.2 million, respectively, compared to the third quarter of 2008. The company generated $3.6 million from its Distribution business during the reported quarter.

Revenues from prescription pharmaceutical products increased 22.7% to $29.8 million during the quarter, primarily driven by increased sales of Jinji capsule, Boke and CCXA products, partially offset by decline in sales of Shuanghuanglian injection powder (SHL). We believe prescription drug sales should continue their growth trajectory as China is aiming a reform in the health care sector to incorporate the previously unaddressed rural markets.

Although prescription pharmaceutical products recorded a robust growth during the quarter, revenues of OTC pharmaceutical products declined to $36.2 million compared to $37.8 million in the year ago period, primarily due to lower sales of Jinji Yimucao, a drug included in China’s Essential Drug list since distributors reduced orders viewing price uncertainty related to health care reform.

While American Oriental recorded an increase in revenues, both gross profit and margin deteriorated during the quarter. Gross profit was $44.1 million compared to $47.2 million in the third quarter of 2008 while gross margin was 56%, compared to 66.8% in the prior year period. A shift of revenue mix to CCXA’s generic product sales, rising raw material prices and lower margin Distribution business from Nuo Hua brought down the margin.

An increase in both selling & marketing and general & administrative expenses reduced operating income of the company, which came down to $15 million in the quarter compared to $21.6 million in the year ago period. Selling & marketing and general & administrative expenses increased 23.2% due to higher promotional initiatives and 37.7% driven by expenses related to improving production efficiency and other norms to meet more stringent GMP manufacturing standards, respectively.

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