Sector financial performance:

This company, which primarily manufacture OTC drugs and natural base health products including supplements, personal care and cosmeceutical products, has been grouped into OTC& natural drugs sector.

Data indicates this sector has been growing slowly and demand for OTC drugs and natural drugs vary with product categories. There are certainly some temporary reasons behind this growth rate in the past several years. However, from what we see the radical reason may have to be traced to declining demand.

Products innovation seems to be helping companies in this sector. However, decreased gross margin seems to be the inevitable result when companies launch new products. A typical gross margin for this sector is around 46% with 56% SG&A spending as percentage of sales and 3% R&D as percentage of sales. They thus have negative operating margins of   - (12-13) %.

According our analysis, a typical ratio of enterprise price/sales is 1.5.

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Company performance:

It seems the sales of its core products – OTC drugs and natural cold remedy products had been decreasing in the past several years due to decreasing demands as a result of the decreased incidence and severity of upper respiratory illnesses according this company. However, the sales seem to have gained very strong support from new manufacturing contracts of lozenge base products in the past two years. This company seems to have been trying to increase its sales by contract manufacturing for third party and the sales actually have been boosted in that way.

For the first nine months of fiscal 2018 compared with same period of 2017(ended 0930)

Organic net sales increased 58% attributable to the increase in contract manufacturing of lozenge base products.

For fiscal 2017 compared with 2016

Organic net sales increased 135% attributable to the increase in contract manufacturing of lozenge base products.

Organic net sales increased 35% in the first half of 2017 attributable to the increase in contract manufacturing of lozenge base products.

Organic net sales increased 2% in 2016 compared with 2015, attributable mainly to increase of 8% in contract manufacturing of lozenge base products offsetting by decrease of 6% in OTC and cold remedy products.

Organic net sales decrease 6.6% in 2015 compared with 2014, reflecting a 12% decrease in OTC and natural base drugs offsetting by 5% increase in contract manufacturing of lozenge base products.

The gross margins as percentage of sales decreased from 64% of 2014 to 35% of 2018 straight as a result of increasing manufacturing for third party and costs of previous spending in fixed assets. During the same period of time, we also see the decreasing SG&A as percentage of sales (down to 43% from 77%) and as a result this company improve its operating margin from -20% to -11%. We thus see its cash flow has been improved since 2015.

Stock price

This stock currently has an enterprise price/sales ratio of 2.6, which we think, is relatively overvalued considering its struggled sales increase for its core products while sales and earnings increased quickly due to manufacturing for third party.