Weighing Up Aoxing Pharmaceutical Company Inc (NYSEMKT:AXN)

The Chinese pharmaceutical regulatory landscape is a mess, and this makes investing in the space difficult. Add in to the equation the often opaque nature of American exchange listed Chinese companies' financials, and things get even tougher. This doesn’t mean there isn’t opportunity out there, however, it's just tough to find. Plus, it commands a much higher risk tolerance.One company that fits this profile is Aoxing Pharmaceutical Company Inc (NYSEMKT:AXN). The company is registered in California, but pretty much its entire operations take place in China, and all of its revenues derive from the latter. It's got a product portfolio of around 22 established drugs, including 19 OTC and 3 prescriptions, and a further 7 drugs currently in development. Two of these seven are filed with the CFDA and are pending approval (we'll touch on this shortly), while the rest are in early stage development.At first glance, financials look good. The company generated $6.5 million revenues during the first quarter of 2016, for a gross profit of $4.9 million and a net income of a little over $622K. Cash on hand at last count (March 31, 2016) came in at $6 million, and total current assets hit just shy of $30 million. For a market cap of $60 million at last close, this all looks pretty impressive.Then we look at debt, and things change a little.At March 31, the company reported more than $26 million short/current debt, and a further $11 million accounts payable. Total liabilities come in at more than $38 million. This debt is crippling the company, and is a real problem going forward.

"We had an accumulated deficit of $54.4 million as of March 31, 2016. In addition, we had negative working capital of $8.7 million as of March 31, 2016"

Management reckons the company has enough cash to see out the next twelve months, but this is going to require revenues to make up a serious shortfall, and even then the chances are we'll need to see a boost in current revenues if Aoxing is going to avoid a finance raise.This boost will have to come from increased current product sales (which is unlikely to any real degree) or a fresh approval. As mentioned, the company has two drugs pending with the CFDA, but the process in China isn’t as refined as it is in the US – far from it. The CFDA has only 120 employees, compared to the FDA's 5000, and there are something like 4000 drugs backlogged and waiting for a decision. There's no prioritization (first come first served) and no fee, meaning there's basically no barrier to submission.There's also a high rate of fake numbers passed through the agency. At the end of last year, the CFDA brought in new proposals that would see clinical trial stats verified to a stringent level of detail. Nearly 50% of applications withdrew. Aoxing didn’t withdraw anything, which is a good sign, but it illustrates what the CFDA has to deal with.This one is all about balance sheet focus. Aoxing has a good suit of products on the market, and a promising pipeline (albeit one that might take a while to mature). It also generates a decent level of revenues, and turns a positive bottom line quarter after quarter. It's debt problem is a real issue, however, and the fact that it will likely have to raise toxically over the coming couple of years makes it a dilutive risk. A new CFO started in December, and his remit is likely debt-centric. If he does his job, Aoxing could be a nice exposure to a growing market. It's also 50% cheaper today than it was this time twelve months ago. If the balance sheet continues to worsen, however, it could quickly become toxic One to keep an eye on, with caution.Stick with us for AXN updates by subscribing to our newsletter using the box below.Disclosure: We have no position in AXN and have not been compensated for this article.