The price of pork – China’s staple meat product – is up 43% on the same time last year amid rising demand and a supply shortage following a recent outbreak of the pig disease blue-ear, which has already caused the death of 18,000 pigs this year. Skystar Bio-Pharmaceuticals (OTC BB: SKBI) Director Wen Wei tells Amy Cheung of The China Perspective how the blue-ear outbreak is good news for the company.

The China Perspective: Skystar recently received approval from the Ministry of Agriculture (MOA) to begin producing 36 new veterinary medicines, including three drugs targeting blue-ear disease. What do the approvals mean for the company, and do you have any other products in the pipeline for approval?
Wen Wei: The average gross margin for these newly approved veterinary medicines, which include 14 western medicines and 22 traditional Chinese medicines, is expected to be above 50%. The approvals increase the total number of Skystar’s veterinary medicines to over 70.

We also just received 10 more new product approvals on June 20, including trraditional Chinese medicine and western medicines in the form of tablets, powders and injections. Eight additional approvals from the MOA are likely to arrive in the coming few days.

In 2007, we expect a total of 100 new product approvals. Depending on our research and development progress, we expect 20 to 30 new product approvals can be obtained in 2008.

TCP: Can you tell us more about your new bio-pharmaceutical facilities?
WW: Skystar’s new bio-pharmaceutical facilities cover 14,000 square meters, of which 4,700 square meters are dedicated to vaccines, 4,300 square meters to veterinary medicines and 1,000 square meters to animal testing. The veterinary medicines production facilities, which have met or exceeded Good Manufacturing Practice (GMP) Certification Standards and have received GMP Certification from the Chinese government, have already started production.

The vaccines and animal testing facilities are still under construction, but they are expected to be completed by the end of this year and will obtain GMP certification then.

TCP: One of the reasons for the recent pork shortage is an outbreak of the pig disease know as blue-ear, which has already caused the death of 18,000 pigs this year. Is this a friend or foe to Skystar’s business?
WW: First, I’d like to emphasize that blue-ear disease is only one of the reasons for the recent pork shortage. However, the disease has caused the death of 18,000 pigs, and there is currently no effective prescription that can cure the disease. The only thing farmers can do is to prevent pigs from picking up infections.

However, Skystar now has 3 types of traditional Chinese medicines in the forms of vaccines that can prevent blue-ear disease, and we also offer western vaccines that can prevent blue-ear disease and other illnesses. In a way, the pork shortage is good news for Skystar as it boosts the markets demand for our products and thus increases our sale. The market has reacted very positively towards our products.

TCP: Can you tell us more about your sales and distribution network, which covers 27 provinces and regions as well as Vietnam and Taiwan? What is your plan to expand to new markets?
WW: We currently have 400 mainland sale agents and we plan to grow this number to 600. Our sales strategy is to penetrate into town and county level where most farmers are located, push direct sales to end users and to bring our products directly to our customers. We also obtained new distributor contracts at the 2007 China Stock Breeding and Forage Industry Expo in Ningbo, and these are expected to expand Skystar's geographic presence and deepen the company's penetration in its existing markets. We believe our sales strategy can further boost our sales revenues in 2007.

Skystar exported Xylan Probiotics to Taiwan and then to Europe through a trade company located in Qingdao. Skystar is the OEM provider for this trade company. We also exported Animal Feed Additives to Vienam through a dealer located in China.

Our sales network now operates on a county level covering locations that we did not before but we still plan to expand to new markets of high livestock farming destiny. We will launch advertising and promotional campaigns in these areas to make ourselves known to farmers. We are also moving to Tibet and Qihai province, where there is a high concentration of horse, sheep and cattle farming.

TCP: Are counterfeit drugs a problem for Skystar?
WW: Skystar products have not yet encountered any problems regarding counterfeiting. The MOA has decided to crack down on existing fake drugs in the market, and one of the measures it is taking is to raise the GMP threshold in terms of manufacturing and management. As all veterinary manufacturing needs to obtain GMP certification, we expect industry consolidation in the next few years under these circumstances.

TCP: What is your forecast for Skystar’s growth this year? What are the growth drivers?
WW: Our growth drivers this year are twofold. First of all, despite declining numbers of pigs in the first quarter, we expect significant increases in the number in the second half, meaning greater demand for our products. One of the reasons for the predicted increase is that the government offers subsidizes to support the animal farming industry. The government now offers a RMB50 subsidy per pig to maintain the number of pigs at 600 million. The government also aims to maintain the total number of chickens at 14 billion. Therefore, we believe domestic animal farming is a market of great potential.

Second, our products range from western vaccines to traditional Chinese remedies covering the entire lifespan of animals. This gives Skystar a definite competitive advantage.

We expect we will grow faster in 2007 than in 2006, when we posted US$12.9 million (RMB100 millions) in full-year revenues and an increase in the overall gross profit margin at 50%.

TCP: Do you have any plans to go public?
WW: Skystar was listed on the OTCBB (Over The Counter Bulletin Board) since 2005, but we want to upgrade to a national exchange such as the New York Stock Exchange or NASDAQ. However, we do not have a concrete timeframe at the moment.