Eight products manufactured by China Sky One Medical (NASDAQ: CSKI) appear in a Chinese government notice of “counterfeit drug products,” which states that pharmacies should “immediately stop the sale” of these products.
The government document is titled “Notice of the Ministry of Health of the People’s Republic of China,” dated November 5, 2009, and is available on the China State Food and Drug Administration website. Click here for the full notice, and click here for a translation.
The Ministry of Health notice states that the listed products “deceive and mislead consumers in the promotion of their efficacy.” The notice also states that the listed products are only disinfectants, but are “passed off as drugs to defraud and mislead consumers.”
Out of 91 products on the list, eight are identified as being manufactured by CSKI’s main operating subsidiary, Harbin Tian Di Ren Medical Science and Technology (TDR). All eight are identified with the “Kangxi” brand name. CSKI separately identifies “Kang Xi” in its annual report as the trademark used on all of its traditional Chinese medicine products.
At least three of CSKI’s products on the Ministry of Health notice are identified individually in the company’s regulatory filings: the Coryza Spray, the Tinea Pedis Spray and the Tinea Pedis Powder. In addition, the “Gynecopathy Cleaning Spray” on the government list appears to be the same product as the “Gonorrhea Cleaning Spray” in CSKI’s annual report.
CSKI’s disclosures concerning product sales in the company’s SEC-filed financial statements are not sufficiently detailed to understand the impact of the government order. However, six of the eight CSKI products on the government list are identified as sprays. CSKI states in its latest quarterly report, filed Nov. 16, 2009, that sales of spray products comprised 14% of total sales in the nine months ended September 30, 2009.
Although the Chinese government order to stop selling eight of CSKI’s products seems to be material to the company’s operating condition, CSKI has provided no disclosure of the order to U.S. investors.
CSKI’s citation for deceptive or misleading marketing practices does not appear to be isolated to the November Ministry of Health Notice, either. The Beijing Drug Administration website contains a notice and a list dated December 2009, which Google translates as “illegal medical device advertising.” Kang Xi hemorrhoid magnetized ointment is item six on that list.
As stated previously, CSKI identifies Kang Xi as the trademark on all of its traditional Chinese medicine products. “Hemorrhoids Magnetic Ointment” ranks as one of CSKI’s bestsellers, according to management presentations, representing 8% of total company revenue in the third quarter of 2009 and 11% of total sales in 2008. The violation, or “illegal reason” for each drug’s inclusion on the Chinese list, is described in the last column. For the Kang Xi hemorrhoid ointment, a translation indicates, the violation pertains to assertions and guarantees of effectiveness.
Earlier, in August of 2009, the Jiangsu Health Department released a list of 31 substandard products. Kang Xi products are numbers eight through 15 on that list; the same products are again cited in the November list from the Ministry of Health.
Meanwhile, back in June of 2009, TDR was apparently fined by the Guangzhou City Industry and Commerce Administration for violation of “The People’s Republic of China Advertising Law.” Two months earlier, Seeking Alpha published an article – entitled “Revealing the Shoddy Practices of China Sky One Medical” – that provided evidence of CSKI’s numerous prior citations for advertising violations and false marketing claims.