Diana Huang - Manager, IR Zhilin Li - President & CEO Sam Hsing - VP

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2013 China Pharma Holdings’ Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise that this conference is being recorded today, Wednesday, 15, May 2013. I would now like to hand the conference over to your host for today, Ms. Diana Huang. Please go ahead.

Thank you, Carol. Good morning ladies and gentlemen, and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ first quarter 2013 earnings conference call. : I would like to remind our listeners that on this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as market and customer acceptance and demand for our products, our ability to market our product, the impact of competitive products and the pricing, the ability to develop and launch new products on a timely basis, the regulatory environment including government regulation in the PRC; our ability to obtain the requisite regulatory approvals to commercialize our products, fluctuations in operating results including spending for research and development and sales and marketing activities and other risks detailed from time-to-time in our filings with the SEC. In addition, any projections as to the company’s future performance represents management’s estimates as of the date May, 15, 2013, China Pharma assumes no obligation to update those projections in the future as market conditions change. Now, it is my pleasure to turn the call to China Pharma’s CEO and Interim CFO, Ms. Li to make her opening remarks in Chinese which will be then translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the company’s first quarter 2013 financial results.

[Foreign Language] Thank you, Diana and good morning everyone. I would like to thank each of you for joining us today and for your continued support of China Pharma. The economic flow and the pharmaceutical challenges and the uncertainties have negatively impacted our business in the first quarter of 2013. In addition, due to the capital expenditure pressure from 2013 new GMP upgrade project, we have continued to tighten marketing strategy to control credit expansion in the market. Per the mandatory requirements of new GMP requirements, the upgrading of our dried power injectable line and liquid injectable line must be completed by the end of 2013. We have adjusted our general sales and credit policies to a conservative stance since the beginning of 2012 in order to ensure the capital requirements for new GMP upgrading requirements are met, and control and improve the growing accounts receivable. The construction relative to certain required facilities and equipment is in full swing. I will now (inaudible) prepared remark in English. The economic and the pharmaceutical challenges HC reform policy uncertainties have negatively impacted our business in the first quarter of 2013, which beat to the old vertical line in sales of our products. First three months that ended March 31, 2013, we have certain drop in the financial performance. Revenue decreased by 49% to $8.25 million as compared to $16.09 million in the first quarter of 2012. This decrease was primarily due to our continued tightened marketing strategy as well as cessation of our product Buflomedil. In March 2013, the China Food and Drug Administration, CFDA issued a nation-wide notice. The CFDA notice for the cessation of the production, sales and use of the Buflomedil effective immediately. The CFDA notice was the result of the re-evaluation done by the CFDA based on the indication from the recent China and international research materials, which found the side-effects risks of the Buflomedil to nervous system and the cardiovascular system has surpassed its clinic treatment effects. It was applicable to all the manufacturers and distributors in China, who are in the business of the production and the sales of the Buflomedil related products. Pursuant to the CFDA notice, the company has ceased the production and the sales of the Buflomedil based products and recalled its Buflomedil based products from the market. The products in our helpline process slowing but stiffly along with the development process and are getting closer to product launch. The CFDA is also revising its production approval criteria and process resulting longer approval time for new production applications across all type of products. In some cases they are aiding additionally requirements for product already under review. In November 2012, we received production approval from the CFDA Candesartan; a front-line drug therapy we developed for the treatment of the hypertension. We plan to launch this product during 2013. The clinical trial of Rosuvastatin, a generic version of the Crestor was completed in December 2010 and we are in the process of applying for the production approval for this product. In September 2010, we also completed the Phase I of our clinical trial for our new antibiotic combination drug. We are currently moving ahead and in Phase II of the trials for this product. Overall, we believe long-term growth prospects of Chinese pharmaceutical industry remain unchanged. The golden decade of the pharmaceutical in China is still expectable; while in the early stage of the golden decade. The entire industry is required to upgrade our facility to the new GMP standards which were published by the Ministry of the Health of China on February 12, 2011 effective March 1, 2011. This run of the upgrading is challenging for all players and also means survival of the fittest. The new GMP standards significantly raised the standard in the PRC and [present feature] mandatory requirements for among other things; our manufacturing and quality control process, key manufacturing and the quality control personnel; and our supply and logistics chains for those mandatory requirements the operating of our injectible product line must be accomplished by the end of 2013. So far the construction work is in process. The tendering and the evaluating process for the equipment are undergoing. Even under the operating pressure we still firmly believe in our long term prospects in China’s rapidly growing pharmaceutical industry with established and differentiated product portfolio, extensive sales and distribution network, and growing pipeline of generic and proprietary drugs. We are committed to continue to deliver sustainable long term growth. Now I would like to review our first quarter 2013 financial results and balance sheet information. For the three months ended March 31, 2013, our sales revenue was $8.25 million a decrease of 49% compared to $16 million in the same period of 2012, given the capital expenditure pressure from 2013, new GMP upgrades project. We have to control [private] expansion in the market, as tightening marketing strategy has negatively impacted our revenue. Sales decreased throughout our major product categories. The most significant revenue decrease in terms of dollar amount was in our CNS Cerebral Cardio Vascular product category which generated $2.1 million in sales revenue in the three months ended March 31, 2013 compared to $4.8 million a year ago; a decrease of the $2.7 million. This decrease was mainly due to sales of the Buflomedil, because the CFDA issued a nation wide notice for cessation of production, sales and the use of the Buflomedil effective immediately. The company ceased the production and the sale of this product and voluntarily recalled immediately the quality of our sold products from the markets as a customer service measure. No further record is mandated by the CFDA notice. Sales of the antiviral infection respiratory category decreased by $2.2 million to $4.6 million in the three months ended March 31 of 2013 compared to $6.8 million in the previous year period. Our digestive disease category generated $0.8 million of sales in the three months ended March 31, 2013 compared to $2.5 million in the previous year period or a decrease of 1.7 million. Our other product category sales fell to 0.7 million from 2 million, a decrease of 1.3 million. Cost of revenue for 3 months ended March 31, 2013; our cost of revenue was 6.1 million or 74.3% of total revenue which represented a decrease of the 4.7 million from the 10.8 million or 67% of the total revenue in the three months ended March 31, 2012, a decrease of 43.2%. The decrease in cost of revenue during the first quarter of 2013 was not proportionate to the revenue decrease primarily due to the increases in our average unit cost of the inventory and the continuously rising cost of our raw materials and our fixed cost. The inventory obsolescence in March 2013 as a result of safety and notice; the company recognized inventory obsolescence expense in amount of 3,692,895 to write-off all of our Buflomedil related raw materials and the finished goods inventory. This was recorded as an inventory obsolescence and accompanied statement of the operation for the 3 months ended March 31, 2013, which represented 11.1% of the total inventory as of March 31, 2013. There was no comparable expense for the three months ended March 31, 2012. Gross profit and the gross margin; gross loss for the three months ended March 31, 2013 was $1.6 million, while gross profit for the three months ended March 31, 2012 was $5.3 million. Our gross profit margin in the first quarter of 2013 was negative in 19% compared to 33% in the first quarter of the 2012. Without the effect of inventory obsolescence in the first quarter of 2013, management estimate that our gross profit would have been approximately $2.1 million, and gross margin would have been 26% in the first quarter of 2013. The Healthcare Reform instituted by the Chinese government since 2009 has resulted in margin compression in most pharmaceutical products on the markets today, especially in the generic space that many of our products are in. The decreases of the sales and continue increase of the purchase price of the raw materials attributed to the decrease of the gross profit. Going forward, we expect to see continued pricing pressure on most products, but new products such as Candesartan and Rosuvastat could help to support overall gross margin once they are launched. Income from operations; our operating loss for the three months ended March 31, 2013 was $3 million compared to operating income of the $3.4 million in the three months ended March 31, 2012; a decrease of the $6.4 million. The main reason for the decrease were lower revenue and the inventory obsolescence reserve recognized as a result of the CFDA notice on Buflomedil in the first quarter of 2013. Selling, general and administrative expenses; selling, general and administrative expenses in the first quarter of 2013 were $1.55 million or 19% of the sales compared to $1.57 million or $0.10 of sales in the first quarter of 2012, due to many adjustments in our selling process from healthcare reform policies. Despite the decrease in sales we still need to maintain necessary personnel and expenses to support the sales and the [collapsing] accounts receivable. For the three months ended March 31, 2013, the company recognized the $0.12 million bad debt benefits compared to expense of the $0.32 million in the same period of 2012. The income tax benefits, in the three months ended March 31, 2013 and the 2012; the paid income tax and for the rate of the 15%. Income tax benefits were $0.27 million in the three months ended March 31, 2013, and income tax expense was $0.53 million for the three months ended March 31, 2012. As a result of the CFDA notice ceasing production of Buflomedil, we have net operating loss carry forwards of $0.48 million, which under Chinese tax law can be carried forward for five years. We believe that we will have sufficient taxable income in the near future to utilize these tax benefits. Net loss for three months ended March 31, 2013 was $2.81 million, or earnings per basic and diluted common share was $0.06 per share, compared to net income of $2.81 million in the three months ended March 31, 2012, or earnings per basic and diluted common share was $0.06 per share. The decrease in net income was mainly due to the decrease in revenue, and the inventory obsolescence reserve recognized as a result of the CFDA notice on Buflomedil. Turning to the balance sheet, our cash and cash equivalent was $4.75 million, which represents 3% of our total asset as of March 31, 2013 was compared to $4.03 million, which represents 2.5% of our total asset as of the December 31, 2012. At March 31, 2013 our accounts receivable was $62.7 million, a decrease of $3.5 million from $66.2 million at December 31, 2012. Our receivables decreased due to decreased sales and improved performance of our collection in accounts receivable. For the three months ended March 31, 2013 $1.9 million was generated from the decreases in accounts receivables compared to $4.1 million was used to fund increase in accounts receivables in the comparable period a year ago. At March 31, 2013 total inventory was $33.3 million, a decrease of the $3.1 million from $36.4 million at December 31, 2012. This decrease was mainly due to inventory obsolescence recognized pursuant to the CFDA notice on Buflomedil in March 2013. Overall we continue to be excited about the market opportunities that lie ahead by leveraging our core competencies in the differentiated product portfolio, extensive product distribution network and commercialization expense. We are confident in the task of the maximizing long-term shareholder value. With that, we will now open the call up to the questions. Operator?

(Operator Instructions) Our first question comes from the line of [Jason Wang from Dingsheng Investment]. Please ask your question.

[Foreign Language] I would like to translate [Mr. Wang’s] question which is respond first. Mr. Wang asked whether the performance of -- it seems the performance of the company deteriorated in the first quarter of this year and asked whether the performance could be affected to term better after the company had finished the GMP upgrading?

And Ms. Li answered that yes, the GMP upgrading project had bring a lot on pressure to our operating and beside in addition to that, the unexpected CFDA notice on the Buflomedil had also negatively impacted our performance in this quarter.

[Foreign language] Mr. Wang asked, the question is about the cash flow and accounts receivable, it seems that the company is under heavy pressure on the cash flow and he noted that the AR balance or those AR balances have decreased to some extent during this quarter as a result of the AR aging between one year to two year and actually have increased compared to the year end of 2012, so he is asking the reason, the company's opinion on this issue?

Yes; our GMP upgrading projects require significant CapEx. Accordingly, we had [objected] our marketing strategy to tighten the credit sales, to tighten the expansion of the market through the credit itself in order to support the need from the GMP upgrading and investment to realize the other intangible investments. And speaking of the accounts receivables collection the Ministry refunded that. During the first quarter of 2013 actually we had collected more existing accounts receivables than the newly generated credit sales. These are kind of improvement of the AR effect. But I think now this old ageing program cannot be addressed in short time. We are trying to improve it step by step; that’s all.

(Operator Instructions) Our next question comes from the line of (inaudible). Pleas ask your question.

My question is actually I have a comment, I’ve noticed in the past you (inaudible) very well to weather the storm in difficult times; I mean and as an investor in which (inaudible) as well as wanting to add more positions what are your plans for the future in terms of capturing the opportunities in the (inaudible) because the Chinese market, the population, a lot of people and with your pipeline its feeling very good of course we has anticipated it might come to pass, but if it does, what are your plans in that market because you guys in my opinion seem to be doing great in difficult time we're going through? Thank you. [Foreign Language]

Because of the aging in problem in China and the economic development of our country, the need for pharmaceutical product will definitely become more and more, will become bigger and bigger. So in addition Ms. Li commented that although the CFDA has implemented a stricter process for our patented product. But these stricter review actually applies to all suppliers to all pharmaceutical companies, and from another affect this attitude will increase the general quality of the pharmaceutical industry in China and in addition the new GMP upgrading currently implemented in China, actually improves our standard to the European standard level, which will help the Chinese pharmaceutical industry to internationalize our industry, therefore Ms. Li concluded that if we could go through the current challenging period we will see brighter future and we will have bigger market and more opportunity to develop our business, thank you.

Our next question comes from the line of Peter (inaudible). Please ask your question.

I have comment and two questions, first the comment then will maybe three questions. When you got this recall for this drug, why didn’t you issue a press release? It seems to me that’s material information and you should have communicated that to everybody? [Foreign Language]

Ms. Li relied that because the time of the recall was quite close to the quarter earnings release, the filing therefore she is thinking to disclose this information more precisely through this quarter filing, because at the beginning when we just received the notice it’s very difficult for us to make the estimation of the related share loss and to the extent therefore when it went in to a difficult phase during the (inaudible).

Just personal comment I think that's a mistake, I think if you get, if something material happens I think you forward to investors to release that information at the time just so some people don’t get the information ahead of time. The next thing is I just want an update on the new drugs; the Candesartan when did you begin production. [Foreign Language]

Ms. Li said for Candesartan we are in the trial production right before the initiation of the commercial production, because only if we pass the CFDA review upon outside, [unspoiled] review of the trial production could we announce to initiate the commercialization.

When will that be?

Could you please say that again?

(Inaudible) when is the commercialization going to start? [Foreign Language]

The CFDA staff will come to our facility to make the on spot review of the trial production at the end of this month. And once control and feel okay with this review, we could be allowed to initiate the commercialization.

What is then the problem with the Rosuvastatin [when you finished]? [Foreign Language]

Could you please, I cannot hear you clearly?

In the Rosuvastatin, what's the problem when you finished the clinical trials about three years ago, what's holding up the production approval? [Foreign Language]

Ms. Li said although we have concluded the clinical trial for Rosuvastatin a few years ago but we're are right now, which in the queue for the Rosuvastatin -- for the CFDA review and it's in the queue -- is at on queue well right in the waiting process for the review.

So you have no idea when that will have? [Foreign Language]

Ms. Li said yes because we have already completed all work we are required to do, it is now the part of the CFDA’s review process, which is beyond our control.

And the last question I have is, I do not understand why 45% of your receivables are between one year and two years old. What is the problem with collecting from these hospitals over two year period and what can you do to improve it, because while the receivables are going down, the sales went down, the older receivables are -- have grown? [Foreign Language]

Ms. Li said that's because of the result of the recent strategy to adjust -- to make adjustment on the marketing and to the tightening of the credit sales because we have adjust our strategy to shift to the better customer which means the customer with better performance in terms of accounts receivable. Therefore, the result, it leads to the result of the near-term aging, short-term aging accounts receivable decreased also due to the adjustment those are bad, so-called bad customers whose performance in accounts receivables was not that good. Those old customers still did not change their behavior, but nevertheless we are trying to communicate with those customers and help push the collection of the accounts receivables in that part.

Is there anything you can do -- I mean is there anything you can do to improve the situation? [Foreign Language]

Ms. Li said yes we are doing our homework to improve the general picture. And as you can see, the balance of the accounts receivables has decreased from the previous year period, although this problem cannot be solved in one day but we are aiming to the right direction.

(Operator Instructions) There is no further question on the telephone line. At this time, I will hand the conference back to Sam for closing.

On behalf of the entire China Pharma team, we would like to thank you for your interest in the company and the participation on this call. For any of you traveling to China, we always welcome and encourage any visitors from our shareholders, potential investors and analysts. This concludes China Pharma’s first quarter 2013 earnings call. Thanks.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.