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

China Pharma Holdings, Inc. (NYSE:CPHI) Q2 2013 Earnings Call August 15, 2013 8:30 AM ET

Ladies and gentlemen, thank you all for standing by, and welcome to Quarter Two 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 you that this conference is being recorded on Thursday, the 15th of August 2013. I would now like to hand the conference over to your speaker for today, Ms. Diana Huang. Please go ahead.

Thank you, Willy. Good morning ladies and gentlemen, and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ second quarter 2013 earnings conference call. I am Diana Huang, the company’s Investor Relations Manager. Speaking on the call today are China Pharma’s President and CEO and Interim CFO, Ms. Zhilin Li and Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of the call. The company’s earnings press release issued earlier this morning is available on our website at www.chinapharmaholdings.com. 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 represent management’s estimates as of today August 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 over 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 second 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. In the second quarter of 2013, we continue to execute our prudent marketing strategy to a more stringent screening of existing and potential distributors and hospital customers in terms of speed of payment in order to gradually improve our trade pattern, especially in terms of the collection of our accounts receivable. This strategy temporarily impacts our sales in the current period. Meanwhile, we entered an eight year construction loan facility with a bank on June 21st, 2013. The total loan facility amount is RMB 80 million approximately U.S. $13 million, and the advance is being used to fund construction of our new GMP upgrading project. We already completed the overall architectural structure of our new GMP facility; and are progressing according to our plan to continue to construct the new facility and ancillary projects. With the support from bank loan, we are more confident that the new GMP upgrading will be accomplished in good quality. I will now read results from Ms. Li's prepared remarks in English. The Chinese pharmaceutical industry has been a key contributor to the PRCs economic growth. China pharmaceutical market reached CNY 926.1 billion in 2012 according to Medicine Blue Book, China Pharmaceutical March Report 2012, Blue Book published by Chinese Academy of Social Science, CASS on December 28, 2012. The Blue Book forecasted that this will continue its rapid expansion at an average rate of the 12% from 2013 to 2010. And pointed out that Chinese pharmaceutical market showing features of rapid expansion, fierce competition, lower concentration and the greatly influenced by government's policies. And the pharmaceutical market expansion is supported by increased demand from medicine associated with the population aging, and improved social welfare and the enhanced residents' purchasing power along with the economic development. Although, we believe the long-term growth prospect of Chinese pharmaceutical industry remained unchanged the golden decade of the pharmaceutical in China is still expectable; while in the earlier stage of the golden decade. The entire industry is required to upgrade our facilities to the new GMP standard which was published by the Ministry of Health in China on February 12, 2011 effective to March 1, 2011. This run of the upgrading is the challenging for all players and also means survival of the fittest. The new GMP standard significantly revised the standards in PRC and the presents [feature] mandatory requirements for among others things. Our manufacturing and the quality control process, key manufacturing and the quality control personnel and our supply and logistics chains for those mandatory requirements. The upgrading of our injectible product line must be accomplished by the end of the 2013. We already completed the overall architectural structure of our new facility. We are progressing according to our plan to continue to construct the new GMP facility and ancillary projects. We have also made down payments for the major equipment and the facilities for the new production line in the new (inaudible). We are confident that new GMP upgrading will be accomplished in good quality even under upgrading pressure. We still firmly believe in our long-term prospects in China's rapidly growing pharmaceutical industry. With the established and differentiating product portfolio, extensive sales and distribution network and a growing pipeline for generic and the proprietary drugs. We are committed to continue to deliver a sustainable and long-term growth. Now I would like to review our second quarter 2013 financial results and balance sheet information. Revenue, in the three months ends June 30, 2013, our sales revenue was $8 million, a decrease of 45% compared to $14.6 million in the previous year period, given the capital expenditure pressure from 2013, new GMP upgrades project. We have to control credit expansion in the market. This 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 Anti - Viro/Infection & Respiratory product category, which generated the $4.1 million in sales revenue in the three months ended June 30, 2013 compared to $6.7 million a year ago, a decrease of $2.6 million. This decrease was mainly due to the decrease in the sales of our two antibiotic products, Roxithromycin and Clarithromycin. Sales of the CNS Cerebral & Cardio Vascular category decreased by $2.1 million to $2.0 million in the three months ended June 30, 2013 compared to $4.1 million in the previous year period. This was mainly due to decrease in sales of Gastrodin and the CFDA notice on Bufomedil. The CFDA issued a nationwide notice for the cessation of the production, sale and use of Buflomedil effective immediately in March 2013. The Company ceased the production and sale of this product. Our Digestive Diseases category generated $1.0 million of sales in the three months ended June 30, 2013, compared to $1.7 million in the previous year period, or a decrease of $0.7 million. Our Other product category sales fell to $1.0 million from $2.1 million, a decrease of $1.1million. Cost of revenue for three months ended June 30, 2013, our cost of revenue was $5.8 million or 73% of the total revenue which represents a decrease of $4.7 million from $10.5 million or 72% of the total revenue in the three months ended June 30, 2012, a decrease of 44%. The decrease in cost of revenue during the second quarter of 2013 was almost proportionate made to the decrease in revenue. Gross profit and gross margin, gross profit for three months ended June 30, 2013 was $2.2 million, while gross profit for the three months ended June 30, 2012 was $4.1 million. Our gross profit margin in the second quarter of 2013 was 27%, compared to 28% in the second quarter of 2012. The Healthcare Reform instituted by the Chinese government since 2009 were 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 decrease of sales and the continued increases of the purchase price of the raw materials attributed to the decrease of the gross profit. Going forward, we expect to see the continued pricing pressure on most of the products. The selling expenses, our selling expenses for the three months ended June 30, 2013 was $0.7 million, a decrease of approximately $0.2 million compared to $0.9 million in the same period last year. Selling expenses are accounted for 9% of the total revenue in the three months ended June 30, 2013 compared to 6% in the three months ended June 30, 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 to sales and the collection of the accounts receivable. General and administrative expenses, our general and administrative expenses from the three months ended June 30, 2013 was $1.5 million, an increase of $0.7 million from $0.8 million for the same period of the 2012. General and administrative expenses are accounted for 18% and 6% of our total revenue for the three months ended June 30, 2013 and 2012 respectively. The increase mainly due to the expenses incurred relating to the technology upgrades and production process improvement of some of our existing market products in this year. Income tax benefit expenses, in the three months ended June 30, 2013 and the 2012; we paid income tax at the rate of the 15%. Income tax benefit was $0.4 million in the three months ended June 30, 2013, and income tax expense was $0.4 million for the three months ended June 30, 2012 as a result of lower revenue. We have net operating loss carry forwards of $4.9 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 June 30, 2013 was $4.5 million, or earnings per basic and diluted common share was $0.10 per share compared to net income of $1.8million in the three months ended June 30, 2012, or earnings per basic and diluted common share was $0.04 per share. The decrease in net income was mainly due to the decrease in revenue and the increase in bad debt expense. The six months results, revenue for the six months ended June 30, 2013 was $16.3 million, down 47% from revenue of $30.7 million for the six months ended June 30, 2012. Gross profit for the six months ended June 30, 2013 was $0.6 million, down 94% from gross profit of $9.4 million for the corresponding period of 2012. Operating loss was $7.8 million, down $13.4 million from operating income of $5.6 million for the first six months of 2012. Net loss was $7.3 million, or $0.17 per basic and diluted share, compared to net income of $4.6 million, or $0.10 per basic and diluted share, for the same period a year ago. Turning to the balance sheet, our cash and cash equivalent was $2.5 million compared to $4 million as of the December 31, 2012 and the June 30, 2013. Our accounts receivable was $55.4 million, a decrease of $10.8 million from $66.2 million at December 31, 2012. Our receivables decreased due to the decreased sales for the six months ended June 30, 2013, $1.7 million was generated from the decreases in accounts receivables compared to $3.8 million was used to fund increase in accounts receivables in the comparable period a year ago. At June 30, 2013 total inventory was $33.7 million, a decrease of the $2.7 million from $36.4 million at December 31st, 2012. 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 questions. Operator?

(Operator Instructions) Your first question comes from Peter Cyrus. Please go ahead.

Peter Cyrus, Hello?

Hi Peter.

Yeah. What's happening with the new drug, we haven't heard any about the any of the new drugs? Can you just update us on those?

[Foreign Language]

To answer your question Ms. Li explained that as for our hot notch product in the clinic trial stage and they are all deal in profit because the government CFDA right of new requirements from time to time and the clinic trial. Therefore that deals in a profit. And secondly Ms. Li mentioned that for the Candesartan which has already received the CFDA product approval. We have succeeding to pass all the [Technical Difficulty] expect to launch these products in the near future.

Right, thank you.

(Operator Instructions) As there are no further questions, I would now like to hand conference over to your speaker for today. Thank you.

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 second quarter 2013 earnings call. Thanks.

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