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Biostar Pharmaceuticals, Inc. (NASDAQ:BSPM)

Q3 2012 Earnings Conference Call

November 19, 2012 09:30 AM ET

Executives

Ronghua Wang - Chairman and CEO

Zack Zibing Pan - CFO

Shuang Gong - Secretary of Board

Analysts

Charles Ognar - Ognar Trading Co.

Operator

Good morning and good evening. Welcome to the Biostar Pharmaceuticals 2012 Third Quarter Earnings Conference Call. With us today are Mr. Ronghua Wang, Chief Executive Officer and Chairman of the Board of Directors; Mr. Zack Zibing Pan, Chief Financial Officer and Ally Gong, Secretary of the Board. After management’s prepared remarks, there will be a Q&A session.

Before we continue, I’d like to remind our listeners that this conference may include items of a forward-looking nature with respect to certain securities regulation. We refer you to the forward-looking statement disclaimers made in the 10-K and 10-Q filings with the Securities and Exchange Commission as well as those forward-looking statements made in the Company’s press releases.

I’d now like to turn the conference over to Mr. Zack Pan, CFO of Biostar. Please go ahead sir.

Zack Zibing Pan

Thank you, [Ing] [ph] and welcome everyone to Biostar’s 2012 third quarter operating results conference call. The details of the result are available in the news release and with the Form 10-Q we filed earlier this morning. If you have not received the copy of our press release, please contact Lena Cati, of Equity Group at 212-836-9611, and she will email you a copy.

Now I will hand the conference call over to Mr. Wang, who will discuss recent developments and then I will review the financial results.

Ronghua Wang

Thanks, Zack and thank you everyone for attending today’s conference call. As we announced this morning, our overall results for the third quarter and the nine months ended September 30, 2012 continue to be affected by the temporary industry-wide PRC government imposed suspension of gel capsule sales earlier this year.

On July 30, 2012, we received the “green-light” approval from Xianyang SFDA authorities to restart sales from gel capsule products [since then due to a plan] [ph] that we developed, [that have the] [ph] implementing we’ve [planned to record into] [ph] our business has started to recover. Zack will provide you more details about our plan shortly.

As a result of our effort, our net sales for the current quarter increased by approximately $1.8 million or 22% as compared to the 2012 second quarter. And we expect our sales to continue to gradually recover in the coming months based on net sales recorded for the month of October and first half of November. And we expect 2012 fourth quarter sales to be significantly higher than 2012 third quarter.

I will now turn the call over to Zack, who will discuss our third quarter and nine months results. He will also discuss the steps we’ve taken to [rebound on this] [ph] temporary setback. Then I will be available to answer your questions. Zack, please go ahead.

Zack Zibing Pan

Thank you, Wang and thank you (indiscernible). [At last] [ph] due to gel capsule related issues for both reporting period 2012 third quarter and nine months, our net sales decreased and we report losses. Net sales for the 2012 third quarter and the nine months period of our flagship gel capsule product, Xin Aoxing substantially decreased as did net sales for all other gel capsule products. However, that was partially offset by (NYSE:A) Net sales of approximately $1.3 million in 2012 third quarter resulting from shipments to Xijing Military Hospital. (NYSE:B) Net sales from our Weinan facility, which accounted for approximately $2.0 million or 19.7% and approximately $5.3 million or 15.5% of sales for the 2012 third quarter and nine-month period, respectively.

Gross margin for the 2012 third quarter and nine-month periods declined mainly due to substantially lower net sales for Xin Aoxing, which historically has been our highest margin product and also as a result of lower selling prices due to fierce competition and by the PRC government’s essential drug list price control policy.

As a percentage of net sales, selling expenses for both reporting periods increased mainly due to lower sales. Our profitability for the quarter and the nine months was affected by $1.6 million one-time, non-appealable administrative penalty, which we paid the local government related to the gel capsule incident, a fee which we paid in the third quarter.

Also earlier this year, we recorded a $7.9 million write-down to our accounts receivable for credit given to customers for issues related to gel capsule drug. $0.7 million expenses related to the issuance of incentives that recorded in the third quarter; $0.9 million allowance for doubtful account, also recorded in the third quarter. Also our R&D expenses for the 2012 third quarter and nine months were $0.8 million and $2.4 million respectively.

In 2012, we reclassified long-term deposits into current assets and amortized R&D quarterly; we did not incur quarterly R&D expenses in 2011, as R&D expenses was recorded as a long-term deposit at December 31, 2011. As a result we recorded net losses of approximately $5.9 million and a $13.3 million in the third quarter and nine months period respectively.

Our balance sheet remains strong. Total current assets at September 30, 2012 were $48.6 million versus total current liabilities of $4.2 million for a 12:1 current ratio. We continue to fund our business from our free cash flow. As of September 30, 2012, we had cash of approximately $12.1 million compared with approximately $17 million at 2011 year-end.

Before opening the questions, I’d like to emphasize that despite the recent temporary setback, our business remains solid. The gel capsule issues are now behind us and we were continue to work hard to [further recover] sales of our existing products in 2013 due to the following steps we have taken. We ramped up production by adding a second shift. We initiated an aggressive advertising campaign to rebuild consumer and physician confidence in our products and established incentives for the sales force in all distribution offices nationwide.

Secondly, we plan to continue to introduce new products into the market and further diversify our portfolio. Third, in early September we added a new dimension to our sales model by establishing a business to customer, B2C call center, which is currently ready to operate.

And finally, we increased our efforts to complete several experimental tests for Xijing Military Hospital which resulted in the signing of two one-year contracts valued at approximately $3.6 million and $3 million respectively to manufacture a total of eight drugs specifically for the needs of Xijing Hospital. We are targeting additional contracts with Xijing Military Hospital.

Going forward we expect our net sales to significantly improve in the fourth quarter as compared to the third quarter, and we expect a full recovery in 2013. We look forward to reporting our progress in the months to come.

Ladies and gentlemen, this concludes our prepared remarks. We would like to open the line to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And we do have a question from the line of Charles Ognar with Ognar Trading. Please go ahead.

Charles Ognar - Ognar Trading Co.

What profit margins do you anticipate with the military contracts?

Zack Zibing Pan

Charles, are you talking about the medicines that we supply to the hospital?

Charles Ognar - Ognar Trading Co.

Yes. You have a $3 million and a $3.6 million on whatever contracts, then you have a lot of R&D against that. Is this profitable business now and going into the future, can this be renewed without the R&D cost?

Zack Zibing Pan

Charles, let me put this question to Mr. Wang and then I will translate for you for the answer. And as for the profit margin I can – based on the third quarter numbers our gross profit margin for these three products was close to 30%. But please keep that in mind, for these three products we’ve signed contracts directly with the hospital, so we do not have any – we do not have much [selling expense] [ph] and also admin expenses. So the net margin was pretty close to the gross margin for this product, it’s over 15% for these three products.

And about the future of these three products and the contracts with military hospital, let me double check with Mr. Wang and I’ll come back to you.

Charles Ognar - Ognar Trading Co.

And so you’re saying all the research and development is for different products, not for these signed contract products?

Zack Zibing Pan

No, I assume you’re asking about these three products, we’ve signed – that we’ve recently signed with the hospital, right?

Charles Ognar - Ognar Trading Co.

Yes.

Zack Zibing Pan

We finished all the testing, and we’ve the supply contracts already.

Charles Ognar - Ognar Trading Co.

Okay.

Zack Zibing Pan

Okay. Hold on Charles, let me double check with Mr. Wang for the prospect of these three products, for the future contracts.

Charles, Mr. Wang explained that the sales revenue for these three products was better than we predicted for Xijing Hospital. So, since we already passed all the tests and we had good quality medicines to supply and we’re optimistic that we’ll continue to supply this hospital for the coming years for this product.

Charles Ognar - Ognar Trading Co.

As a follow-up question…

Zack Zibing Pan

Let me finish his comments for you.

Charles Ognar - Ognar Trading Co.

Okay, sorry.

Zack Zibing Pan

For the second contract we signed later for the 3 million Mr. Wang mentioned the volume is not as big as the first three product contracts. And the third, there are – we still have like about 20 products we continue to [fight] [ph] for the supply for Xijing Hospital. We're continuing working with the Military University and the hospital is under the University, so we’re continuing to work with the University to sign rest of the products. Okay.

Charles Ognar - Ognar Trading Co.

Thank you. As a follow-up for that, for two years now we’ve been talking about an Army contract for analgesic. What is the status of that and in general how does the business looks as the function of the new political change?

Zack Zibing Pan

Are you talking about a specific product? Charles, what specific product are you asking?

Charles Ognar - Ognar Trading Co.

I don’t know the name of it, but for two years we were contemplating and negotiating with the Army about an analgesic rub. I don’t know if that was for the foot or just the analgesic in general?

Zack Zibing Pan

Okay, you’re talking about probably the Zushima product.

Charles Ognar - Ognar Trading Co.

Yes. I mean has that contract ever been left or is it on the table yet; and what about the new politics?

Zack Zibing Pan

Okay. Let me check with Mr. Wang.

Charles, for the military product Mr. Wang said that is the spray product for the pain control. For that product we already got the approval, the license approval. But the issue is the GMP certification. Since this is a military product and we [belong] [ph] to the local business our pharmaceuticals is not a military pharmaceutical. So the military is working with the local government to get the GMP certified. So this is – they’re coordinating with the local government to get it GMP certified. Once GMP certified is done, we should be ready to produce that medicine, (indiscernible) time for the coordination between the military and the local system.

Charles Ognar - Ognar Trading Co.

I see. Thank you.

Zack Zibing Pan

Thank you, Charles.

Operator

Thank you. (Operator Instructions) And we have no further questions. I’ll turn it back to Mr. Pan for any closing remarks. Actually we do have a follow-up from Charles Ognar’s line again. Go ahead, sir. Charles you’re – your line is open again.

Charles Ognar - Ognar Trading Co.

Yes, thank you. If there are no other questions then let me ask, with the return to increased sales of the lead product; is there still such pricing pressure? What do we look for the return of the business; will it be profitable in 2013?

Zack Zibing Pan

Charles, Mr. Wang said the price competition is still very, very fierce – very big. So, yes we’re under the price pressure and due to the capsule incident we’re studying the price structure and we’re probably going to lower our price a little bit for the product price in the near future. As for 2013, Mr. Wang said, we’re working very hard and we’re confident to be profitable in 2013, I’m sorry.

Charles Ognar - Ognar Trading Co.

Thank you.

Operator

Thank you and we have no further questions at this time.

Zack Zibing Pan

Again, I want to thank everyone for joining us today. We look forward to updating you on our 2012 year-end results in March 2013. Thank you again.

Operator

Ladies and gentlemen, this concludes the Biostar Pharmaceuticals 2012 third quarter earnings conference call. Thank you for your participation. You may now disconnect.

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