BMP Sunstone Corp. Q3 2008 Earnings Call Transcript

| About: BMP Sunstone (BJGP)

BMP Sunstone Corp. (BJGP) Q3 2008 Earnings Call November 11, 2008 9:00 AM ET


David Gao – Chief Executive Officer

Fred Powell – Chief Financial Officer

Martyn Greenacre – Chairman


Jeff Miller – J&G Capital

Julie Chen – CRT Capital Holdings


Please bear with me as I take you through the company's Safe Harbor policy. The statements contained in this conference call which are not historical fact may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. BMP Sunstone does not undertake any obligation to update forward-looking statements except as required by applicable law.

Now allow me to turn the call over to David for a strategic overview of the business and then Fred will provide a financial review.

David Gao

Thank you for joining us for our Q3 2008 conference call. During the course of this quarter we have continued to deliver strong growth throughout our business units. Total revenues for the nine months period were $78.2 million up 258% from the same time period in 2007 and the non-GAAP net income for the nine months period was $3.5 million compared to a loss of $3.7 million for the same period in 2007.

During the quarter we continued to build a leading position as a specialty pharmaceutical company focusing on women and children's health. On July 4th we successfully closed our acquisition of 63.3% of Shanghai Rongheng Pharmaceutical which provides us direct access to the largest pharmaceutical market in China. Rongheng distributes over 400 pharmaceutical products to more than 140 top tier hospitals and thousands of retail pharmacies in Shanghai. We are very happy with the third quarter of Rongheng contribution with its employees delivering revenue of $5 million and operating at close to breakeven. Rongheng's management is confident about future profitability.

With the Rongheng acquisition we now have a national distribution network focused on three of China's top pharmaceutical markets in Beijing, Shanghai and Guangdong Province. Our distribution arm now covers more than 1,800 hospitals and 50,000 pharmacies throughout the country through Wanwei, Rongheng and our affiliate, Guangzhou Pharmaceutical Corporation. We have been taking steps to both integration of Rongheng into our national network aiming to maximize the sales potential of our proprietary products.

The third quarter results we reported last night showed consistent revenue growth for both BMP China and Sunstone despite a couple of external challenges. First, the third quarter has historically been the weakest quarter for Sunstone. Our brand is OTC division, given that a significant portion of Sunstone sales are generated from its cold medicine portfolio.

Second, strict government restriction during the Summer Beijing Olympics had the potential to negatively affect commercial activities of both Sunstone and Wanwei, especially around the Beijing area. However, each of our business units demonstrated strong growth over the same period of 2007, and we are particularly encouraged by the improvement demonstrated in the consolidated gross margin to 45.3% from 13.1%.

High margin products have increased and contributed to the total revenue and thus grows the gross profit. Operating income and net income performance on a GAAP and non-GAAP basis improved substantially from prior quarters. On the product and development side, we began marketing and distribution Ferriprox and our five-year licensing agreement with Apotex Inc.

In later June 2008, Ferriprox is a cost-effective thalassemia treatment which will result in greater drug compliance with competing injectable formulations. We are confident that our sales and the marketing expertise in the addressable market together with our existing distribution relationships we'll quickly capture market share and expand the therapeutic market. Early indications are that Ferriprox has gained significant traction in sales in the fourth quarter of its launch and we believe it can have a meaningful revenue contribution to BMP Sunstone in 2009 and beyond.

On August 18, 2008, Sunstone received a production license from Chinese State Food and Drug Administration to manufacture and market GoodBaby multivitamin granules, a multivitamin formula for infants and children in China. This is an ideal extension of our GoodBaby brand because it builds on our existing brand strength in the pediatric focus. We continue to plan for a nationwide product launch during the fourth quarter of 2008.

On July 18, 2008, BMP Sunstone signed a non-binding letter of intent to acquire 75% of Zhangjiakou Shengda Pharmaceutical Corporation for up to 30 million RMB or approximately $4.4 million. While terms for the acquisition are not yet finalized as completion is subjected to a number of conditions, we continue to expect to complete the transaction by the end of the fourth quarter of 2008.

The company intends to use the cash available at Sunstone to fund the acquisition. Shengda is the leading manufacturer of pediatric pharmaceuticals specializing in antibiotic research and development and has approximately 75 product licenses approved by SFDA in China and we look forward to the partnership.

The Shengda products we intend to acquire specifically target oral pediatric market. This feeds strategically into our GoodBaby brand and also complements our pediatric franchise in both the OTC and Rx markets. Utilizing our existing sales coverage in the nationally recognized brand we intend to realize synergies immediately by increasing sales volume and improving sales margin.

At this time I will turn the call over to Fred Powell, our Chief Financial Officer, who will review our third quarter financial results.

Fred Powell

In the third quarter we continue to attain sustainable profitability at the operating income line. We improved revenue and gross margin performance on a year-over-year and quarterly basis and our operating income improved from a loss at this time last year.

We also continue to believe our financial performance should be viewed on a non-GAAP basis which excludes amortization related to acquisitions, debt discounts and issuance amortization and stock-based compensation. On a non-GAAP basis, we generated $1.9 million of net income this quarter, which is a significant improvement from a loss of $1.3 million in the third quarter of last year.

Revenues for the third quarter of 2008 were $30.5 million compared with $9 million in the third quarter of 2007. Sunstone contributed $15.5 million in revenues during the third quarter of 2008 and was not yet acquired in the prior year period. Revenues from distribution were $13.7 million in the third quarter of 2008 compared to $8 million in the comparable quarter of 2007.

Revenues from licensed products were $1.3 million in the third quarter of 2008 as compared to $960,000 in the prior year period. Non-GAAP gross profit increased to $13.9 million from $1.2 million in the third quarter of 2007. Gross margin of 45.7% was up substantially from 13.1% in the prior year, which reflects the higher margin revenue contribution from Sunstone in licensed product sales versus distribution revenue.

GAAP operating income reached $3.5 compared to non-GAAP loss of $1.5 million in the third quarter of 2007. Our operating income includes a $525,000 reversal of an over accrual for social taxes incurred in prior years. This equates to about $0.01 per share and excluding this our general administration expenses as percentage of revenues improved significantly, decreasing to 11.2% of revenues and compared to 23.3% of prior period revenues. Non-GAAP net income was $1.9 million or $0.05 per diluted share compared to a net loss of $1.3 million or $0.04 per share in the third quarter of 2007. Our cash position was $3.8 million and we had notes receivable of $15.4 million, totaling approximately $19.2 million at September 30th. All notes receivables are guaranteed by established banks in China and have maturities of six months or less.

More recently we completed a small registered direct public offering with existing investors. We raised net proceeds of $2 million which will be used for Rongheng's and Sunstone's operations. Next I will turn the call back to David who will provide an outlook for the remainder of the year.

David Gao

To date we have all the strategic elements of our business platform in place. And during the year we have demonstrated successful execution leading to strong growth and profitability. We are optimistic about our future prospects.

Given the [inaudible] initial contribution from Rongheng organical growth, that is tracking to expectations and out performance from Sunstone during a seasonally slower third quarter. We are reiterating our full year 2008 guidance issued on the last earnings call.

Our total revenues should reach the range of $110 million to $120 million. And our non-GAAP net income should be in the range of $4 million to $5 million.

In conclusion let me run through our key initiatives. First, continue the revenue growth, revenue growth and the profitability. We expect that the revenues from Sunstone and BMP China to accelerate as we continue successful marketing of our existing products. And the introduction of new products through our national distribution network, which now is even larger than before due to our purchase of Rongheng. In addition we expect that each operating business unit within our organization to become profitable for the fourth quarter in 2008.

Second synergy realization and expense control. We have carried out cost cutting initiatives across our organization, realizing synergy and consolidating cost saving measures to continue to be a focus of our operational objectives for the coming quarters.

Third, product portfolio expansion. We have been actively pursuing new product opportunities for both our branded OTC and RX franchises. As we have previously stated, we intend to launch at least two new products per year.

In summary the management team will continue focusing on integration of our national distribution network. Revenue growth, market penetration of our [China] products, expansion of our per price rate in licensed product portfolio as BMP China and the consolidation of Sunstone's market leading position through continued investment in its private portfolio in national leading brands.

That concludes our prepared remarks. Operator, we are ready to take any questions.

Question-and-Answer Session

Fred Powell

The operator is trying to correct the problem, so if you could hold for just a second. I'm not sure whether we've got David on the line. David?

Martyn Greenacre

This is Martyn Greenacre, I can hear you. Fred's tying to work with the operator and I think we've lost David. David was – the operator called out to him so they may have lost the connection.

Jeff Miller – J&G Capital

I just had a question about the notes coming due, I guess in April of ’09?

Martyn Greenacre


Jeff Miller – J&G Capital

May of '09? I just wanted – you know given the credit markets where they’re at I just wanted to maybe have you guys address how you intend to pay those off? I know you're making an acquisition that's going to drain $4.4 million of cash from the balance sheet. Maybe you could just go into what you see for '09 and how to repay those notes?

Martyn Greenacre

Yes, let me just ask – Fred's come back into the room. I'll ask him to respond to that in reference to the notes due in May next year and how we're going to handle that.

Fred Powell

No, it's been our intention to continue to speak with our note holders after the earnings release and before the end of the year, review the funding methods available to us. And by that I mean we have note holders that wish to be paid out in cash maturity. Some may want to extend their loans and some may have another option which could be beneficial to both the note holder as well as to BMP.

Based on this information we'll then determine what we would consider the best method for our note holders as well as all shareholders to eliminate the outstanding debt. The method we raised the additional cash may be through debt or equity and we need to determine the best method available in the market at the time.

Jeff Miller – J&G Capital

Right, but I mean, that's a nice scripted note you just read. But given the credit markets, where they're at right now with liquidity very tight, I guess I'm just kind of concerned that you're making more acquisitions and spending $4 million when you only have $3.8 million in cash, another $2 million that came in, but I'm not sure what your balance is right now of cash and $15.5 million notes receivable. So you have $29 million of notes coming due.

I think you need to be cautious about spending cash on future acquisitions rather than – before you actually find out the intentions of your note holders, whether they want to be paid out in cash or converted and do some sort of option.

Fred Powell

No, and I understand the concern and as I said, we have had the discussions ongoing. We are taking a look at the cash that's available to us. We are aware that Sunstone does have the cash requirements for the acquisitions and that there will need to be some type of additional financing that would come into this company if all of the note holders desire to be paid out at this time.

As I said, we are looking at it right now and we expect to have the answer before the end of the year. The acquisition that we announced has been announced for a period of time. We're working to close that with – knowing the debt requirements that are there.

Jeff Miller – J&G Capital

Okay. I mean, have you spoke to banks about getting some kind of revolver in place?

Fred Powell

We've had multiple discussions on different levels from revolvers to equity to convertible. We're just taking a look to see what would be the best path forward for us. So yes, we've looked at all of the above.

Jeff Miller – J&G Capital

Okay, so basically you said that you're going to have, you're going to be contacting bondholders and you're going to have some sort of answer by year-end.

Fred Powell

That's correct.

Julie Chen – CRT Capital Holdings

Hi Martyn, it's Julie.

Martyn Greenacre

Hi Julie. I'm not sure we have David on the line. David, are you back?

Julie Chen – CRT Capital Holdings

Well why don't I just start with a couple questions that I do have. Just would like to know, in terms of the acquisitions for the Zhangjiakou Shengda, is the due diligence completed? Are we looking, as David has mentioned, that we are looking at a closing on the fourth quarter of 2008, is the company almost at the stage where they can actually – all the due diligence are completed? Or is this something that's still in the pipeline now?

Fred Powell

I can answer that, Julie. This is Fred. We have completed due diligence. I've reviewed the files. We've had our team there. We're at the stage right now where we're going through negotiations with the management of the company and with our management which is why we're confident that this will close by the end of the year.

We've not found anything in the due diligence that would deter us from moving forward on the transaction.

Julie Chen – CRT Capital Holdings

Great. In terms of this quarter's revenue, hopefully I'm not going forward as needy, greedy [inaudible], but is it possible to give a break down of what the Rongheng contribution is since it was officially acquired in July and when I went through the 10-Q I noticed that the distribution business completed about 14.9 million. And so out of that $14.9 how much did it come from Rongheng?

Fred Powell

Yes, we had $5 million from Rongheng during the quarter and our revenues for distribution were actually about $14.9. So $5 million came from Rongheng.

Julie Chen – CRT Capital Holdings

And how would I think of Rongheng moving forward? As David has mentioned earlier that Rongheng would play a critical role and what is the revenue ramp up? Is it – do we use that $5 million as a baseline, thinking of moving forward toward next year, how should we think about the ramp up moving forward?

Fred Powell

We're looking at that as an opportunity for us to grow the revenue at Rongheng quicker than we would be the Wanwei's revenue increase. We'd be looking in the 20% plus level for Rongheng now that we are truly managing it. We have the cash flow going into Rongheng allowing them to get the products and continue to expand their revenues.

Julie Chen – CRT Capital Holdings

I have one last question, which is a little bit more on the macro level before I move back to the queue. Healthcare reform and NDRC price out, pricing, particularly also with the China slow down that we're seeing these days, how would Beijing MedPharm counter affect I may say, or benefit from some of this reform going on in terms of healthcare? How do they counter affect the NDRC pricing impact particularly with these Western synthetic drugs that try to put a cap on the import business, import products, and the slowdown overall? How should be think about the revenues moving forward?

Martyn Greenacre

David, are you back on the line? I'd really like David to answer that question but I continue – I mean he's actually in Guangdong in the moment and is much more in the detail of the government's package and its likely impact on our sector, so I hope I can get him back before the end of this call. But if not then I'll make sure that he calls you direct.

I'm sorry to everybody about the technical difficulties. And I don't know exactly what's going wrong but clearly we're having trouble.

Fred Powell

Well, I'm going to take this opportunity since the line appears to be open and that's that we appreciate your time today on the call and continuing to follow the company. We look forward to updating you through the fourth quarter as acquisitions are completed and new products are launched.

Unfortunately due to technical difficulties, it seems as though the call needs to be terminated at this point. If you'd like to send me an email we would be able to get back to you. Thank you.

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