Genesis Pharmaceuticals Enterprises, Inc. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

Genesis Pharmaceuticals Enterprises, Inc. (GNPH.OB)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 17, 2008, 10:00 am ET

Executives

Crocker Coulson - President, CCG

Xu Haibo - COO

Elsa Sung - CFO

Analysts

Louis Mark

Lu Jeans

Jen Hue

Angel Lew

Peter Styris

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Genesis Pharmaceuticals’ Earnings Conference Call. My name is Jessica, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Crocker Coulson, President of CCG. Please proceed, sir.

Crocker Coulson

Hi. Thank you very much, operator. Good morning everybody, and welcome to Genesis Pharmaceuticals’ first quarter of fiscal 2009 earnings conference call. I am Crocker Coulson, and with us today on the call are Mr. Xu, Genesis Pharmaceuticals’ Chief Operating Officer, and also the company’s Chief Financial Officer, Ms. Elsa Sung.

Before I turn this call over to company’s management, I’d like to remind our listeners, in 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 for forward-looking statements that’s contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and, therefore, we’d like to refer you to a more detailed discussion of these risks and uncertainties in the company’s filings with the SEC.

In addition, any projection as the company’s future performance represent management’s estimates as of today, November 17th, 2008, and Genesis Pharmaceuticals assumes no obligation to update these projections in the future as market conditions change.

It’s now my pleasure to turn the call over to Mr. Xu.

Xu Haibo

Thank you, Crocker. [Foreign Language].

Let me translate Mr. Xu. Thank you all. Welcome everyone, and thank you for joining us today for our first quarter of fiscal year 2009 earnings conference call. We are happy to talk that Genesis Pharmaceuticals achieved a good start to the new fiscal year. We continued the strong growth momentum of our overall base and added Radix Isatidis Dispersible Tablets to our product portfolio.

This makes us confident about our performance in the year ahead. During the course of this conference call we look forward to discussing our past operational and financial results and our outlook for the 2009 fiscal year, along with answering your questions. Thank you.

Crocker Coulson

Thank you very much, Mr. Xu and thank you [Ms. Xue]. Next, we are going to turn the call over to the company’s Chief Financial Officer Ms. Elsa Sung, and she is going to provide an update on Genesis’ Q1 operations and financial results. Elsa?

Elsa Sung

Thank you. Crocker. Once again, welcome everybody, and thank you for joining us today for our first quarter of fiscal year 2009 earnings conference call. We are pleased to share with you that Genesis Pharmaceuticals achieved strong financial results for the quarter ending September 30, 2008.

Our revenue was $27.6 million, up 65.9% from the corresponding quarter ending September 30, 2007. Gross profit was $21.8 million with a gross margin of 79.1%, up 81.3% from the corresponding quarter ending September 30, 2007.

Operating income was $7.3 million, up 48.9% from the corresponding quarter ending September 30, 2007. And net income was $3.1 million, or $0.32 per diluted share. Non-GAAP adjusted net income was $4.8 million.

There were a number of notable achievements in the first quarter. In July we received approval from the Chinese State Food and Drug Administration to start producing and distributing Radix Isatidis Dispersible Tablets. This is an herb-based traditional Chinese medicine used to cure viral influenza, meaning common cold and flue symptoms.

We begun to sale this product in October is before the start of the cold and flu season. We distributed this [OBC] throughout the country and marketed through broad advertising and a variety of promotional activities.

In September, we announced that we received purchase orders for a total value of approximately $12 million over the next 12 months from over 80 wholesale distributors when we attended a pharmaceutical conference in Shandong.

Radix Isatidis Dispersible Tablets received a highest number of all orders, over 60% of a total value of the purchase orders. We’ve gotten great market response to this drug and expected to be a significant contributor to our revenue in fiscal 2009.

In addition to Radix Isatidis Dispersible Tablets, we produced five other western and traditional Chinese medicine products that treat large addressable populations in China. Clarithromycin Sustained-release Tablets are used to treat infections such pneumonia, bronchitis, and infections of the ears, sinuses, skin, and throat. The product accounted for approximately 36% of our total sales in the first quarter. It is a mature product that I think [rolling out].

Itopride Hydrochloride Granules used to treat Gastro-intestinal system related diseases. Test sales increased over 90% in the first quarter of fiscal 2009 compared to the corresponding quarter in fiscal 2008. The product accounted for approximately 35% of our total sales in the quarter. This product has approximately 10% to 12% of its market in China, and a gross profit margin of over 80%.

Baobaole Chewable Tablets are used to stimulate children’s appetites and promote digestion. This drug was introduced at the end of calendar year 2007 and has became one of -- has become one of our strongest sellers. Baobaole Chewable Tablets accounted for approximately 27% of the current quarter sales.

We also offer Ciprofloxacin Hydrochloride Tablets and Paracetamol Tablets. These two drugs have low profit margins due to severe competition, and we’re trying gradually retiring the two products from the market.

We currently have a strong pipeline of new drugs in late stages of SFDA approval including Felodipine Sustained Release Tablets. It’s a western drug used to treat high blood pressure and arteriosclerosis; Yuandu Hanbi Capsules, a traditional Chinese medicine used to relief arthritis pain; and Bezoar Yijin, a traditional Chinese medicine used to cure inflammations such as pharyngitis.

We expect to get final approvals from SFDA for all three drugs, either by the end of calendar 2008 or in early calendar 2009, and immediately plan to begin to manufacture and distribute those drugs once we receive those approvals.

Our fourth drug for which we were seeking approval is the Ligustrazine Ferulic Acid Acetate, LFAA and long-term debt consist of 3.2 million in convertible debts. Shareholders’ equity was 97.4 million, future contractual obligations within one-year period including 7.9 million in bank indebtedness and 4.4 million in Research and Development contractual agreements.

The company generated 13.7 million in cash flows from operating activities in the first quarter of fiscal 2009. We believe that our existing cash balance and cash flows from operations will be sufficient to meet future cash needs and enable the company to successfully implement its growth strategies. I will now like to discuss our business outlook and financial guidance.

I have already spoken about our product portfolio, and how we expect it to grow. We expect sales of our current products to continue growing because of increased marketing and sales effort by our sales network. Additionally, we anticipate our new product Radix Isatidis dispersible tablets will help contribute to our sales and net income growth. We continue to recognize competence of our extensive sales network. We recently developed distribution capabilities for the OTC market to pharmacies.

We hope to build further upon via -- accomplishments. In line with our strong financial growth and expectations of expanding our product line as guidance, we expect revenue for fiscal 2009 to be from a 122 to a 130 million and operating income to be from 40 to 43 million. This guidance underscores how we are very excited about the growth opportunities available to Genesis Pharmaceuticals throughout the rest of fiscal year 2009.

Our growth strategy will be focused on several key initiatives. First, we will continue to enhance our product pipeline through close co-operation with leading research institutions in China, and selectively -- and of selective acquisition of promising drug candidates in the late-stage SFDA approval. Second, we will continue to strengthen our sales and marketing organization with a focus on increasing our penetration in rural markets. And third we are looking at strategic acquisition opportunities that can accelerate our growth and strengthen our presence in the OTC market.

We appreciate the interest and support that our shareholders have shown in Genesis. I hope that I have been able to give you a sense of our excitement about the future, and the potential of your company. We look forward to becoming more widely known to the international investment community in the future and look forward to upgrading to a senior stock exchange.

With that, let’s open the floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of [Louis Mark]. Please proceed.

Louis Mark

Sure. Thank you for taking my calls. First of all, congratulations on the very impressive sales performance for the past quarter. My first question is regarding your revenue breakdown. Could you give us a little more detailed revenue breakdown for this quarter in terms of Clarithromycin, Itopride and Baobaole?

Elsa Sung

Certainly. In the Clarithromycin syrups in the current quarter accounts for approximately 36% of our total sales, Itopride accounts for approximately 35% and Baobaole Chewable accounts for approximately 26.6%.

Louis Mark

Okay. Great. And the rest are mostly and Cipro and Paracetamol?

Elsa Sung

Yes, yes.

Louis Mark

Okay. Great. And, also, as you mentioned in the call the Company is launching the sales of Radix tablets in October. Could you give us a little bit more color -- any feedbacks you have on the market on this product, and more specifically how much revenue do you expect per quarter going forward, and what kind of growth margin do we have?

Elsa Sung

On that product the market feedback from our sales representatives has been extremely well, and in the quarter -- current quarter we expect to have, I believe, its over between $2 to $3 million sales, possibly more. And going forward we are looking at (inaudible) is very exciting because the market has been continually changing (inaudible). So, all I can tell at this point is that growth would be very significant.

Louis Mark

Okay. That’s good to hear. And you also mentioned that in a recent annual drug conference in China there was an order of $12 million the company received, and you mentioned that 60% of that order is for Radix, if I am correct? What -- can you tell us what are the remaining drugs in order?

Elsa Sung

Mostly it’s the current drugs like the Clarithromycin and Itopride as well as Baobaole.

Louis Mark

Okay, okay. Actually great. Next question is regarding the LFAA, does the Company have any updates on the LFAA patent appeal with Shandong University?

Elsa Sung

We are still in the final stage of -- again finalizing the purchase price with the Shandong University, and we believe we should be able to have the deal finalized, if not in December, it would be January.

Louis Mark

Okay. Okay. Thank you. Next question is regarding the expenses. It seems like the increase in net -- other expenses was due to increase in realized -- in realized losses in the security investment, what point are do you familiar, and could you give us a more color on this loss, and are we -- do we expect -- can we expect any more related loss going forward?

Elsa Sung

This loss primarily relates to the security in our investment portfolio basically we heard those securities a reverse merger from the old Genesis Technology Group and this is mostly related to Lotus Pharmaceutical Security -- Lotus Pharmaceutical Share that we have in our portfolio. At June 30, their stock price was at $0.76 per share. However, when it comes to September 30, the share price dropped to somewhere between $0.33 to $0.35 per share. So we suffer a significant unrealized loss on those securities, and at this point we really don’t expect hopefully the loaded shares would not go at least further down, and hopefully when Lotus Company when they have -- when they have better performance of their stock -- their stock price would come back to where it should be. So, overall, (inaudible) the overall market impact unless as well. But again, those are unrealized.

Louis Mark

Okay. Thank you. Just one final question. For this past quarter it seems like tax rate increased to 38.6%? Could you tell us the reason for that?

Elsa Sung

Mostly it is because of -- when you are looking at the tax rate on a consolidating -- on our consolidated income statement, the net income combined those -- the net income for China as well as the net loss in the State because majority of our losses incurred in the State for just financing expenses, both unrealized loss. So overall, they appear to be -- the income -- the income tax provision appear to be higher.

Louis Mark

Okay. Thanks. Sorry -- just one more question. I also noticed the selling expense increased quite a bit. Is that mostly related to the Baobaole chewing tablet sales? Did you increase your sales people’s commission?

Elsa Sung

Actually the percentage of sales that we increased -- yes that is actually correct and the Baobaole -- there -- their commission is higher than others as well as in January of 2008 we actually increased the commission percentage as a incentive to our sales people to in an effort to generate more sales. So company with the quarter ending September 30, 2007 our sales commission is higher.

Louis Mark

Okay, so can we expect that the sales commission percentage will be fairly high and it will be on this level going forward then?

Elsa Sung

Right, it was, yes that is correct and when we have especially like when we have the Radix start selling be bit sales commission will be expected to be about the same level as now percentage wise.

Louis Mark

Okay. Great, well, thank you very much.

Elsa Sung

Thank you.

Operator

And your next question comes from the line of [Lu Jeans], please proceed.

Lu Jeans

Okay, thank you, thanks for taking my call, and my first question is I want to know the gross margin will be higher than 79% all over than that we have a new added capacity in the volume quarter.

Elsa Sung

Okay. Thank you for the question and our gross margin actually we anticipated to pretty much stay at current level because the Radix actually will be right now where you are estimating, we are still trying to get the cost of sale to stabilize and as we go forward, but we are estimating going forward cost of sales for Radix should be somewhere between 20% to 25%. So as we move forward I would expect that the gross margin should stay at current level.

Lu Jeans

Okay, that’s great, thank you. And one more question about my ability to assume the problem of an [evolution] that you item (inaudible). And yeah, that 50.5 million and compared to plus 2 million in the corresponding period of last fiscal year and I don’t know why and they item how so higher growth?

Elsa Sung

(Inaudible).

Lu Jeans

Yes.

Elsa Sung

You might be looking at low line item, our liability assume foundry organization at September 30, 2008 was approximately 550,000 and at June 30, 30 actually we have approximately 1 million so its actually a reduce of approximately 450,000.

Lu Jeans

How about -- I mean departure of ending September not fiscal year maybe is about 0.2 million maybe I am wrong.

Elsa Sung

I am not quite sure where are you looking at our balance, are you looking at gradually paying off no liability assume foundry reorganization.

Lu Jeans

Okay. And I want to know what is liability assumed from the organization.

Elsa Sung

Those are mostly the trade payable that’s at reverse merger back in October 1, that Genesis Technology group have reverse merger, they actually basically left us a lot of liabilities including various payables, including various liability, accrual liabilities that we suppose to and we also are paying off using those assets we obtained through the reverse merger. Also couple arbitrations that are going forward and they are all related to those ongoing arbitration or related to the [Shale] company operation which you know of course incurred certain legal expenses now we have to pay. So they will be part of the trade payable as well. So those are where the liabilities from reorganization mostly coming from.

Lu Jeans

Okay. Thank you, and good luck. Thank you, Elsa.

Operator

(Operator Instructions). And your next question comes from the line of [Jen Hue], please proceed.

Jen Hue

Yeah, good results.

Elsa Sung

Thank you.

Jen Hue

I want to ask you, because right now investors are very worried about China’s economy. So maybe can you give us some comments what you see in terms of your sales do you see any slowdown or any or just everything is just as usual.

[Foreign language].

Xu Haibo

[Foreign Language].

The US financial crisis actually affects the global economy; however, the China -- we’re very glad to see the China government actually stepped in and announced economic stimulation plans. And as of now, it is still hard for us to estimate the impact from those stimulation plans, however. And we believe that starting next year the China economy should somehow show a little bit of improvement. And on top of that, the government also announced a medical – basically, it’s a medical improvement exchange plan to basically provide -- strategically provide some changes to the medical healthcare market.

And again, it’s hard for us to impact the actual impact -- to estimate actually impact from those plans, but we remains very optimistic. And the company actually has three major strategies to react to the current market condition. First, we are working on improving our product portfolio. We’re training through different channels to increase the variety of our products. And number two, we are currently in the process of changing our operational model. In the past, we focused on the hospital -- have focused on directly distributing to the hospitals.

However, going forward, we are working on increasing number of distributors in China to distribute -- large distributors, so they can distribute our products. And also, we are looking to further breaking to the [root] market such as the countries like to increase (inaudible) product. And thirdly, we are working on increasing our advertising as well as related promotional activities to increase the market awareness, both of our company as well as our product.

So, we believe through these three different strategies our future revenue will continue to grow and we are very confident in the company’s growth.

Jen Hue

Okay. That’s great. And Elsa one question for you. Many, many Chinese pharmaceutical companies may up slide and also they have got this high-tech status. I don’t know whether for Genesis that, have we applied for that high-tech status? Are fully applied, or when you think we should have this granted?

Elsa Sung

It’s actually -- based on my understanding, it’s actually -- we don’t -- the Chinese operating company actually, we not consider they are high-tech company -- we’re not consider to be in that criteria, mostly because the drugs that we’ve been selling in the past have not been -- against higher ranking like the Class I, Class II. But, we are looking into getting to that category and that would certainly be the direction to go.

Operator

Okay. Your next question comes from the line of [Angel Lew]. Please proceed.

Angel Lew

Hey, Elsa, [Haibo and Cao].

Elsa Sung

Hi.

Angel Lew

I think this is regarding the LFAA. I want to know if you got a contract with the party next years -- early next year, or if you need to finish all the application in the (Inaudible)?

Xu Haibo

[Foreign Language].

Okay. So, in terms of LFAA, we still -- we have been continually negotiating with Shandong University. Right now, the basically the barrier is really just on the purchase price as well as the [penalty]. We really don’t wanted to -- wanted to pay the high price, so we are still doing our final negotiation on those prices. And we expect to either -- we expect to finalize the contract to finish the purchasing. If it’s not in December of ‘08, we should be able to finalize that in January of ‘09.

And although we haven’t finalized the agreement, all the clinical trial testing and all the different tests are still going on at Shandong University. Their have been no delay whatsoever. And the Shandong University basically agreed to help us to obtain the approval by June of ‘09. So, all of that still haven’t been delayed, while we are in the process of negotiation.

Angel Lew

Okay, thank you. But if you can’t get the new drug approval in June 2009, will Ligustrazine Ferulic sales contribute in the fiscal year 2010? And can we have some guidance for the sales?

Xu Haibo

[Foreign Language].

Crocker Coulson

And also, maybe we can just get the English speakers caught up with the translation and then we can go forward with any follow-up questions?

Elsa Sung

Correct. Absolutely.

Xu Haibo

So, we expect to have the manufacturer approved by the government by the end of 2009, and we should be able -- that will be the calendar year 2009. And then we should be able to start selling those in the fiscal year 2010, which will be beginning of calendar year, 2010 January -- January of 2010, I believe.

And however, there was -- there is still currently a one uncertainty that’s really difficult, was to control which is the government slowdown in the approval. There are couple of issues, currently with the Chinese -- the China SFDA -- they can basically carry through what is promised to the pharmaceutical industry, which in previous comments that they were going to speed up the approval process, the process of examining different new drugs.

However, because of the recent events including full safety concern, as well as, various drug safety concerns, they do show a slowdown in their process. So, if they take that into effect, and if the government cannot catch up with their work, we might hamper the delay as well.

Angel Lew

Okay. Thank you. And so, ask another two question, which is the -- can we determine the transaction cost with the prices? And the second is financial color of the arbitration with China (inaudible).

Elsa Sung

[Foreign Language]

Xu Haibo

[Foreign Language]

Elsa Sung

On the LFAA, purchase price the initial negotiation -- the initial purchase price was at RMB 110 million, which is approximately US $16 million. And on top of that, right now, Shandong University wanted to increase the price by -- between RMB 20 million to RMB 40 million, which is why we are still in negotiation with them. And very much -- and very likely we can see an increase in the purchase price of RMB 20 million, which is approximately US $3 million, in the purchase price.

Angel Lew

Okay.

Elsa Sung

And in terms of the arbitration status, we are still currently working very closely with our attorneys, and because we are in the middle of going through the whole process, going through the discovery of process, we -- the attorney really advised us not to, basically, comment or make public comments or discuss any of the detail in public. So, again, I just had to apologize for that, and because the whole arbitration process, we would not be able to provide further detail.

Angel Lew

Okay. Well, thank you Elsa. Congratulations on your quarter.

Elsa Sung

Thank you.

Haibo Xu

Yes.

Operator

And your final question comes from the line of Peter [Styris]. Please proceed.

Peter Styris

[Foreign Language]

Elsa Sung

[Foreign Language]

Peter Styris

I would just like ask a few questions all of which is -- I want to make sure I understand. First, you said operating income would be 40 million to 43 million this year. What does that work out to per share?

Elsa Sung

In terms of operating income?

Peter Styris

No. You gave the operating income number, what would that mean in earnings per share?

Elsa Sung

It will be approximately $4 per share for operating income.

Peter Styris

But how about the -- but what would be --

Elsa Sung

Net income, you mean?

Peter Styris

Yes. What would that be in earnings per share?

Elsa Sung

Right, right. I am reluctant to discuss the earning -- the net incomes and earning per share finally because of those holdings -- those security holdings. It is really difficult --

Peter Styris

I understand. In other words, you get the operating income is -- we have the operating income -- the difference in the operating income and the earnings per share has to do with security holdings and things like that?

Elsa Sung

And the financing charges there.

Peter Styris

Got it. Okay, thanks.

Crocker Coulson

And also, we have some tax rate which --

Peter Styris

No, no. I understand that Crock. I am just saying the variable. I can figure out the tax rate. The variables are basically -- these things that had nothing to do with the Company.

Elsa Sung

Correct.

Crocker Coulson

But they are highly unpredictable. I think that’s why the company decided not to --

Peter Styris

No. No. I understand that. Now, the -- Lotus is the major holding?

Elsa Sung

Lotus as well as Gold Horse International.

Peter Styris

Right. Okay. Now -- and then how do you carry these -- at the end of the quarter, what are your pricing for market?

Elsa Sung

Yes.

Peter Styris

And sometimes when these companies are out raising capitals and things like that, the market is -- who knows what the market is in a lot of these companies. Would it make sense just to take a more conservative approach write it down further? Can you legally do that or are you stuck with market price so that it will vary every quarter as long as you have?

Elsa Sung

The guidance really require us to keep it at market price. So that -- especially as of now both maturities are considered trading securities in our portfolio.

Peter Styris

Okay.

Elsa Sung

In terms of -- market, I really have to -- look into different guidance to see -- if that’s really the way that we can do it.

Peter Styris

And how many shares of Lotus and Gold Horse do you have?

Elsa Sung

Well, for Gold Horse we have approximately 7.2 million shares.

Peter Styris

Yes.

Elsa Sung

And for Lotus, we have approximately 2.4 million Lotus.

Peter Styris

Okay. The -- now I am confused a little about the drugs in the pipeline, as I want to make sure I understand that. You have -- how many drugs are still awaiting approval?

Elsa Sung

We have a three.

Peter Styris

Three and the --

Elsa Sung

Counting the LFAA.

Peter Styris

Yes. And leaving the LFAA, there is two, right?

Elsa Sung

No, no.

Crocker Coulson

I got. It’s three.

Peter Styris

Not -- not three. I’m sorry. Three, not counting LFAA. And they have been a little slow -- again to just make sure I understand what your expectations on when they might be approved?

Elsa Sung

We really hope to have the approval by the end of December. And if not, it should be in the first quarter. But we are quite confident that we should be able to get it in the first quarter calendar of 2009.

Peter Styris

Okay. So, when you say like the operating earnings, the operating earnings assume that you will start selling those three new drugs, when?

Elsa Sung

Late first quarter of -- late -- basically, our quarter would be third quarter of 2009 --calendar quarter would be --

Peter Styris

First quarter.

Elsa Sung

First quarter of calendar year 2009.

Peter Styris

Okay. So, you are assuming that you’re not going to literally selling those drugs until March of 2009 basically?

Elsa Sung

That’s correct. Some time February or March, yes.

Peter Styris

Okay. Okay, great. Now, the last question I have is the LFAA, it’s -- I think that you said you might pay the more than actually $20 million R&D?

Elsa Sung

Okay. Yes.

Peter Styris

And you would start selling that drug -- basically that drug you would start selling when?

Elsa Sung

In our fiscal year 2010.

Peter Styris

Okay. So --

Elsa Sung

Part of that fiscal year.

Peter Styris

Right. So, we’re not going to see that drug until calendar year 2010 at the early, is it right, assuming what happens?

Elsa Sung

Then that would be calendar year -- yes, that’s correct.

Peter Styris

So, what I’m curious about is, since a lot of money is going to that drug, what are your expectations assuming this what happens since nothing has happened yet, what are your expectations about the long-term potential of this drug?

Elsa Sung

Well, for the first fiscal year is started selling which is fiscal year 2010, and we only estimate in less than six months sales we should be able to generate over $20 million from our drug. And going forward in next fiscal year which will be 2011, we should have over $35 million in sales coming from that drug.

Peter Styris

And this would be a drug you would have five years exclusive on?

Elsa Sung

No, most likely it would be between 10 to 15.

Peter Styris

10 to 15 years?

Elsa Sung

This is the Class I drug.

Peter Styris

I know that the most you got on Class I drug, it was seven years.

Elsa Sung

Let me confirm with Mr. Xu, because my information might be a little bit outdated.

Peter Styris

Okay.

Elsa Sung

[Foreign Language].

Haibo Xu

[Foreign Language].

Elsa Sung

[Foreign Language].

Haibo Xu

[Foreign Language].

Elsa Sung

Okay. So, Mr. Xu just confirmed that in terms of the exclusive patents and technology and formula for LFAA, it should be a 15 years.

Peter Styris

Great

Elsa Sung

However, if other people take the good -- take good choosing, you know, develop their own technology and develop their own formula and they wanted to start selling the good thing related product, market if you feel to it. Our technology and formula are protected for 15 years.

Peter Styris

I see. It's technology and formula that's the thing.

Elsa Sung

Right. The technology to manufacture to producing this drug.

Peter Styris

Great.

Xu Haibo

Elsa.

Elsa Sung

Yes

Xu Haibo

[Foreign Language].

Elsa Sung

[Foreign Language].

Xu Haibo

[Foreign Language].

Elsa Sung

Okay. So Mr. Xu just confirmed that government actually has a protection period for all new drugs and it could go between five to seven years meaning, you know, highest could go to seven years. So Peter your understanding is also correct. I guess it's the definition of pattern.

Peter Styris

Okay. So the government would protect a drug for five or seven years, but your technology pattern would be good for 12 to 15 years.

Elsa Sung

Yes, formula, yes.

Peter Styris

Okay. [Foreign Language].

Operator

And there are no more questions at this time. So I would now like to turn the call over to Crocker Coulson for closing remarks.

Crocker Coulson

Okay. Operator, we would -- may we just give people one last chance to ask a question if you don’t have anymore then I will wrap it up.

Operator

You have a follow-up question from the line of [Angel Lew]. Please proceed.

Angel Lew

Final question regarding the FAA, how much CapEx you will spend on to have the new facility because its mutual if you have 130 million to purchase the whole drug, how long did you see the -- investment turn back, I mean can you guide us on the gross margin of the FAA?

Elsa Sung

[Foreign Language].

Xu Haibo

[Foreign Language].

Angel Lew

[Foreign Language].

Xu Haibo

[Foreign Language].

Angel Lew

[Foreign Language].

Elsa Sung

Okay. So, the additional CapEx from -- for investing LFAA would be approximately $10 million, and we expect to have the entire investment on this drug to recover within three years, and possibly would be quicker. And our margin on this drug would be the best among our current products, which will be close to 90% gross margin on this drug.

Angel Lew

Will we see the (inaudible) CapEx happening 2009 fiscal year or 2010?

Elsa Sung

[Foreign Language].

Xu Haibo

[Foreign Language].

Elsa Sung

So, the timing will depend on the status of finalizing the agreement with Shandong University and most likely as soon as we finalize it then we would be have to start investing in the capital which would be in 2009 in that case.

Angel Lew

[Foreign Language].

Elsa Sung

Thank you.

Operator

And there are no further questions at this time.

Crocker Coulson

Great. We really want to thank everybody for all of your questions on the call today. As you can tell Genesis had a successful first quarter, and looking forward to a very successful fiscal 2009. And on behalf of the entire management team we want to thank you, and if you come to China feel free to contact us and we will be happy to arrange a visit or tour of the facilities.

And again we are looking forward to coming back to you early next year to talk about our second quarter fiscal year 2009 results. This does conclude our call.

Operator

Thank you for your participation in today's conference. This does conclude the call. You may now disconnect. Good day.

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