BMP Sunstone Corporation Q4 2008 Earnings Call Transcript

Mar.17.09 | About: BMP Sunstone (BJGP)

BMP Sunstone Corporation (BJGP) Q4 2008 Earnings Call Transcript March 17, 2009 5:00 PM ET

Executives

Ashley Ammon MacFarlane – IR, Integrated Corporate Relations, Inc.

David Gao – Chief Executive Officer

Fred Powell – Chief Financial Officer

Analysts

Ding Ding - Susquehanna Financial Group

James Tong - Roth Capital Partners

Katherine Lu – Oppenheimer

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 BMP Sunstone Corporation Earnings Conference Call. My name is Kamesha and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference (Operator instructions) As a reminder, this conference in being recorded for replay purposes. I would now like to turn the call over to Ms. Ashley Ammon from ICR. Please proceed ma’am.

Ashley Ammon MacFarlane

Thank you, operator. 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 facts 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 Gao for a strategic overview of the business and then to Fred Powell will provide a financial review. David?

David Gao

Thank you Ashley and good morning everyone. Thank you for joining us for our Q4 and full-year 2008 conference call. I am proud to say that 2008 was a year of great progress for BMP Sunstone and our results got better and better throughout the year as we executed and integrated our acquisitions. High margin products increasingly contributed to total revenues through the year and enjoy [ph] our gross profit and the recurring operating performance. Due to this our operating income and net income performance on our GAAP and non-GAAP basis improved substantially from prior quarters. The global economic crisis is impacting companies around the world and we are diligently watching this of course, but China’s healthcare market is still growing exceptionally fast. And they believe that our services in the products have shown resilience thus far even in the middle of the crisis.

China’s healthcare reform creates some changes and challenges overtime. However this could present some new opportunities for companies like us who are well positioned. They believe that government increasing quality standards and expenditure ultimately creates more opportunities for the leaders with high quality products and especially with niche premium products. We are well positioned to take advantage of the opportunities because we are diversified on the product side with branded OTC, as well as prescription products and on the service side with our marketing capabilities, as well as our manufacturing business are indeed in licensing and we are also geographically diversified. Over the year of 2008, we have successfully transformed that the company from a low margin distribution business to a high margin fully integrated specialty pharmaceutical company.

Total revenues for the Q4 increased to $36.6 million from $9.2 million last year. Our gross margin was approximately 52% including Sunstone’s 77% gross margin. Our non-GAAP net income for the quarter was $3.5 million compared to a loss of $5.3 million in the prior year period. For the full-year, revenue increased to $114.9 million from $31 million in 2007. And non-GAAP in net income was $7.2 million compared to a loss of $9 million in 2007. We now have a strong presence in China’s most important healthcare market of Beijing, Shanghai, and the Guangdong Province. Our product portfolio is notably more divorce. With national brands like GoodBaby, Confort, and Nemei as well as with in licensed products including Propess, Anpo, and Ferriprox which we officially launched in 2008 to allow us to access niche markets that were previously underserved in China. I would like to highlight some of the important milestones we reached in 2008.

Our 2008 financial results overwhelmingly reflect at the strength of our corporate development strategy, which was active and effective. Since the beginning of the last year, we have been quite busy completing the Sunstone, Rongheng, and Shengda acquisitions as planned. Sunstone is a proven leader insisting [ph] on the marketing OTC products with sales to our growth approximately 60% of all retail pharmacies in China and it is a very competing product portfolio of more than 75 SAP approved products. The integration process went smoothly and today our combined company is profitable on an operating basis and is well positioned to drive significant growth in the future as we roll-out new products, especially in the area of pediatrics in the women’s health. Sunstone received high tax status in the fourth quarter and we are very glad to be recognized that because it lowers our tax rate substantially to 15% from 25% for three years starting in 2008. Rongheng enhanced our Shanghai presence and most recently we started to leverage our Beijing MedPharm products across the Rongheng hospital network. This business now operates a close to breakeven and we are confident that Rongheng’s operating performance can continue to improve through the year.

Shengda is a leading manufacturer with antibiotic pharmaceuticals and has approximately 75 products license already approved by SFDA. Shengda’s overall pediatrics products fit nicely into our GoodBaby brand and also complement our pediatrics franchise in both the OTC and the Rx markets. We are currently repackaging and rebranding Shengda’s products and soon we will launch them under the GoodBaby brand through Sunstone sales force. This effort is progressing as planned. In 2008, we also executed on our strategy to drive revenue growth through new product launches and they kick off several new products at the end of the year. At Sunstone, we enhanced our product portfolio with GoodBaby vitamin lunch ended acquisition of the Runchang capsule. The GoodBaby multivitamin granule is an ideal expansion of our GoodBaby brand as it builds on our existing brand strength in the pediatric focus. Demand for vitamin supplements is a substantial emerging market opportunity in China were vitamin deficiency is common and we estimate the total market in China for pediatric vitamin can reach 2 billion RMB within the next five year, out of substantial sustainable annual growth rate of 15%.

Rongheng’s SFDA approved already and importantly the acquisition gives us a sole proprietary ownership of the unique technology for hard liquid filled capsules. We acquired the manufacturing volume and we intend to utilize this technology for other products as well. We think this innovation gives a competitive advantage and we intend to fully elaborate our existing China’s and sales platform to capitalize on the market demand for similar products, especially within the area of almost on the children’s health. During the year of Beijing MedPharm we began marketing and distribution Ferriprox and our five-year licensing agreement with Apotex Inc. Ferriprox is a cost-effective thalassemia treatment, which will result increase drug compliance than competing injectable formulations. Through the year we continue to see that Ferriprox has gained significant attraction in sales and we believe it can have meaningful revenue contribution to Beijing MedPharm in 2009 and beyond. Lastly, our investment in GPC along with Alliance Boots is progressing nicely and we were pleased with the top line performance and the bottom line growth.

At this time I will turn the call over to Fred Powell, our Chief Financial Officer, who will review our fourth quarter and the full-year financial results. Fred?

Fred Powell

Thank you David. Our full-year and fourth quarter results are detailed in the press release, so let me run through some of the key points for the quarter and for the full-year. Our key revenue highlights are the following, branded OTC, which is our Sunstone products traded $65.7 million in revenue for the period February 17 through December 31 and GoodBaby products accounted for 81% of that total. Distribution products which reflects Wanwei and Rongheng increased 59% to 43.7 million from 27.9 million the year before. Rongheng was about 10 million of that and contributed to the results in the third and fourth quarters of 2008. Licensed products increased 76% to 5.4 million from 3.1 million in 2007 and reflects sales and marketing efforts at Propess, Anpo, Ferriprox, and Galake compared to the prior year. Revenues for the fourth quarter of 2008 were $36.6 million compared to $9.2 million in the fourth quarter of 2007. Sunstone contributed $21.2 million in revenue during the fourth quarter of 2008 and was not yet acquired in the prior year.

Revenues from distribution were $13.9 million for the fourth quarter of 2008 compared with $8.1 million in the comparable period of 2007. Revenues from licensed products were $1.5 million for the fourth quarter of 2008 compared to $1.1 million in the prior year. Our gross profit increased to $19.2 million from $1.5 million in the fourth quarter 2007. Gross margin of 52.8% up substantially from 16.2% in the prior year reflects the higher margin revenue contribution from Sunstone and license product sales versus distribution revenue. Non-GAAP operating income reached $3.5 million compared with non-GAAP loss of $4.7 million for the fourth quarter of 2007. In the fourth quarter, we continued to generate non-GAAP net income and report approximately $3.8 million compared to non-GAAP net loss of $5.3 million in the prior year. This is considerable improvement from earlier in the year, as well as in the prior year quarter. Please see our press release for reconciliation of GAAP to non-GAAP, but excludes amortization related to acquisitions that discount and issuance amortization and stock-based compensation.

When looking at the full-year, our EBITDA comparison highlights significant operating improvement and we reached full-year EBITDA of $10.6 million in 2008 compared with a loss of $10.7 million in 2007. Our cash position was $15.7 million and we had notes receivable about $15.8 million totaling approximately $31.5 million at December 31. All the notes receivables are guaranteed by established banks in China and have maturities of six months or less. Finally, we have generated positive cash flow from operations of $3.3 million in 2008. Since the beginning of this year 2008, we exchanged or called all of the convertible notes that were coming due this may and after the completion of the calling of these notes we will have $25 million of senior and subordinated notes outstanding which mature in July of 2011. This significantly enhanced our financial flexibility and we continue to focus on utilizing our cash to pursue profitable growth to drive shareholder value over the long-term.

Next I will turn the call back to David who will discuss our 2009 outlook. David?

David Gao

Thank you Fred. As we progress through 2009 we are confident in our continuous growth and improved revenue and the profit performance. Given (inaudible) global economic environment and despite the uncertainty caused by China’s healthcare reform plans, China’s healthcare sector presents a unique growth opportunity for the companies that are high value, high quality providers like BMP Sunstone. The reform program including more than 800 billion RMB in incremental spending and aim for universal coverage by 2012. Within this context our value proposition is extremely competing and we are well positioned to capture the opportunities presented by reform and by China’s stimulus program. We have combined capabilities in several of the largest market aimed at relatively underserved patient populations. We also provide products at a variety of price points ranging from basic OTC products to high value in licensed prescription drugs. This level of diversity strengths our organization to succeed even with a variety of regulatory changes.

Some of our OTC products are currently are on the essential drug list and we have many in the pipeline reserve that we could roll-out to go after high volume sales for the rural areas. At the same time we have many high-end products, which we will likely now to be included on the essential list, but which patience will still pay for. Furthermore we believe we will continue to license additional products from around the world as global pharmaceutical companies try to enter the Chinese market. To the extent that reform efforts make the market enter more complicated our services will be in great demand. Through 2009, we will continue to focus on our key initiatives. First, continued revenue growth and the profitability. We expect the revenues from Sunstone in the Beijing MedPharm to accelerate as we continue successful marketing of our existing products and the introduction of new products through our national distribution network. In addition, we expect that each operating business unit to be profitable for the full-year of 2009.

Second, synergy realization and expense controls. We carried out cost-cutting initiatives across our organization in 2008 and we will continue to do so in 2009. Our greatest focus in 2009 is delivering enhanced profitability and this is why our projected revenue is growing 35% while our EBITDA, net income EBITDA should increase by at least 50%. So, we are stringent on the cost control and aggressive on pursuing profitable revenue of growth. To this end our third key initiative is product to portfolio expansion. We have been actively pursuing new product opportunities for both our branded OTC and Rx franchises. We exceeded our goal for new product launches in 2008. We will continue to expand our product portfolio by internal development, as well as product targeted acquisition.

Moving on to our guidance, we anticipate revenue growth of at least 35% over year, which brings us to $150 million to $160 million in 2009. Our EBITDA performance should also continue to improve and right now we are expecting EBITDA for the full-year of 2009 to reach $16 million to $18 million. Please note that today we adjusted our GAAP and non-GAAP net income expectation to account for the interest expenses and debt discount. Amortization will incur through the year related to the convertible FAS we just issued due in July of 2011. We now expect net income to be $2 million to $4 million and we expected non-GAAP net income to be $9 million to $11 million. This guidance takes into account our previous launched new products, as well as the sales and marketing expense in China resulting from continued improvement of performance at all of our business units, especially at Sunstone. In 2009, we expect all of our business units to be profitable and to outperform the market growth, which we expect to be around 15% to 20%.

In summary, the management team will continue focusing on revenue in especially profit growth, market penetration of our existing and newly launched products, expansion of our proprietary in licensed product portfolio at BMP China, and solidification of Sunstone's market leader position through continued investment in its private portfolio in national leading brands. I believe the previous achievements were only the force (inaudible) in the value creation for our shareholders. We have established a solid foundation with all necessary building blocks and a very strong management team over the past years. I have more confidence than ever that as a (inaudible) devastation, BMP Sunstone would achieve the strong momentum for growth and become one of the most successful pharmaceutical companies in China over the next three to five years. That concludes our prepared remarks.

Operator, we are ready to take any questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Ding Ding from SIG. Please proceed.

Ding Ding - Susquehanna Financial Group

Thank you. Congratulations on a strong quarter and closing the financing yesterday. I noticed you have a very strong quarter for Sunstone this past quarter. Can you share with us what drove Sunstone growth this quarter, any other factors in addition to the favorable fourth-quarter seasonality? And secondly, what is your expectation on the impact of volume and margin on Sunstone business due to China healthcare reform going forward? Thank you.

David Gao

Okay. Thank you Ding Ding. Here is David. I think the person probably I should ask to answer the question is Fred and Martyn if you have any comments on this. Just the short answer, I think obviously the Q4 is always the strongest of quarter of Sunstone and actually, but even compare with the fourth quarter in 2007 Sunstone still has a very strong growth. The reason is obviously there is several products, that is very strong. The top product is to treat the cold, the common symptom for the children's, (inaudible) still at a point of high growth, that is, our market growth rate is over 15%, which does really constitute about 50% of the Sunstone actually GoodBaby products. And secondly the largest products, which is to treat the cough for the children's has an extraordinary strong growth because that product has just launched since last two or three years and also we have some new product launch. Obviously that is not a significant contribution yet, however it is going to start actually to show the contribution in Q1. So, not just I would say so far even we have not finished Q1, we are right in the March, but our January and February sales is still very strong and for the healthcare reform, healthcare reform there is still many kind of changes, still not very clear, even the government published the policies, but the execution of the details is not very clear outright. However in general, we would think that reform would benefit for the companies, especially targeting the high-end, both in the low-end market. But the high-end market obviously is going to be benefit from the stimulus plan and also to free the pricing free the high-end of pricing for the drugs that is on the nonessential list, drug list. But for the low end is the reform has a broader coverage, actually in the China government to talk about by 2012 as I mentioned in my remarks, they won’t have a 100% coverage for the whole China. This is significant, if you just talk about $20 or maybe $30 or $40 per person and at times 800 million farmers is going to be huge market. I think our company, especially Sunstone, will have a strong reserve in our pipeline, which we really have the drugs approved by the SFDA, we came quickly to capture that market segment.

Ding Ding - Susquehanna Financial Group

Great thank you. Second question, if I may, I am wondering how is Wanwei and Rongheng doing, given it is relatively small size as pharma distributor, and the overall pressure on the smaller distributors, as a result of China healthcare reform, what is your strategy on Wanwei and Rongheng going forward?

David Gao

Very good question, actually as we know China is still, the market has been changing radically and also the distribution basis are very fragmented industry. Actually, we believe and most people believe as we move forward there is only two type of distributors that’s going to survive. The first type of distributors obviously is the large distributors by the scale such like GP Corp you know what they acquired together with Alliance Boots, this company is getting bigger and bigger, is getting you know in region, the company maybe invoiced [ph] to five years, there is the five or ten such big companies exist. And another type of company distributor will exist, which is the distributors with the very special unique products focused on the products that is more like a specialty distributors. Actually we transformed the both Wanwei and Rongheng in this type of distributors as we, you know, before we acquired so that was our strategy from very beginning. Currently we are trying to control their revenue growth so that we can end up, but however we are changing the product mix. Our plan is going to radically increase our own product of distribution through these distributors, so that gives them a high margin. We believe this is the second type of distributors that is going to survive in the long-term. Other than this two type of distributors it is going to be -- basically it is going to be diminishing over time.

Ding Ding - Susquehanna Financial Group

Great thank you very much and lastly if I may and I will get back to the queue, David what is your outlook on the new product acquisition outlook for Sunstone in 2009 and also the in licensing business, for your in licensing business, do you see more opportunities in 2009 or do you think there is challenge and pressure in terms of ---?

David Gao

Actually we look at the challenges from the changes, but obviously changes provide opportunity. As I mentioned for Sunstone, our strategy right now is very quickly to expand the Sunstone portfolio under the same brand and sales through our sales force that means for 2009 is going to be a product year for Sunstone. Right now as you know we acquired Shengda, we are going to use the same strategy that is the product to focus acquisition strategy acquire one or two additional companies that both has a dozen new products, so that we can just repackaging the products or rebranding the products and sell the products quickly to capture mostly in the lower end market, but also a few products is going to target even the high end market. When I talk about the lower end market, not necessarily mean the lower margin, actually the net margin is going to be stay the same like our current product because by lower end you don’t need a big promotion kind of expenses. For BMP China, you know Beijing MedPharm side, we believe we are still on the plan, we have a one new product rating the pipeline, which is the Ethypharm product, is treating the cancer supportive products that treated the Nausea, which is planed to launch by the end of 2009 at the same time we are having some discussions, intensive discussions to some multi-national companies and try to take hold of the product that we shall really approved in China. So that means, once we takeover the products than we can launch this year too.

Ding Ding - Susquehanna Financial Group

Great thanks very much.

Operator

And your next question comes from the line of James Tong from Roth Capital. Please proceed.

James Tong - Roth Capital Partners

Hi congratulations for the quarter. Well I have a question on the gross margin, I notice that there is a great significant improvement for the gross margin this quarter, is this going to be used as a forward projection center?

Fred Powell

I can answer that one and you are probably looking at the gross margins in the press release, we put up the 10-K a little bit earlier today as well. When you take a look at the quarter, it was an extremely strong quarter for Sunstone, which has the higher gross margins in the business versus the distribution you will see that in the third quarter, actually our gross margins were weaker, we had additional distribution so, we think we are going to be right around the 50% gross margin percent going forward.

James Tong - Roth Capital Partners

And second of all is that the – I think Fred, it is also for Fred, can you give me a breakdown for your notes payable and accounts payable and your balance sheet? The notes payable here is 33.6 million, and accounts payable of 27.5.

Fred Powell

With the notes payable and the balance sheet as of 12/31 are very different then they are as of today, maybe I will give you a quick reconciliation between the two because as of the end of the year we are $23 million coming due as of May 1 of this year. That $23 million is now extended through May 1, 2011. We did the first $10.7 million of it in January and the remaining amounts we announced it yesterday. The total debt for both senior and subordinate debt as of right now from that $23 million is $25 million. The remaining difference is normal bank loans or operating loans that we have at Sunstone and that is approximately $10 million and that fluctuates during the year it will go up little or down a little, but these are typically one year notes working capital notes that we renew for the business at Sunstone getting us to the total of $33 million.

James Tong - Roth Capital Partners

I see. And the accounts payable, 27.

Fred Powell

Yes.

James Tong - Roth Capital Partners

And the accounts payable for the $27.5 million.

Fred Powell

Okay. Most of those they are actually operational accounts payable, it would be for material and supplies for the Sunstone business as well as our distribution business for Wanwei and Rongheng. Almost over 95% of our total payables come from the operating businesses for the supplies that we use as well as their raw materials.

James Tong - Roth Capital Partners

Yes. Okay the second question I have is that, probably the third question that David has talked about I thought alluded to acquisition for 2009, is there any target for acquisition or is there any initiative of that?

David Gao

Yes. As I mentioned in my remarks, actually we do identify some acquisition target at the Sunstone level, but it is not at the corporate level, obviously because in the current marketing environment we don’t plan to do any significant acquisitions which require a significant cash for the year, however we don’t want to undermine the future growth in the long run and for the Sunstone obviously we still continue to look for the companies, which has the good products, with good feet in our strategic focus and at the same time the company is in lack of the brands and the sales channels which we are very strong. So, we can leverage our competency to leverage and to grow our business immediately.

Fred Powell

And James just to add on top of that. As David mentioned we are looking at additional products, but those products would be coming out of and financed by the operating cash flow generated by Sunstone as opposed to any corporate equity or debt that we would need to do additional acquisitions and that would come from really just additional products that we are adding.

James Tong - Roth Capital Partners

Okay thank you.

David Gao

Sure.

Operator

(Operator instructions) And your next question comes from the line of Katherine Lu from Oppenheimer. Please proceed.

Katherine Lu – Oppenheimer

Hi good morning David, good afternoon Fred. Thank you for taking my questions. Congratulations on a very strong quarter. Your ’09 guidance is very impressive no matter from the top line or the EBITDA basis. David could you remind us which products you think would be the key growth driver for 2009? And could you also remind us revenue guidance for Shengda? In terms of integration of Shengda do you think it would be more price driven or volume driven?

David Gao

You mean the Shengda products?

Katherine Lu – Oppenheimer

Right.

David Gao

Okay. Katherine thank you, I guess it is good afternoon here in New York, anyway the – I think the main driver from our growth for 2009 obviously the Sunstone business has been performing very strong to good indicator, we had a good start for this year in January and February. I think our existing product sale is going to outperform the market growth. While the market growth we still anticipate is somewhere between the 15% to 20% and also the – that is good you mentioned about the Shengda because Shengda was not even in our guideline because I actually we acquired the license in January, so obviously we are going to start consolidating our fees the bottom line because we own that company 50%. So, that guidance was not included in our guidance. I think the Shengda because we have been to a rebranding on the repacking of the Shengda product. So, actually we are anticipating however the increase the price for the Shengda products. Once we are re-branding or repacking the products and for Beijing MedPharm as you see the 2008 has a good growth and we are anticipating what we have in 2009 is a similar type of growth in 2008 over 2007 and one of the reason obviously because of the products at Beijing MedPharm there is no competitor actually it is quite unique products and it is still in the early stage of the development. So, we are expecting this would provide kind of the high growth for 2009.

Katherine Lu – Oppenheimer

Okay great. That’s very helpful. And then in government healthcare reform draft that was issued in January and also last November, it seems the government will have increased focus on women’s health especially to improve the standard of labor and delivery, so I am just wondering if any of your product will benefit from this government healthcare reform.

David Gao

I think that as I said as a government healthcare reform actually this is continuing kind of action by the government so some party it is not very clear, however we think for the high-end products for example Anpo and the Propess. Propess actually we don’t see there is any price sensitivities there, so that is really still the kind of a one-time spending for the women to deliver the baby in the lifetime and we think we would be less effected by the pricing control and the Anpo is still performing very strong. So, both products are already qualified as the forced align treatment. It is not just by the product the chemical compound, but also by the trademarks that is, as a guideline, which is very, very unusual in China because that’s disposed products a unique products. So, we still think this product will have the contribution for the growth. I hope this did answer your question.

Katherine Lu – Oppenheimer

Sure definitely thank you. And Fred, could you remind us the amortization schedule for your convertible debt?

Fred Powell

The amortization schedule for the convertible debt, we – the debt that we issued of $25 million, 12.5% goes through July 1 of 2011. There are no warrants attached. We think in the current year, we will have a tax discount of $1.2 million [ph], 2011 approximately $1.9 million and then coming back down again in 2011 down to approximately $1.2 to $1.5 million again. So, for the current year, we would expect to have additional debt discount of about $1.2 million.

Katherine Lu – Oppenheimer

Okay great thank you and finally, and for David, you mentioned there are couple of products that can potentially be included in essential drug list, I am just wondering in terms, yes there is a lot of uncertainty related to healthcare reform, do you feel your current sales and marketing force is big enough to allow you to maximize the benefit from this healthcare reform?

David Gao

Thank you. That is good question. Actually since last year, actually the quite significant increase our sales force at the Sunstone level and so we increased our sales force from 300 to 500. Another thing we think we are very well positioned to capture the rural market because our product is really very strong in the tier 2 and tier 3 cities, which could easily reach out to the rural area compared with some of our competitors and which has only the sales channels and control in the tier 1 cities. Since we are very well positioned to tier 2, tier 3 cities, so actually for us it is much easy to reach out to the rural market.

Katherine Lu – Oppenheimer

Okay great. Congratulations.

Fred Powell

Thank you.

David Gao

Thank you.

Operator

And we have a follow up question from Ding Ding from SIG. Please proceed.

Ding Ding - Susquehanna Financial Group

Thank you for taking my follow-up question. On your in license business how is inventory level for this quarter, I think for the first half of 2008 you had high inventory level of two to three months that has come down in third quarter, how is inventory level right now and going forward?

David Gao

Fred do you want to answer the questions or you want me to answer the question?

Fred Powell

I can answer the question. You are right Ding Ding. We saw an increase in the inventory level that we had obviously – tier 2 distributors that had left Wanwei and that corrected itself in the third quarter and we see that still unlined with no significant deviation as of the end here as well as beginning into the beginning of this year. So, it is in property relationship to the sales that we’ve had.

David Gao

Ding Ding, let me do some additional answer. Actually for the in licensed products, our in licensed products the volume was low that is 2006 or 2007, we keep three months inventory, the reason for that is because the volume is low, so anytime as you place the orders you want to have a kind of a backside and a certain back side, so you will have to just do it and as we move forward obviously our volume is getting bigger. Our intention is – our plan is to keep the inventory level for in licensed products within a year, no within one month. So, actually anytime we place the order we are trying to just replace one month volume.

Ding Ding - Susquehanna Financial Group

Okay great that is very helpful. And secondly on the cash obligation for 2009, other than I just wanted to get an update on your payment schedule for Shengda you mentioned you will be owning 50% of Shengda and also for the Runchang capsule acquisition, so besides those two items any other cash obligation you are expecting for 2009 and what is your CapEx requirement for 2009?

David Gao

There is not significant other cash obligations of the company, we will have capital expenditures as we have had in the prior years, I would expect that we will continue to see that somewhere in the $2.5 million to $3 million range.

Ding Ding - Susquehanna Financial Group

And Shengda payments is that going to be paid out in installments or –

David Gao

Yes you are right, actually we obviously we had a good -- actually payment terms obviously Shengda the reason obviously so we just are trying to you know control our cash expenditure. We still plan by the four installment step by step to acquire 50%, but at the same time they were also steel plant for our core additional 25%, right now we are still under negotiation so we see the local covenant and however that expenditure is going to be under the Sunstone, so we feel we have enough cash to take care of that. And at the same time I think the Runchang capsule is already completed, so there is no additional cash needed for that products.

Fred Powell

Again just a little bit follow-up and you are right David. What we were able to do is actually extend it over five equal payments of the remaining $2 million, so you will see on our balance sheet as of the end of the year our original payments and then the remaining $2 million will come out of operating cash flow for Sunstone for this year taking place at the end of 2009.

Ding Ding - Susquehanna Financial Group

Very helpful thanks. And just last question, I notice your sales and marketing cost for the fourth quarter had an uptick percentage wise, should we expect this to be reflective for 2009?

Fred Powell

When you say an uptick in terms of total dollars or percentages?

Ding Ding - Susquehanna Financial Group

Percentage. So, this quarter you had about 36.6% versus last quarter I think, third quarter ’08 was 30%.

Fred Powell

I think, we did have an uptick in both obviously I just want to make sure we were obviously the commissions go through there and we have the higher sales that was one of the reasons driving the higher absolute dollars, but with the percentages yes we had a higher percentage than we had in the third quarter, we think that it is going to be more normalized a little bit lower in the mid 30s to 34%, 35%, but the fourth quarter was higher than in prior quarters.

David Gao

Let me say this, I think the fourth quarter because I need to really confirm still I think that has also included the one-time payment for Runchang capsule, which is about 4 million or 5 million RMB that is the one-time charge.

Ding Ding - Susquehanna Financial Group

That was included in the sales and marketing cost?

David Gao

I believe so, unfortunately we cannot amortize that so we have to record the one-time charge.

Ding Ding - Susquehanna Financial Group

I see. Okay thank you.

Operator

And we have a follow-up question from James Tong from Roth Capital. Please proceed.

James Tong - Roth Capital Partners

I think Ding Ding was going through the light, I am going further here, so I was looking at the tax that you guys $1.4 million for tax refund.

David Gao

Yes.

Fred Powell

What happened was going from the 25% down to the 15% is effective for all of 2010 [ph]. Therefore for the asset spent that actually would benefit in the fourth quarter of 2008 correcting the entire year.

James Tong - Roth Capital Partners

So, then going forward your effective tax will be 15% or around 17% or just exactly at 15%?

Fred Powell

We would expect it to be right at 15% going forward. For Sunstone, that’s right.

James Tong - Roth Capital Partners

Okay, so the whole corporation will be --?

Fred Powell

Well it is difficult because what happens is there is no benefit of the headquarters in Beijing or in the US. There is no offset there. With taxes we need to do it on each entity by entity basis Wanwei and Rongheng will remain at 25% whereas Sunstone will have the 15%. We certainly expect the lions share or the process before taxes to come from Sunstone. So, it is going to be very close to 15%.

James Tong - Roth Capital Partners

Okay, thank you.

Operator

At this time we have no questions. I will now turn the call back over to Mr. David Gao for closing remarks.

David Gao

Thank you everyone.

Operator

This concludes your presentation. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!