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Executives

Diana Huang - Investor Relations Manager

Zhilin Li - President, Chief Executive Officer, and Interim Chief Financial Officer

Sam Hsing - Corporate Vice President

China Pharma Holdings, Inc. (CPHI) Q4 2012 Earnings Conference Call March 15, 2013 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fiscal Year 2012 China Pharma Holdings Incorporation’s Earnings Conference Call. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, March 15, 2013.

I would now like to hand the conference over to your host today, Ms. Diana Huang, Investor Relations Manager. Thank you. Please go ahead.

Diana Huang

Thank you, operator. Good morning ladies and gentlemen, and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ full year 2012 earnings conference call. I am Diana Huang, the company’s Investor Relations Manager.

Speaking on the call today are China Pharma’s President and the CEO and Interim CFO, Ms. Zhilin Li and the Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of this call. The company’s earnings press release issued earlier this morning is available on our website at www.chinapharmaholding.com. I would like to remind our listeners that on this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks as market and customer acceptance and demand for our products, our ability to market our product, the impact of competitive products and pricing, the ability to develop and launch new products on a timely basis, the regulatory environment including government regulation in the PRC. Our ability to obtain the regulatory approvals become most relied on products, fluctuation in operating results including spending for research and development and sales and marketing activities and other risks detailed from time to time in our filings with the SEC. In addition any projections as to the company’s future performance represents management estimations as of the date March the 15, 2013, China Pharma assumes no obligation to update those projections in the future as market conditions change.

Now, it is my pleasure to turn the call over to China Pharma’s CEO and Interim CFO, Ms. Li to make her opening remarks in Chinese which will be translated by Sam. Afterwards Sam will continue translating Ms. Li’s detailed discussion of the company’s full year 2012 financial results.

Zhilin Li

(Foreign Language)

Sam Hsing

Thank you, Diana and good morning everyone. I would like to thank each of you for joining us today for your continued support of the China Pharma. The healthcare reform has produced encouraging results in improving the standards of the healthcare service for people in China. The changes produced by the reform, however, have created a pricing pressure on nearly all pharmaceutical products across the industry, and we expect this environment to continue for some time to come.

The economics and the pharmaceutical challenges and uncertainties, rising cost and price cutting have negatively impact our business in 2012, which leads to the overall climb in sales of our products for the mandatory requirements of new GMP requirements by creating of our dry powder injectable line and liquid injectable lines must be completed by the end of the 2013. We have adjusted our general sales and the credit policies to a conservative spends since the beginning of the 2012 in order to issue the capital requirement for new GMP upgrading requirements or mix and control and improve the growing accounts receivable.

We have completed the planning design and our environment campaign in patient evaluation and commenced the construction related to certain required facility and equipment. We expect the launch of the Candesartan in the 2013 to bring positive streams to our performance. I will now read the rest of Ms. Li’s prepared remarks in English.

The economic and pharmaceutical challenges and uncertainties have negatively impacted our business in 2012, which leads to the overall decline in sales of our products. For the year ended December 31, 2012, we have certain drop in financial performance. Revenue decreased by 33% to $54.5 million as compared to $81.2 million in the year ended December 31, 2011. This decrease was primarily from our CNS Cerebral & Cardio Vascular product category in terms of the decrease in dollar amounts approximately $10.6 million, and that just gives you this product category in terms of percentage of the decrease in revenue approximately 24%.

In the year ended December 31, 2012, we continued to execute our business strategy of spending revenue from our core portfolio of the products, while continuous development process of the new products. However, the year was challenging one as the implementation of the healthcare reform has resulted in increased pricing pressure, a lower gross profit margin across almost all pharmaceutical products. The products in our pipeline focusing slowly, but stiffly along the development process and are getting closer to product launch. The SFDA is also revising this production approval criteria and process resulting in longer approval time for new production applications across all type of products. In some case, they are aiding additional requirements for products already under review.

In November 2012, we received the production approval from the SFDA for Candesartan, our frontline drug therapy we developed for the treatment of hypertension. We plan to launch this product during 2013. The clinical trial for Rosuvastatin or the generic version of Crestor was completed in December 2010, and we are in the process of the applying for the production approval for this product in September 2010. We also completed Phase 1 of our clinical trials for our new antibiotic combination drugs.

We are currently moving ahead, and in Phase 2 of the trials for this drug. The following is the list of our current study of some of our pipeline products. Candesartan, we received the production approval from the SFDA for Candesartan, our frontline drug therapy we developed for the treatment of hypertension in November 2012. We plan to launch this product during 2013.

Antibiotic combination, we completed the Phase 1 clinical trials of our novel cephalosporin-based combination antibiotic in the third quarter of the 2010. We are currently in Phase 2 of the clinical trials, which is progressing well. Rosuvastatin is the generic form of Crestor, a drug from indication of the high blood cholesterol level. Clinical trials for these generic drugs were completed in the fourth quarter of 2010 and we have submitted application for production approval.

Heart disease drug, we are developing liquid oral medicine for the treatment of the coronary heart disease. This product comes with the patented traditional Chinese medicine TCM formula and we are currently conducting Phase 3 clinical trials for this drug due to improve the regulatory requests for clinical works. We adjust our anticipated completion timeframe for the clinical trials works for these products to 2013.

Overall, we believe the long-term growth prospects of the Chinese pharmaceutical industry remain unchanged in the golden decade of the pharmaceutical in China. We still expect growth. While in the earlier stage of the golden decade, the entire industry is required to upgrade our facility to the new GMP standards, which were published by the Ministry of Health of China on February 12, 2011 effective March 1, 2011. This round of upgrading is challenging for all players, and also means survival of the fittest. The new GMP standards significantly raised our standard in the PRC and present stricter mandatory requirements for, among other things, our manufacturing and the quality control process, key manufacturing and quality control personnel, and our supply and logistics chains.

Per those mandatory requirements, the upgrading of our injectable product line must be accomplished by the end of 2013. So far, we have initiated the construction work, the tendering and evaluation process for the equipment and are undergoing. Even under the upgrading pressure, we still firmly believe in our long-term prospects in China’s rapidly growing pharmaceutical industry. We expect established and differentiated products portfolio, extensive sales and distribution network, and growing pipeline of the generic and proprietary drugs. We are committed to continue to deliver sustainable long-term growth.

Now, I would like to review our 2012 full year financial results and balance sheet information. For the year ending December 31, 2012, our sales revenue was $54.5 million, a decrease of the 33% compared to $81 million in 2011. In the year ended December 31, 2012, revenue breakdown by product category showed small change in sales of the Anti-Viro/Respiratory products category represented 45% of total sales in the year ended of the December 2012 compared to 39% in 2011. The CNS Cerebral & Cardio Vascular category was stiffly representing 28% of the total revenue in 2012 and 32% in 2011. The Digestive Disease category represents 13% total revenue in 2012 compared to 15% in 2011. Other category represented 14% of revenue in 2012 and 2011.

Cost of revenue, for the year ended December 31, 2012, our cost of revenue was $38.7 million or 71% of total revenue, which represented a decrease of the $13.5 million from $52.2 million or 64% of the total revenue in 2011, a decrease of 29.5%. The decrease in cost of revenue during 2012 was not proportional to the revenue decrease, primarily due to decrease in our average units cost for inventory.

Gross profit and gross margin, gross profit for the year ended December 31, 2012 was $14.1 million, a decrease of the $15 million, or 51% from $29 million in 2011. Our gross profit margin in 2012 was 26% compared to 36% in 2011, without the effect of inventory obsolescence in 2012. Management estimated that our gross profits would have been approximately 29% in 2012.

The Healthcare Reform instituted by the Chinese government since 2009 has resulted in margin compression in most of the pharmaceutical products on the markets today, especially in the generic space, where many of our products are in. The decrease of the sales and the continuous increase of the purchase price of the raw material attributed to the decrease of the gross profit. Going forward, we expect to see the continued pricing pressure of the most products, but new products such as Candesartan and Rosuvastatin helps to support overall gross margin once they are launched.

Selling expenses, our selling expenses for the year ended December 31, 2012 were $3.54 million, an increase of approximately $0.1 million, compared to $3.44 million in the 2011. Selling expenses accounted for 6.5% of the total revenue in 2012 compared to 4.2% in 2011 due to many adjustments in our same proceeds from the healthcare reform policies despite as our decrease in sales, we required additionally personnel and expenses to support to the sales and the collection of the accounts receivables.

General and administrative expenses, our general and administrative expenses for the year ended December 31, 2012 were $3.31 million, decrease of the $0.41 million from the $3.72 million in 2011. General and administrative expenses accounting for 6.19% and 4.6% of our total revenue in 2012 and 2011 respectively. Income from operations, our operating income for the year ended December 31, 2012 was $5.9 million compared to $22 million in 2011, a decrease of $6.1 million. The main reason for the decrease were lower revenue, lower gross profits, and higher bad debt expenses in 2012.

Net interest income, net interest expense for the year ended December 31, 2012 was $303,431 compared to $247,990 in 2011, an increase of $55,441. Derivative gains, change to derivative warrant liabilities are recognized in the results of operations and resulted in the derivative gain of the $934,260 during the year ended December 31, 2011. There was no derivative gain during the year ended December 31, 2012. Income tax expense, in the years ended December 31, 2012 and the 2011 we paid income tax in the rate of 15%. Income tax expense was $0.98 million and $3.44 million for the year ended December 31, 2012 and 2011 respectively. We obtained the National High-Tech Enterprise status from the PRC government in the fourth quarter of 2010. With this designation, we are entitled to a preferential tax rate of the 15% for the years ending December 31, 2011, 2012 and 2013, which is notably lower than the separate income tax rate of the 25%.

Net income, net income for year ended December 31, 2012 was $4.6 million, a decrease of the 76% from $19.3 million in the year ended December 31, 2011. The decrease in net income was mainly due to the decrease in revenue, gross profit margin, increase in cost, and change in derivative gain. For the year ended December 31, 2012, earnings per basic and diluted common share was $0.11 per share compared to $0.44 per share in the year ended December 31, 2011.

Turning to the balance sheet, at December 31, 2012, we have $4 million in cash and the cash equivalents on our balance sheet as compared to $4.1 million as of December 31, 2011. Accounts receivable totaled $66.2 million as of December 31, 2012 compared to $69.7 million at the end of 2011. Working capital was $98 million versus $97 million at the end of the 2011. Inventory totaled $36.4 million as of December 31, 2012 compared to $30.4 million on December 31, 2011. In order to avoid any negative impact from our transition to our new production facility, new GMP upgrading and the construction, we have gradually increased our inventory to a relatively high level.

Overall, we continued to be excited about the market opportunities that lie ahead. By leveraging our core competencies and the differentiation in product portfolio, extensive product distribution network and the commercialization experience, we are confident in the task of maximizing long-term shareholders’ value.

With that, we will now open the call up to the questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Jason Wang from (indiscernible) Investment. Please ask your question now.

Unidentified Analyst

(Foreign Language)

Zhilin Li

Yes.

Unidentified Analyst

So, Ms. Li, we are interested in your business and we heard from last teleconference that you try to reduce your receivables as one of the most important work for this year. So, actually we read this year’s 10-K report, it seems that receivable is not improved too much, especially the receivables over 360 days to 770 days receivables even much higher than in the year 2011. We want to know what’s going on and we did some research it seems that your product is not sold in most of the coastal developed areas in China, instead your products are mainly sold in province like Sichuan, Anhui, and Hubei which are relatively under developed markets, where the receivables are difficult to collect. Can you explain what’s the reason, why you choose these markets your main markets? Thank you.

Zhilin Li

(Foreign Language)

Unidentified Analyst

(Foreign Language)

Zhilin Li

(Foreign Language)

Unidentified Analyst

(Foreign Language)

Diana Huang

I just would like to translate Ms. Li’s answer to Mr. Wang’s first question. Ms. Li answers that, because the majority of our existing products are prescription products, which are mainly sold to the hospital. And it is a Chinese phenomenon that the government-backed hospitals kind of (indiscernible) their payments. And therefore, the non-cash collection cycle, a common practice to do business with the hospital in China and because we have very few OTC, over-the-counter products and over 90% are prescription products, therefore, this non-collection cycle product phenomenon seems very obvious for China Pharma.

And Ms. Li continues that actually we have expense, these are, if you for quite a lot of time, but maybe you are new investor to our company, therefore she would like to explain to you again. And that’s actually in 2012, we did recognize certain improvements of the collection of accounts receivable. The cash and cash equivalents, we collected of course including the bank’s acceptance, we collected from the accounts receivable actually was bigger than the sales revenue. We recognized in this year 2012, which is improved compared to the condition in the previous years. And of course, during these adjusting periods in 2012 with respect to the accounts receivables, we did have the phenomenon as what you mentioned the long aging for accounts receivable increased. That if a problem cannot be solved in fact mainly, we are trying to solve the overall picture of accounts receivable, but we kind of addressed some other issues like the selecting of the federal customer in terms of their payable performance first.

Unidentified Analyst

Okay.

Diana Huang

That’s basically what Ms. Li’s response to Mr. Wang’s first question.

Zhilin Li

(Foreign Language)

Diana Huang

Ms. Li answered the second question, she said because in the previous years in order to have better performance in the penetrating in the markets and to expand our markets, we kind of invest lot of capital to some of the sales, because as you know, we have the long collection cycle of accounts receivables requires us to support our marketing and the sales expansion with a lot of money, but at that time in the previous year, because we do not have compulsory and large CapEx needs like what we have, the new GMP upgrading nowadays. Therefore, we acted aggressively to expand the sales markets and made a lot of purchase of the drug formula as you observed in financial statements, but since 2012, due to the compulsory requirements of the new GMP upgrading, we have to spend the capital to support the complexion and upgrading. Therefore, we adjusted our strategy to act more prudently with respect to the sales expansion in order to guarantee the CapEx needs and the payments for the milestone payments of the current patented products.

Zhilin Li

(Foreign Language)

Diana Huang

Ms. Li added in addition, the company also acts aggressively to seek bank project financing to support the CapEx needs, because the project financing from bank is lowest cost financing measures we have on hand. And as an important and famous company in Henan Province, we have the government and the bank’s support for this kind of financing. And in addition Ms. Li mentioned, due to our extremely low stock price to seek any financing from the capital market seems unreasonable nowadays for us.

Operator

Thank you for your questions. (Operator Instructions) You have follow-up questions from Mr. Jason Wang. Please ask your question.

Jason Wang

(Foreign Language)

Zhilin Li

(Foreign Language)

Jason Wang

(Foreign Language)

Zhilin Li

(Foreign Language)

Jason Wang

(Foreign Language)

Zhilin Li

(Foreign Language)

Jason Wang

(Foreign Language)

Zhilin Li

(Foreign Language)

Diana Huang

Mr. Wang continued to ask the sales performance of China Pharma in different provinces in China, because so far based on his research in certain provinces like Zhejiang, Shanghai and Jiangsu which are more developed provinces and with better average general accounts payable performance. He did not observe much sales activity from Helpson, which is a subsidiary of China Pharma. And he asked Ms. Li, why China Pharma did not seek deeper penetration to those more developed markets? Then Ms. Li answered that actually China Pharma has quite our sales coverage, the majority of the provinces in China, and we did have sales in the provinces as what you mentioned. As for such as (indiscernible) provinces, the sales activity – the purchase on sales activity in this province was quite well under regulation and developed, and only drug included in their drug purchase system announced to result in that province. And we currently have two or three products included in their system and Mr. Wang continued to ask that he is planning to make a visit to China Pharma in early April and Ms. Li welcomed his visit.

Operator

Thank you. (Operator Instructions) There are no more questions from the phone line. I would like to handle the call back to the management for closing remarks.

Sam Hsing

On behalf of entire China Pharma team, we would like to thank you for your interest in the company and the participation on this call. For any of you traveling to China, we always welcome and encourage any visitors from our shareholders, potential investors, and analysts. This concludes China Pharma’s 2012 earnings call. Thanks.

Operator

Ladies and gentlemen, that concludes the conference for today. Thank you for your participation. You may disconnect the lines.

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