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Biostar Pharmaceuticals, Inc. (NASDAQ:BSPM)

F4Q 2012 Earnings Call

April 15, 2013 9:30 a.m. ET

Executives

Ronghua Wang - Chief Executive Officer and Chairman

Qinghua Liu - Chief Financial Officer

Ally Gong - Secretary of the Board

Analysts

Charles Ognar - Ognar Trading Co.

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Biostar Pharmaceuticals Incorporated 2012 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to our translator, [Chris Lee]. Go ahead sir.

Unidentified Speaker

I am Chris Lee, the translator on Biostar. With us today are Mr. Ronghua Wang, Chief Executive Officer and Chairman of the Board of Directors; Ms. Qinghua Liu, Chief Financial Officer and Ally Gong, Secretary of the Board. After management’s prepared remarks, there will be a Q&A session.

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

Thank you and welcome everybody to Biostar's 2012 earnings conference call. My name is Chris Lee and I am translator of Biostar. The details of the results are available in the news release and the Form 10-K we filed earlier this morning. If you have not received a copy of our press release, please send an email to office@aoxing-group.com and they will email you a copy.

Now I will hand the conference call over to our Chairman and CEO, Mr. Ronghua Wang, who will discuss recent developments and then our CFO, Ms. Qinghua Liu, who will review the financial results.

Ronghua Wang

Thank you, everyone for attending Biostar's 2012 earnings conference call. I am Chairman and CEO, Ronghua Wang.

As we announced this morning, our overall results for year 2012 ended December 31, 2012 was affected by the temporary industry wide PRC government imposed sanction of gel capsule sales earlier this year.

On July 30, 2012, we received the green-light approval from Xianyang SFDA authorities to restart sales of gel capsule products. Since then, due to a plan that we designed, developed and have been implementing, we have seen our business starting to recover since third quarter. Mr. Qinghua will provide you more details about our plans shortly.

Our net sales for 2012 decreased approximately 46.4% or $42.7 million as compared to 2011. The decrease was mainly due to the capsule incident in early 2012. Our net sales recorded in the fourth quarter were $15.3 million, representing 63% increase compared to the third quarter of 2012. We expect our 2013 sales continue to recover and increase compared to 2012 sales.

I will now turn the call over to our CFO, Ms. Qinghua Liu, who will discuss our 2012 results. She will also discuss the steps we have taken to rebounce from this temporary setback. Then I will be available to answer your questions.

Qinghua Liu

Thank you, Wang. As announced, due to gel capsule related issues for year 2012, our net sales decreased significantly and we reported losses for year 2012. For the 12-months ended December 31, 2012, revenues decreased approximately 46.4% to $49.3 million compared to 2011. Sales of Aoxing Pharmaceutical’s capsule product were affected by the suspension of sales and negative publicity associated with the Chinese SFDA investigation of several capsule manufacturers which used industrial gelatin with high chromium content in their product.

Net sales of capsule products decreased by $51.3 million, or 63.2%. The sales of other Aoxing Pharmaceutical products were also affected by the negative publicity. Net sales of these products decreased by $1.5 million or 15.1%. The company acquired Shaanxi Weinan Huaren Pharmaceuticals, Shaanxi Weinan in the fourth quarter in 2011 and continued the sales of Shaanxi Weinan's existing products. These products accounted for $7.4 million or 15.1% of total net sales in 2012. The company discontinued one product due to low sales volume and demand. During 2012 the company reintroduced six of Shaanxi Weinan’s previous products which accounted for $0.7 million or 1.4% of total net sales in 2012.

Compared to the fiscal year of 2011 cost of sales decreased by about $6.1 million of 29.4% for the year ended December 31, 2012. This decrease is mainly due to the decrease in net sales. Gross profit was $29.9 million, decreased by $34.5 million or 53.6% for the year ended December 31, 2012. This compared to the year ended December 31, 2011. The decrease in gross profits was due primarily to the decrease in sales volume. Gross profit lost as a result of the capsule incident was estimated at $34.5 million.

The overall gross profit margin decreased to 60.5% for the fiscal year of 2012 from 70% for 2011, mainly because of the increase in the cost of labor and raw material. For the year ended December 31, 2012, the decrease is also due to significant change in the sales mix of products. Xin Aoxing Oleanolic Acid Capsule, the highest gross margin product, contributed 63% to total gross profit in 2012 as compared to 78% in 2011.

Total operating expense increased by $5.4 million or 11.7% to $51.6 million for the fiscal year of 2012 from $46.2 million for 2011. The increase is attributed to the administrative penalty imposed by the SFDA and the compensation paid to the company’s customers as a result of the capsule incident; increase in research and development expense and increase in provision for doubtful accounts.

Operating loss was $21.8 million and $18.2 million in 2012 and 2011 respectively.

Net loss was $20 million for the fiscal year ended December 31, 2012, a decrease of approximately $32.2 million from earnings of $12.2 million for the same period in 2011. Fully diluted loss per share was $2.09 as compared to earnings per share of $1.31 for the fiscal year of 2012 and 2011 based on 9.6 million and 9.3 million shares respectively.

Cash and cash equivalents totaled $1.8 million on December 31, 2012 as compared to $17 million on December 31, 2011. Accounts receivable balance was approximately $21.9 million on December 31, 2012 versus approximately $35 million on December 31, 2011. The company has total assets of $70.5 million versus total liability of $12.7 million on December 31, 2012. Working capital on December 31, 2012 was $29.2 million as compared to $53.8 million on December 31, 2011. For the fiscal year of 2012, the company used $3.6 million in cash and operations and expensed $17.3 million in investing (inaudible).

Before opening the line to questions, I would like to emphasize that despite the recent temporary setback our business remains solid. As we disclosed in our 10-K, we have taken a number of steps to resume sales of gel capsule drugs immediately following the SFDA approval. We are ramping up production by adding a second shift in anticipation of gradual higher sales of our existing products. We also initiated an aggressive advertising campaign to revisit the consumer and fill in confidence in our products and establish incentive for our sales force in all institutional offices nationwide.

We plan to continue to introduce new products into the market and further diversify our portfolio. We launched our call center in September and it is operating well. We expect this new call center to contribute to our sales increase in 2013. We also increased our efforts to complete several [incremental] tests for Xijing Hospital. This resulted in the signing of two one year contracts valued at approximately $2.6 million and $3 million respectively. We manufacture a total of 8 drugs specifically for the need of Xijing Hospital, so having additional contracts with Xijing Hospital.

Going forward, we expect our net sales to incrementally improve in the year 2013 as compared to 2012. We look forward to reporting our progress in the months to come. Ladies and gentlemen, this concludes our prepared remarks. We would like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Charles Ognar. Please go ahead.

Charles Ognar - Ognar Trading Co.

Could you address the bird flu and likelihood of Zushima spray with the army? And lastly, could you also address the recent purchases, do you anticipate sales in 2013 and '14 and did you need a shareholder vote for the issuing of those shares? And lastly I have a follow-up question about accounts receivables.

Unidentified Speaker

First, we would like to address the first two, right.

Charles Ognar - Ognar Trading Co.

Yes.

Unidentified Speaker

Right now the bird flu happened in about five provinces in China, Shanghai, Zhejiang, Anhui, Jiangsu and Henan. In last week Beijing found just one case. So you also want to address the spray?

Charles Ognar - Ognar Trading Co.

Yes, Zushima.

Unidentified Speaker

Zushima is not medicine for bird flu.

Charles Ognar - Ognar Trading Co.

I realize that but is it approved yet? What is the status of the approval?

Unidentified Speaker

So right now the military has authorized the local government to do the GMP certificate. So we are just waiting for that. We have submitted all the documents, we are just waiting for the approval.

Charles Ognar - Ognar Trading Co.

And about accounts receivable. They decreased from 21 from 35, are you done writing off the doubtful accounts? Do you anticipate good profits in 2013 because of this?

Unidentified Speaker

(Inaudible) to collect the accounts receivable and we also anticipate our 2013 sales will improve significantly.

Charles Ognar - Ognar Trading Co.

So they are done writing off the bad doubtful debts?

Unidentified Speaker

No, we will not write off the accounts receivables and we believe we can collect all the accounts receivables.

Charles Ognar - Ognar Trading Co.

And do you anticipate -- when you bought new drugs, 13 new drugs and issued new shares, did you need a shareholders vote for that? And do you anticipate sales in 2013 or 2014 from these 13 new drugs you brought?

Unidentified Speaker

We anticipate the 13 new drugs, they will go through -- they will enter into the market within two or three years, so we anticipate the sales will be from the 13 new drugs.

Charles Ognar - Ognar Trading Co.

Two or three years, I see. So do you have an estimate for 2013 of sales and profits?

Unidentified Speaker

Right now the sales is normal and we are considering to anticipate the news release on the right time.

Charles Ognar - Ognar Trading Co.

Can you address why the change in CFO, auditor and no public relation firm here in the USA?

Unidentified Speaker

For our CFO, our previous CFO Zack Pan submitted resignation letter to us and because he had some other job, some better job maybe, and just because of private reasons. So we changed our current CFO Ms. Liu who had a good experience of the company.

Charles Ognar - Ognar Trading Co.

And the auditor? Are you going to have a…

Unidentified Speaker

Yeah, hold on, Mr. Wang will address the auditor.

Charles Ognar - Ognar Trading Co.

Okay.

Unidentified Speaker

For changing the auditor we have two reasons, the first reason is because our previous auditor they raised several times the fees to us until we cannot afford that. And the second reason is the previous auditor has discussed with our field work the time and cannot reach a time with us, we cannot agree. So for these two reasons we changed the auditor.

Charles Ognar - Ognar Trading Co.

And the public relations? Is there a public relations firm in the United States now?

Unidentified Speaker

Since the previous PR worked for us, we don’t think they have good performance for us and we already contacted several PR companies, right now we are considering. And after we recently got like one, we will engage one.

Operator

(Operator Instructions) And Mr. Lee it looks like we have no questions left in the queue at this time. Please continue. I am sorry, we do have a question coming from Charles Ognar. Please go ahead, sir?

Charles Ognar - Ognar Trading Co.

I would ask another question. In the fourth quarter your sales increased by 53% over the third quarter but you had still significant losses. Was this due to doubtful accounts?

Unidentified Speaker

No, it is not because of doubtful accounts, it is because of the R&D expenses and the reinstalls in the fourth quarter.

Charles Ognar - Ognar Trading Co.

Are you going to be profitable in 2013?

Unidentified Speaker

We will try our best. Any more questions?

Charles Ognar - Ognar Trading Co.

I am sorry, I did not hear the answer to that.

Unidentified Speaker

Yeah, we will try our best, try our best to perform.

Charles Ognar - Ognar Trading Co.

So you cannot say if you will be profitable this year?

Unidentified Speaker

We don’t think it's the right time to answer that question through the phone. We will consider to release a news on the right time. Is that okay. Thank you.

Operator

And, sir, we have no questions on the queue. Please go ahead.

Unidentified Speaker

Again I want to thank everyone for joining us today. We look forward to updating you on our first quarter 2013 results in mid-May. Thank you everybody.

Operator

Ladies and gentlemen this concludes the conference call. We would like to thank you for your participation and you may now disconnect.

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