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Tongjitang Chinese Medicines Co. (NYSE:TCM)

Q3 2009 Earnings Call

November 18, 2009 08:00 am ET

Executives

Charles Wang - CFO

Xiaochun Wang - CEO

Justin Chen - COO

Operator

Good morning and welcome to the Tongjitang Chinese Medicines Third Quarter 2009 Financial Results Conference Call. (Operator Instructions). It is now my pleasure to turn the conference call over to your host Charles Wang, Tongjitang's Chief Financial Officer. Please go ahead sir.

Charles Wang

Good morning everyone. I'm pleased to welcome you to Tongjitang's third quarter 2009 Earnings Call. First, I would like to take a moment to thank all our associates for the hard work and commitment during the quarter.

Before we continue, 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 filing with the SEC. Tongjitang does not undertake any obligation to update forward-looking statements except as required by applicable law.

I’m joined today by Xiaochun Wang, our Chief Executive Officer; and Justin Chen, Chief Operating Officer. I will provide you with a strategic overview of the business and then take you through the key financial highlights in the third quarter.

Our third quarter performance reflects the introduction of the newly-launched sales rebate program to the majority of distributors, in which they would receive a cash rebate after year end, should they meet certain sales and cash settlement target.

As a result of this rebate program, RMB6.2 million has been recorded against revenues year-to-date. Additionally, even though the Essential Drug List, EDL had been announced by China's Ministry of Health during this third quarter, uncertainties regarding execution details and pricing continued to cause hospitals and distributors to destock their inventory levels, leading to low sales during the quarter. However, we believe that such declines in purchases from hospitals and distributors should recover notably when the pending Chinese healthcare policies are finalized and disclosed.

On the more positive note, we are very proud to have two exclusive traditional Chinese medicine products included in the final EDL, namely Xianling Gubao, XLGB our flagship product and Jingshu Granules produced by our recently acquired subsidiary Jingfang. Inclusion of this XLGB underlines its market leadership in treating osteoporosis.

Right now XLGB is the only osteoporosis drug among all traditional Chinese medicines to be included in that list. With this exclusive right we believe that it’s got great potential for us to expand XLGB sales into previously untapped market such as smaller cities and hospitals.

The inclusion of Jingshu Granules illustrates our statement in the last quarter regarding Jingfang's great potential. Since last quarter we have committed significant resources to enhancing the marketing efforts of Jingfang product as well as to restructuring its sales team and distribution network. We expect to see the initial results of these actions by the end of the year.

More specifically, we expect Jingfang to have enhanced our orthopedic brand, complemented and enriched our existing product portfolio and augmented our geographic presence.

As we discussed last quarter, Jingfang's primary products are included in the National Medical Insurance catalog, which again show the steady demand in the market. Overall in spite of the challenges and uncertainties we faced during this third quarter, we maintain our belief that healthcare reforms drive long-term opportunity once its implementation starts to gain momentum.

We also continued to believe that the government emphasis on TCM will have a positive effect on in the long-term development of industry and thus bodes well for Tongjitang.

On November 11, the company completed a repurchase of 4.8 million ordinary shares in a private transaction. The purchase price of $1.025 per ordinary share was the same as the purchase price paid by the company to certain non-affiliates and non-management investors and the recent share repurchases completed in September 2009 through a privately negotiated transaction.

As the seller of these 4.8 million ordinary shares was a company controlled and owned by certain current and ex-senior management of the company's operating subsidiary in China, this transaction may be deemed as a related party transaction. Due to such consideration, before the share repurchase was carried out, it had been pre-approved by both the company's board of directors as well as the board's audit committee.

At this time, I'd like to review some key points from our third quarter and financial results. By now you have all seen our press release with our detailed financial results. I will point out some key highlights and then we can move onto the question and answer session.

Revenue in the third quarter of 2009 was 104.6 million down by 5.3% RMB110.4 million at the same period last year. Sales performance reflects decreased sales in XLGB of RMB60.6 million and 4.1% year-over-year increase in sales of other core products, including Moisturizing & Anti-itching Capsules and Zaoren Anshen Capsules. The revenue contribution from LLF decreased to RMB2.6 million from RMB5.1 million in the second quarter of 2009.

The third quarter contribution from Pulante maintained at a stable level of RMB1.9 million. Revenue contribution from Jingfang, which was acquired at the end of the first quarter of 2009, was RMB17.6 million compared to RMB14.4 million in the second quarter of 2009.

Gross profit was RMB60.3 million down from RMB69 million in the third quarter of 2008. Gross margin was 57.6% and reflects reduced revenues from XLGB and LLF, which enjoyed the higher margin, and the introduction of sales rebates. The price of barrenwort, used in the production of XLGB, remained stable in the third quarter of 2009.

Operating expenses for the quarter primarily reflected increased selling and marketing expenditure incurred for implementing the new marketing strategy for Jingfang as discussed above.

We incurred a net loss of RMB13.7 million, which yielded net loss per ADS of RMB0.43 and net loss per share of RMB0.11. Also the non-GAAP net loss of RMB5.4 million this quarter was down from the net income of RMB16.3 million in the same period last year. We close the quarter with approximately $45.5 million in cash.

In closing, during the third quarter our financial results have been impacted by combination of low sales brought about by market uncertainties of details of the healthcare reform and our sales rebate program, as well as increased selling and marketing expenditure in respect to Jingfang.

Nonetheless, as discussed above, we remain positive about the long term benefits of the healthcare reform and the sales potential of XLGB and Jingshu Granules.

That concludes our financial performance overview. Thank you for participating in the call today. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions). We'll go first to Katherine Lu of Oppenheimer.

Unidentified Analyst

Good morning, this is (inaudible) calling for Katherine Lu from Oppenheimer. Congratulation on inclusion of Xianling Gubao into the essential drug list. Looks like this is the only drug that is included in the category and the pricing is very stable. Could you talk about how you elaborate this opportunity and do you need to build additional sales force for that and also the pricing?

Charles Wang

Translation for our Chairman Mr. Wang.

Xiaochun Wang

(Foreign Language)

What our chairman Mr. Wang just said in answering the question on how to leverage on this opportunity in terms of expanding the market share or the market penetration of XL GB. One of the main objectives of the healthcare reform is to expand healthcare to smaller towns and communities in China.

So we have to expand ourselves in distribution network from our present larger markets into the smaller markets to take advantage of this added opportunity, because the target set by government for this year is as the basic healthcare organization should prescribe 30% of the EDL drugs. So we have to make sure that we have the network to meet that demand.

On the second question about pricing, in terms XLGB, the price announced by the central government is the same as its previous level, where as for Jingshu Granules, it's roughly 9% below its pre…

Operator

This is the operator. Katherine did that answer your question.

Unidentified Analyst

Yeah. I have another question. It looks like you are buying back a substantial amount of shares. Fosun Pharmaceutical is increasing its stake in you. Could you tell us the latest implication to this, do you think if there is any opportunity that Fosun will eventually acquire your company completely?

Operator

Sorry for the interruption is the management team still there. Mr. Wang though I do sure your still connected to the conference, we are unable to hear your responses at this time, sir. Ms. Lu thank you for your patience, please continue to standby madam. (Operator Instructions). Katherine or [Karen] rather is it on Katherine Lu’s line are you there.

Unidentified Analyst

Yes I am here.

Operator

Okay wonderful thank you again for your patience. Your question will be answered momentarily. We are connecting the presenters to the conference at this time.

Operator

(Operator Instructions). For Katherine Lu's line, we are still open at this time, [Karen] if you wanted to proceed with your question again.

Unidentified Analyst

Looks like your buying back substantial amount of shares and the Fosun Pharmaceutical is increasing stakes in you. Could you tell us the strategic implication to this? Do you think if there is possibility that Fosun will eventually acquire your company completely?

Unidentified Company Representative

I'll answer the question. So for the first part of your question, yes we did repurchase total percentage of our outstanding shares in the market in the past few months. The major reason is that we believe that our shares are undervalued in the market that seems to be have sufficient cash and we consider share repurchase, a good way of using the cash to benefit all the shareholders of the company.

For the second part of the question about the intention of Fosun, I suppose Fosun is in a better position to answer the question, because so far we didn’t hear anything about Fosun's final intention of acquiring Tongjitang's share. If we hear something, and we believe we will disclose according to the regulation. Thank you.

Operator

(Operator Instructions) Okay. Mr. Wang, it appears that we have no further question from the telephone audience. With that that will conclude this question-and-answer session. This will also conclude today's event. I would like to thank everybody for your participation.

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Source: Tongjitang Chinese Medicines Co. Q3 2009 Earnings Call Transcript

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