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Tianyin Pharmaceutical Co. Inc. (NYSEMKT:TPI)

F1Q14 Earnings Call

November 15, 2013 8:30 AM ET

Executives

James Tong – CFO, Chief Business and Development Officer

Analysts

Angel Liu – Pope Asset Management

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Tianyin Pharmaceutical Co., Inc., First Quarter Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided.

(Operator Instructions)

I will now turn the presentation over to James Tong. Please go ahead, Mr. Tong.

James Tong

Thank you, operator. Good morning, good evening, ladies and gentlemen. Welcome to Tianyin Pharmaceutical (TPI), first quarter fiscal year 2014 earnings conference call. I am James Jiayuan Tong, Chief Financial Officer and Chief Business and Development Officer of the company. During this conference call, we will be reviewing the first quarter fiscal 2014 financial highlights, followed by the question-and-answer period.

Before we continue, please note that this call will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Any statements set forth in this presentation that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, which may include but are not limited to, such factors as unanticipated changes in the product demand, increased competition, failure to obtain or maintain intellectual property protection, fluctuation in the economy, results of research and development, failure to obtain regulatory approvals and other information detailed from time to time in TPI’s filings and future filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this presentation are made only for this day and TPI is under no obligation to revise or update those forward-looking statements.

First quarter fiscal year 2014 ended September 30, 2013 financial highlights. Revenue totaled $14.8 million, compared with $16 million in the same period last year, a decrease of 8.1% year-over-year.

Operating income was $2.2 million, compared with $2.1 million in the same period last year, an increase of 1.4% year-over-year. Net income was $1.5 million compared with $1.5 million in the first quarter fiscal year 2013.

Earnings per share are $0.05 per basic share and $0.05 per diluted share, compared with $0.05 per basic share and $0.05 diluted share for the same period last year. Cash and cash equivalents totaled $25.6 million on September 30, 2013.

Sales for the quarter ended September 30, 2013 was $14.8 million, compared to $16 million for the quarter ended September 30, 2012. The sales decrease reflected the continuous pricing pressure and restrictive sales policies in generic products.

Our top five core products quarterly sales were: Gingko mihuan oral liquid (GMOL) for stroke and cardiovascular disorders, $5.1 million; Mycophenolate mofetil capsules (NYSE:MM) for renal transplants, $2.2 million; Azithromycin tablets (AZI) for infection, $0.5 million; Qingre jiedu oral liquid (QR), $0.7 million; Qianlie Shule capsules (QS) for prostate conditions, $0.27 million. These core products totaled $8.8 million in sales, representing 59.7% of the quarterly revenue.

Gross margin for the quarter was 40.6% as compared to 39.1% for the year before. The improvement was a result of a greater mix of higher margin products being sold during the period.

Net income was $1.5 million with a net margin of 10% for the quarter ended September 30, 2013, as compared to net income of $1.5 million with net margin of 9.4% for the same period last year.

Balance sheet and cash flow. As of September 30, 2013, we had working capital total $38.3 million, including cash and cash equivalents of $25.6 million. Net cash provided by operating activities was $0.25 million for the three months ended September 30, 2013 as compared with net cash generated from operating activities of $0.48 million for the three months ended September 30, 2012.

The net decrease in operating cash flow was predominately the result of the payment of the QLF Qionglai Facility construction/relocation related accounts payable at the amount of $2.7 million which was offset by an increase of cash flow from accounts receivable, inventories and other receivables totaling $1 million. We believe that TPI is adequately funded to meet all of our working capital and capital expenditure needs for fiscal year 2014.

Business development and outlook: Research and Development. The partnership-based R&D strategy supports TPI to commercialize, produce, and broaden our product pipeline to market those products through our sales and marketing infrastructure. Currently, we have been monitoring the progress of several pipeline drugs with our partnership research institutes, of which we could be able to register intellectual property rights of these products upon milestone results.

The following are a brief summary of the ongoing business and development project which have been disclosed in our previous filings.

R&D for additional indications of GMOL, Gingko mihuan. Our flagship product GMOL was indicated for clinical conditions such as cardiovascular disorders, coronary heart disease and cerebral ischemic attack including strokes and further clinical data shows that GMOL have been indicated in hepatic diseases and ophthalmological diseases. The validity of these observations is currently being investigated.

Jiangchuan Macrolide Project (JCM). Since the completion of Jiangchuan JCM project, JCM had started the production of the macrolide API for TPI’s Azithromycin Dispersible Tablets since July 2012. Currently the monthly production capacity of JCM is five to 10 tons of Azithromycin macrolide API. The API produced by JCM is mainly to supply for TPI’s own Azithromycin Tablets.

The progress of pre-extraction and formulation plant development at Qionglai Facility. In preparation for the new GMP standards stipulated by the PRC government, TPI has initiated process to optimize the manufacturing facility, which result in the current relocation – the construction and relocation of the formulation plant and pre-extraction plant at Qionglai County.

Through the process, we are estimating that $25 million of capital expenditure for the whole project for the Phase I, which when completed, is expected to expand the current capacity by approximately 30%. If the company decides to further expand the capacity, Phase II QLF Qionglai facility, an additional $10 million may be invested to double the current capacity.

Since the official start of the relocation project in February 2012, the construction of the QLF project has been progressing on schedule. The relocation of the pre-extraction plant of Phase I is expected to be initiated by the end of 2013 calendar year, which will be immediately followed by the initiation of the relocation of formulation plant.

Fiscal 2014 Guidance. The company continues experiencing restrictive pricing pressures in the healthcare market in China as a result of the enactment of additional healthcare reform policy. The prevailing tightened pricing control of generic medicines in China during this healthcare reform and from the government’s efforts to promote lower margined essential drugs (EDL), also simultaneously compressed our margins as well as our sale volumes for these generic products.

These factors together with the negative market environment of Azithromycin API pricing, led to intensified market and pricing competition combined with an excess of capacity of API that may continue to last for the next few years.

Based on the continuous pricing pressure going forward, we reiterate the revenue forecast to range from 0% to 5% growth year-over-year from last year, along with the 10% net margin. The forecast net income guidance excluded non-cash expenses associated with the stock compensation plans or stock option expenses.

We believe the following factors will influence the future growth perspectives of our company. Market expansion and revenue growth of TPI’s core product portfolio led by flagship product GMOL; gradual ramp up of JCM revenue; the stabilization of generic sales following the progressive pricing restrictions; meaningful Tianyin Medicine Trading (TMT) distribution revenue contribution; QLF relocation and smooth transition of production capacity.

Management will continue to evaluate the company’s business outlook and communicate any changes on a quarterly basis or as when appropriate.

Operator, please open the question-and-answer period.

Question-and-Answer Session

Operator

Sure. Thank you. (Operator Instructions) And your first question today will come from Angel Liu with Pope Asset Management. Please go ahead.

Angel Liu – Pope Asset Management

Good morning, James.

James Tong

Good morning, Angel.

Angel Liu – Pope Asset Management

I just wanted to – can you breakdown how much of the sales was from trading and any from API for this quarter?

James Tong

Okay. So in the prepared remarks, we made it more succinct, anyhow we have actually disclosed in our filings. So there is $1.9 million from the TMT distribution revenue at the margin of about 13% to 14%, gross margin.

Angel Liu – Pope Asset Management

Okay.

James Tong

And the rest of it is the sales for our core product in generics. So that’s about $12 million. And for the…

Angel Liu – Pope Asset Management

And so can – sorry, go ahead.

James Tong

For the Azithromycin API it’s minimal. So for the quarter ended September 30, we did not have significant third-party sales.

Angel Liu – Pope Asset Management

How the trading ones [ph] are much smaller comparing to the same for last year, is there a strategy change?

James Tong

Yes, well you’re right. So when you are focusing on the core product that we detailed in our guidance, that we have a five to six core products and then essentially during the distribution, there is a good addition to our portfolio, but the margin is indeed low, with gross margin 10% at very minimal amount of bottom line were really adding to our performance. So I think it’s a good for the sales have bringing more product to our customers, but I think that accretively the focusing on the core product is more essential for better revenue performance. So yes, it is lower now.

Angel Liu – Pope Asset Management

Okay. But also regarding the five core products you are reporting, I noticed only the mofetil had a nice growth comparing to same quarter last year, the rest of them and especially even Gingko mihuan had a slower growth comparing to last year.

James Tong

Yes, it’s true. Yes.

Angel Liu – Pope Asset Management

So can you elaborate a more?

James Tong

So would you like me to comment on it?

Angel Liu – Pope Asset Management

Yes, please.

James Tong

Okay. Yes, so for Gingko mihuan as the market data shows that, very clearly that Gingko mihuan sales growth is driven by the provincial EDL listing. So we are – so for the new Guangdong province, they have now started. So the sales in Guangdong province has now really perform. So as you can see if you – excluding the new province which were listed for provincial EDL, there is really no too much difference between how many provinces we have listed for GMOL. Very clearly that the sales growth is driven from how many province that we can get the Gingko in there for the provincial EDL.

The other one is that we listed five products. There are other products that have similar sales, so under $1 million, but for the quarter that they’re still stronger than the other generic sales, for example, Yanyan Tablets for the throat conditions. And this one could be in the five products as well, but we kept the last year’s structure for these five products. So if you look at the first, second and the third are pretty stable, but the fourth and the fifth that we have, other products, which is also similar to the current like Qingre jiedu and Qianlie Shule, but they are not listed in the five products.

Angel Liu – Pope Asset Management

Okay. So what will be the GMOL [ph] sale in Guangdong province starts? Do you expect the growth coming from the new provinces?

James Tong

We expected that this quarter and the next quarter we will see some of the trickling effect from the Guangdong province listing. Guangdong province is a huge pharmaceutical market. So we believe that with the good penetration, we should expect today a stronger growth from that sector, but at the moment we can only expect that a gradual increase and hopefully will happen and the current quarter and then mostly will be the second half of 2014.

Angel Liu – Pope Asset Management

So can I say that maybe revenue growth for this year is target 0% to 5% remaining from GMOL and in the mofetil and – because your heavy trading businesses are shirking and other generics is under pressure, is that the right way to say it?

James Tong

Well for the TMT, yes. For this quarter, it’s lower but we expect that there should be meaningful and then stable steady. So but that’s top line and not necessarily adding to the bottom line because the lower distribution revenue grow our margin, so yes. The main factors will still be the five products, the core product portfolio growth, yes.

Angel Liu – Pope Asset Management

Okay. And my last question is regarding the cash on the balance sheet. Does company have any new plan right now? The net cash – you have like $25 million, $26 million cash and cash equivalents, just wonder if you have any update on the plan and also your share repurchases?

James Tong

Yes, well these $25.6 million we have not paid anything for the Qionglai facility in this quarter. So we last – at the end of the fiscal year 2013, we have forecasted about $10 million to capital expenditure to complete the project of relocation and so we haven’t spent a dime of that, because the schedule of construction that usually you pay a – we can say a deposit or a down payment of 20% to 30% and then until the whole completion you don’t have to pay too much. But as soon as you finish that and then get tested, approved for the completion of the project, then you need to really pay huge amount.

So we’re going to see some of the payments in the current quarter and the next quarter. So we will – if we have extra cash, we will be happy to put in into stock repurchase plans, but it’s less than about $15 million and that will be an amount that as working capital to keep the pharmaceutical facilities up running. So but yes, we will definitely keep that in mind, of course.

Angel Liu – Pope Asset Management

All right. Thank you, James.

James Tong

Thanks, Angel.

Angel Liu – Pope Asset Management

No more questions there. Bye.

James Tong

Take care.

Operator

(Operator Instructions) And Mr. Tong, there seems to be no further questions at this time.

James Tong

Okay. Thank you, operator. Ladies and gentlemen, good morning, and good evening. It is our pleasure to communicate with you regarding the first quarter of fiscal 2014. We look forward to communicate future growth plans and any R&D progress with you when it becomes materialized. Also we encourage our shareholders to communicate with us via email or phone call for any questions, and have a nice day. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines.

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