China Pharma Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.21.14 | About: China Pharma (CPHI)

China Pharma Holdings, Inc (NYSEMKT:CPHI)

Q4 2013 Earnings Conference Call

March 21, 2014 8:30 AM ET

Executives

Diana Huang - Manager, IR

Zhilin Li - President, CEO and Interim CFO

Sam Hsing - Corporate, VP

Analysts

Peter Siris - Hua-Mei

Operator

Ladies and gentlemen, thank you all for standing-by and welcome to the Fiscal Year 2013 China Pharma Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation there will be a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, 21, March, 2014. I would now like to hand the conference over to Ms. Diana Huang, Investor Relation Manager. Thank you. Please go ahead.

Diana Huang

Thank you, Erik. Good morning ladies and gentlemen and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ fiscal year 2013 earnings conference call.

I am Diana Huang, the Company’s Investor Relations Manager. Speaking on the call today are China Pharma’s President and CEO and Interim CFO, Ms. Zhilin Li and Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of the call. The Company’s earnings press release issued earlier this morning is available on our website at www.chinapharmaholdings.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 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, and 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 requisite regulatory approvals to commercialize our products, fluctuations 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 represent management’s estimates as of today, March 21, 2014. 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 then translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the Company’s fiscal year 2013 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 and for your continued support of the China Pharma.

China provides a unique opportunity to its pharmaceutical industry. However, the real challenges remain, from compulsory new GMP upgrading requirements and rising pricing pressure to extended regulatory review time for new medical production applications, which temporally impacted our performance negatively in 2013, we have maintained a conservative stance in the general sales and credit policies in 2013 in order to ensure the capital requirements for new GMP upgrading requirements, and control and improve the condition of our accounts receivable.

As of January 1, 2014, we have suspended our dry powder injectable and liquid injectable production lines due to the failure to meet the new GMP upgrading deadline. However, we have already completed the overall architectural structure of our new facility, and are in the process of installation and commissioning the equipment. We are looking forward to acquire a new GMP certificate and pass the CFDA inspection in the second quarter of 2014.

I will now read results from Ms. Li's prepared remarks in English.

The Chinese pharmaceutical industry has been the key contributor to the PRC’s economical growth. The Chinese pharmaceutical market reached RMB 926.1 billion in 2012 according to the Medicine Blue Book, China Pharmaceutical March Report 2012, the Blue Book published by the Chinese Academy of the Social Science, CASS on December 28, 2012. The compound growth rate of the China’s pharmaceutical market was over 20% from 2005 to 2010. And the Blue Book forecasts that it will continue its rapid expansion at an average rate of 12% from 2013 to 2020.

The Blue Book pointed out that the Chinese pharmaceutical market is the showing features of the rapid expansion, fierce competition, lower concentration, and is greatly influenced by the government's policies. The Blue Book further mentioned that the pharmaceutical market expansion was supported by the increased demand for medicine associated with the population aging, improved the social welfare and the residents’ enhanced purchasing power along with the economic development.

Now I would like to review our fiscal year 2013 financial results and balance sheet information. Revenues for the year ended December 31, 2013, were 32.8 million, a decrease of 40% from the revenue of 54.5 million for the year ended December 31, 2012. This decrease primarily results from the decrease in the sales throughout all our product categories, especially our CNS cerebral cardiovascular products decreased by roughly 8 million and our antiviral infectious respiratory products decreased by roughly 6.3 million.

Gross loss for the year ended December 31, 2013 was 0.5 million, compared to the gross profit of 14.1 million in 2012, a decrease of 14.6 million. Gross loss margin was 1.5% in 2013, compared to the gross profit margin of 25.8% for 2012 without the effect of inventory obsolescence management estimates that our gross profit would have been approximately 29% in both 2013 and 2012. The Healthcare Reform instituted by the Chinese government since 2009 contains pricing controls, which have resulted in margin compression in most pharmaceutical products on the market today, especially in the generic space where many of our products are sold.

Going forward, we expect to see continued pricing pressures on most products, while new products could help to support overall gross margin once they are launched. We launched Candesartan in November 2013 and started its marketing activities.

Selling, general and administrative expenses in 2013 were $5.7 million, or 17.3% of sales, compared to $6.4 million, or 11.8% of sales, in 2012. For the year ended December 31, 2013, the Company’s research and development expense was $1.7 million, compared to $0.4 million in 2012. The increase in R&D expense was mainly due to the fact that the Company has started to take a dominant position in the research activities of the formulation screening, new technology exploration, technical criteria improvement in 2013. We expect this new model will improve our exploration channels for pipeline products.

For the year ended December 31, 2013, the Company’s bad debt expense was $10.8 million, compared to a bad debt expense of $0.9 million in 2012. In the fourth quarter of 2013, we implemented a one-time trade receivables collection discount program to accelerate the collection of the old accounts receivable. Management negotiated the settlement offers with certain customers from which we had accounts receivable balances of approximately $8 million that were greater than one year past due. The offers to these customers were comprised of discounts ranging from 15% to 30% of the total past due balance in exchange for the payment of the remaining balance in full by December 31, 2013. As a result of this program, we were able to collect cash of approximately $5.85 million after granting those customers discounts totaling $2.1 million. The collection discounts were recorded as bad debt expense

Net loss for the year 2013 was $20 million, or $0.46 per basic and diluted share, compared to net income of $4.6 million, or $0.11 per basic and diluted share in 2012. The decrease in net income was mainly due to the decrease in revenue, increase in inventory obsolescence, and increase in bad debt expense.

Turning to the balance sheet, As of December 31, 2013, the Company had cash and cash equivalents of $6 million compared to $4 million as of December 31, 2012. Our accounts receivable balance decreased to $45.1 million at December 31, 2013 from $66.2 million at December 31, 2012. Our receivables decreased due to our enhanced collection efforts, increased allowance and the trade receivables collection discount program implemented in the fourth quarter of 2013 to encourage the collection of the accounts receivable aged over one year, and three years and a decrease in sales.

In addition, we entered an eight-year construction loan facility with a bank on June 21, 2013. The total loan facility amount is $13 million. We utilized approximately $12.4 million of the facility through March 7, 2014. The cash flow generated from operating activities and the newly executed construction loan facility is being used to fund the construction of our new GMP upgrading project.

Overall we will continue focusing on our business development and new GMP project construction and believe that this will support the fair evaluation of our shareholders’ interest in the future.

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

Question-and-Answer Session

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We would take one question at one time, if you wish to ask more questions, please join the queue again. (Operator Instructions) Your first question comes from the line of Steven Johnson, please ask your question.

Unidentified Analyst

Could you explain what new products in the pipeline that you’ll expecting to do very well towards your revenue?

Diana Huang

[Foreign Language]

Zhilin Li

[Foreign Language]

Diana Huang

We see that our new product Candesartan which has been launched and started marketing activities in November 2013. This product has not generated revenue in 2013 yet, but the Company expects this product to generate revenues in 2014.

Unidentified Analyst

Okay, good. Thank you.

Diana Huang

Thank you.

Operator

Your next question comes from the line of Peter Siris. Please ask the question.

Peter Siris - Hua-Mei

Mei Hua. Can you point out what the GMP and -- so right now there is some products that you can’t make, on what business does that entail and just bring us up-to-date on the progress of the new GMP approvals?

Diana Huang

[Foreign Language]

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li answered that as far as new GMP standard that sterilization products are complete the upgrading by December 31, 2013 and for our case our dry powder injectable and liquid injectable production line belongs to the sterilization production line because we feel to comply with the new GMP standard by this line therefore we suspend our production for this product. We could only recover our production for those production lines once we receive the new GMP production certificate. In addition, if we added that the Company has already completed the overall architecture structure of our new GMP facility and are in the process of installation and commissioning the equipments and we are trying our best to work out the GMP certificate by the second quarter of 2014.

Peter Siris - Hua-Mei

So, Diana I want to -- if assuming that you get it by the end of the second quarter, how much business will you lose because you don’t have the manufacturing?

Diana Huang

[Foreign Language]

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li answered that actually the Company had gradually built up our inventory level in 2013 for certain products to prepare for this temporary production shutdown. And however the Company will try our best to minimize any risk of client loss, due to this production shutdown. However Ms. Li mentioned that the CFDA reviewing process is uncertainty beyond the Company’s control. But we will try our best to minimize the waiting process for this CFDA reviewing process.

Peter Siris - Hua-Mei

No, I understand CFDA is beyond your control, but you have the inventory in these things, so it shouldn’t hurt you as much as it might seem?

Diana Huang

[Foreign Language]

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li says yes your understanding is correct. We have been well prepared in 2013 to build up the inventory to minimize or loss -- losing clients due to the production shutdown.

Peter Siris - Hua-Mei

Okay. I also want to ask that on Rosuvastatin you finished the clinical trials and submitted your application in 2010 and now the CFDA has come and asked for new information. Can you tell us what do you think the chances of that getting approved is and what the timing is?

Diana Huang

[Foreign Language]

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li replied that actually the Company has anticipated to launch this product Rosuvastatin a generic version of crystal long time ago. However, due to the CFDA increased their expander for approval of these products. The Company had to supplement new material and process new trials for the improved standard. Ms. Li expects the Company could complete the supplemental trials for this product in the second half of this year 2014. And after that we expect this product will enter the next round of the reviewing process.

Peter Siris - Hua-Mei

Okay so it’s fine. Thank you very much.

Diana Huang

Thank you very much.

Operator

Thank you. (Operator Instructions) There are no further questions. I would now like to hand the call back to the Company for closing remarks.

Sam Hsing

On behalf of the entire China Pharma team we would like to thank you for your interest in the Company and participation on this call. When you’re travelling to China you are always welcome and we encourage any visitors from our shareholders, potential investor and analysts. This concludes the China Pharma’s fiscal year 2013 earnings call. Thanks.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect. Have a nice day.

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