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Tianyin Pharmaceutical Co., Inc. (NYSEMKT:TPI)

F3Q 2014 Earnings Conference Call

May 15, 2014 09:00 ET

Executives

James Jiayuan Tong - Chief Financial Officer

Analysts

Angel Liu - Pope Asset Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Tianyin Pharmaceutical Co., Inc. Third Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions)

I will now turn the conference over to Dr. James Tong, Chief Financial Officer. Please go ahead.

James Jiayuan Tong - Chief Financial Officer

Thank you, Melissa. Good morning, good evening, ladies and gentlemen. Welcome to Tianyin Pharmaceutical (TPI) third quarter fiscal year 2014 earnings conference call. I am James Jiayuan Tong, Chief Financial Officer of the company. During this conference call, we will be reviewing the third quarter fiscal year 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 the presentation are made only for this day and TPI is under no obligation to revise or update those forward-looking statements.

Third quarter fiscal year 2014 ended March 31, 2013 financial highlights. Revenue was $8.6 million versus $15.5 million in the third quarter last year, a decrease of 45% year-over-year. Sales for the nine months ended March 31, 2014 was $37.3 million, a decrease of 32% as compared to $49.1 million for the nine months ended March 31, 2013. Our gross profit was $3.5 million with gross margin at 41% versus gross profit of $5.9 million with a gross margin at 38% in the third quarter of fiscal year 2013. Gross profit was $21.6 million for the nine months ended March 31, 2014 at gross margin of 42% as compared to $30.2 million for the nine months ended March 31, 2013 at gross margin of 39%.

Operating income was $0.4 million, compared with $1.8 million in third quarter fiscal year 2013. Operating income was $5 million for the nine months ended March 31, 2014 as compared to $6.5 million for the nine months ended March 31, 2013. Net income was $0 million compared with $1.3 million in the third quarter last year. The net income for the nine months ended March 31, 2014 was $3.1 million compared with $4.6 million for the nine months ended March 31, 2013.

Earnings per share for this year is $0.00 EPS per basic and diluted share, compared with $0.04 per basic and diluted share in the third quarter fiscal year 2013. EPS for the nine months ended March 31, 2014 was $0.11 per share compared with $0.16 per share for the nine months ended March 31, 2013. Cash and cash equivalents totaled $33.1 million on March 31, 2014.

For the sales, it is the – for the past nine months ended March 31, 2014, the top five core products sales are Gingko Mihuan, GMOL, for stroke and cardiovascular disorders, $16.6 million; mycophenolate mofetil capsules, MM, for renal transplant is $4.3 million; azithromycin tablets, AZI, for infection, $1.6 million; qingre jiedu oral liquid, QR, $1.9 million; qianlie shule capsules, QS, for prostate conditions, $0.93 million. The decrease for the sales was a result of continuous pricing pressure and restricted sales policies in generic products compared with the same period last year and also the early Chinese New Year Holiday compared with the other years combined with the temporary interruption of our production due to the Hugan incident also impacted the revenue performance significantly during this quarter.

The core products totaled $25.3 million in sales, representing 68% of our revenue for the nine months ended March 31, 2014. With the generic pricing and margin pressure, we expect further concentration of sales in the core product segment and erosion of sales and margins in generic segment. The contribution from our distribution business through TMT for the past nine months amounted to $3.0 million at 10% gross margin in the nine months ended March 31, 2014.

Gross Margin for the quarter ended March 31 is 40.5% as compared to 37.7% for the quarter ended March 31, 2013. Gross margin for the nine months ended March 31, 2014 was 42.1% versus 38.5% for the year before. As discussed above in the segment of costs of sales, our gross margin improved, predominately as a result of a greater mix of higher margin products.

Income from operations for the nine months was $5 million as compared to $6.5 million for the nine months ended March 31, 2013. The significant decrease in the income from operations were mainly due to the fixed costs in operation of manufacturing and an increase of operating costs in JCM, our Jiangchuan Macrolide facility as the production of Azithromycin API ramped up during this quarter. Net income was zero million dollar for the quarter ended March 31, compared with net income of $1.3 million at net margin of 8.1% for the quarter ended March 31, 2013. The significant decrease of net margin for the quarter was primarily the result from the impact on overall sales from the Hugan Tablets incident and the loss in JCM operation – the operating loss in JCM operation was unable to offset the profit in other subsidiaries. The net income for the nine months ended March 31 was $3.1 million versus $4.6 million of the year before.

Balance sheet and cash flow, as of March 31, 2014, we had working capital of $40 million, including cash and cash equivalents of $33.1 million. Net cash provided by operating activities was $4.4 million for the nine months ended March 31, 2014 as compared with net cash provided from operating activities as $0.8 million for the nine months a year before. TPI had minus $1.4 million and minus $13.3 million cash used in investing activities in nine months ended March 31, 2014 and 2013, respectively. Further increase in the net cash used in investing activity was expected for our QLF relocation project for the remainder of fiscal year 2014. We believe that TPI is adequately funded to meet all of our working capital and capital expenditure needs for fiscal year 2014.

Development and growth strategy, here are pinpoints. One of them is the R&D for additional indications of flagship product Gingko Mihuan. We used the partnership research program the strategy supports TPI to commercialize, produce and broaden our product pipeline and market those products through our sales and marketing infrastructure. As we have – looking into various indications of Gingko Mihuan and also other application of Gingko Mihuan form into tablets and capsules this partnership research program has been employed. So the in-house research group at TPI together with the partnership research institutes will collaborate in developing, testing and filing for the application for the CFDA approval for these additional formulations. Due to the increased stringency and costs for clinical testing, we believe the time span for these R&D activities will be extended further than we have expected.

Jiangchuan Macrolide facility, JCM, in April 2014, JCM has developed a new line of Azithromycin API products that support a steady monthly export orders to South Asia. Following a series of tests on quality, purity, intermediates contents, stereochemistry, stability in comparison with the international standards, JCM has received monthly orders for manufacturing one of the major intermediates of Azithromycin, which is Azithromycin Amine, AA, at a competitive international price, which varies from month to month according to the market demands and the foreign exchange rate. The monthly orders starting April this year for AA were estimated to be 5 tons to 8 tons per month.

Tianyin Medicine Trading, TMT, TMT has been distributing Lianshui Pharmaceuticals’ products, branded generics injection products, including cough suppressant, antibiotics, anti-inflammatory medicines and other healthcare indications. On average, TMT distribution revenue contributed approximately $1 million to $2 million sales per quarter to our total revenue. Here, as an effort to expand the generic market amid the pricing pressure of its generic division, we have explored the strategic reduction of the tendering price of Hugan Tablets for liver conditions, approximately $0.6 million sales per year in order to compete in Zhejiang Province of China.

The competitive tender price has helped the company to successfully secure the right of sales for Hugan Tablets in Zhejiang. However, as a part of the government’s regulatory procedure, the China Food and Drug Administration, the CFDA conducts examination on the production process and the cost of sales for competitive, which is low tendering price bidders. During the period, when the company was under such examination for quality and pricing tests that were conducted by the CFDA of Sichuan province, the company’s GMP certificate granted by the CFDA was being administered, temporarily administrated by Sichuan provincial CFDA and the sale of the majority of our products were temporarily halted pending the results of quality and pricing tests. The tests were completed by early May 2014 and the company has received on May 9, 2014 its renewed GMP certificate, both of its Chengdu Tianyin’s pre-extraction facility at the city of Chengdu and formulation facility at Longquan County of Chengdu valid until the end of 2015.

The production of the majority of the products have returned to normal, except the tablets formulation division, which will be scheduled to be further inspected for its production process by the provincial CFDA on May 24, 2014. Due to the temporary interruption and the sales impact from the early Chinese New Year holiday break compared with the other years, the sales of our products were impacted by over 40% for the third quarter 2014. This impact along with the rippling market effect results a revised guidance for our fiscal year – of our current fiscal year.

The fiscal year 2014 guidance, TPI continues to experience restrictive pricing pressures in the healthcare market. The prevailing tightened pricing control of generic products in China from the government’s efforts to promote lower margined essential drugs, EDL, compressed our margins as well as our sale volumes of those generics. These factors, together with the negative market environment of Azithromycin API pricing led to an intensified market and pricing competition combined with an excessive capacity that may last for the next few years.

Based on the impact from the suspension of the production and sales of Hugan Tablets and the effect from temporary production interruption and the rippling market effect, we would revise our previous revenue forecast of 0% to 5% year-over-year growth to 20% to 30% year-over-year reduction mainly due to the further underperformance of our generic segment and the rippling market effect from this incident. We currently keep our 10% net margin forecast unchanged. The forecast net income guidance excludes any non-cash expenses associated with the stock compensation plans and stock option expenses.

We believe the following factors will influence the future growth prospects of our company: revenue growth of TPI’s core products; steady ramp up of JCM revenue in the fiscal year 2014 and fiscal year 2015; stabilization of generic sales following the progressive pricing restrictions and the recovery of market share following the production restart; meaningful TMT distribution revenue; and QLF Qionglai facility relocation and smooth transition of our production capacity. Management will continue to evaluate the company’s business outlook and communicate any changes on a quarterly basis or when appropriate.

Hi, Melissa. These are the prepared remarks. Please start the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Angel Liu from Pope Asset Management. Please go ahead.

Angel Liu - Pope Asset Management

Good morning, James.

James Jiayuan Tong

Good morning.

Angel Liu - Pope Asset Management

Just a couple of questions. You mentioned that the distribution companies mainly distributing for Lianshui Pharmaceuticals and it’s only about $1 to $2 million, I don’t know, it used to be around $4 million range, it’s – are you losing this business to other distributors, how did this happen?

James Jiayuan Tong

Yes. So, that is a very good question. And we have been looking at the margins that we can get by distributing Lianshui’s products and we found that just because Lianshui is well-known for its EDL products, essential drug list products that their margins are actually getting more limited. For example, for like Gingko Mihuan, we can have margin over 50%, but yet for EDL product, that some of them can only have 20% at the most. So by distributing these Lianshui products, although we do have sales, if you look at the past quarter we did generate close to I think – close to $2 million of sales, but yet the net income was as we felt minimal. So, we have been trimming back on further distributing their products by actually concentrating on high margin product, so that you will see some of the revenue contribution drop, but we were still collaborating with Lianshui and expanding their products market share. So, although it’s going to be lower, but it’s not going to be completely eliminated to run our portfolio, yes.

Angel Liu - Pope Asset Management

Okay. And in the administrative expenses, I noticed your sales were coming down by this quarter as administrative expenses actually went up, what is the reason behind this in the company, when the company facing an old demand in sales is planning to do any cost-cutting strategy or?

James Jiayuan Tong

Yes. So, the SG&A were actually did not go down as so – as the percentage wise was higher, right compared with the sales. It’s mainly due to Jiangchuan Macrolide facility is ramping up their capacity. So there is a catch up. So when Jiangchuan now we have an order for JCM about 80 tons throughout the year, throughout the calendar year of 2014. So, all these will involve adding more employees, getting more, just involve more operating involvement in JCM division, but yet once we invest all these capital, the sales will not occur until actually a couple of months later, because we recognized the sales through the export business. So, it’s a – in Chinese (indiscernible) so, it’s like credit career. So, it usually has a time about 60 days to 90 days. So, what we are seeing here is that you will see an increase of SG&A, but there is no sales, but I think the sales were coming alarm after the cycle started. So, that is one information.

Angel Liu - Pope Asset Management

You mentioned 80 tons, total order for the whole categories on ‘14?

James Jiayuan Tong

At the moment, yes.

Angel Liu - Pope Asset Management

Okay. And will price (indiscernible)?

James Jiayuan Tong

I can give you a range, because the current price is close to $80 per kilogram.

Angel Liu - Pope Asset Management

Okay, that’s I think much lower than what was expected before?

James Jiayuan Tong

It was lot lower, right.

Angel Liu - Pope Asset Management

Yes. So, what is….

James Jiayuan Tong

Yes, it was – because it’s a different product, so previously we are selling is Azithromycin, selling Azithromycin raw material now Azithromycin Amine, which is supposed to be lower, but we found that the market is bigger and there is more gap meeting that demand. But so the Azithromycin raw material we are actually competing with various quite a few competitors in China and they were exporting to India as well, India and Bangladesh and Southeast Asia. That is the reason that we are finding the Azithromycin, Azi Amine. AA was actually we have a better negotiation power on that price, but it is lower than the other product, yes.

Angel Liu - Pope Asset Management

Well, gross margin, can you achieve on this price?

James Jiayuan Tong

Single-digit.

Angel Liu - Pope Asset Management

Okay. You mentioned 5 to 8 tons that was AA too, so you maybe have JCM sales from AA in future?

James Jiayuan Tong

Yes. What we can see is pretty much from AA from then on for the 12 month ahead, yes.

Angel Liu - Pope Asset Management

If you have a single-digit gross margin in JCM or JCM is still around that process or having loss?

James Jiayuan Tong

It has a very meager profit. And if foreign exchange rates, so if locked in our contract as the foreign exchange rate didn’t go in our favor, it actually will be a loss. So, we did make these distance, so the management make these decisions during this period of time if we are not expanding the market instead just waiting for the price to come up, we might lose the market by the time, because the competitors are selling sometime – selling at loss to grab bigger market share. So, that is a decision we have made, but by increasing the volume, it is possible that within half a year or a year that we could squeeze out little bit profits, because the plan will be running even not making big orders. And so – for depreciation and for the trend regular operation having sales order to come in is so much better. Although that the price, so we are at the mercy of the raw material price that if we can squeeze out the very meager profit or at a breakeven or even at a loss.

Angel Liu - Pope Asset Management

I mean, you are talking about the exchange rate affected to profit, what will be the level of the time that you are going to have like a breakpoint in the exchange rate?

James Jiayuan Tong

It’s a moving target. So, the reason I would say in exchange rate is that if we have – so if we lock in this rate locking in the dollars and then suddenly dollar depreciate right. And then the erythromycin, which is a raw material for this Azithromycin Amine was not increasing their price. Then we will have a margin right, because we lock in the order with dollars, but if the other way – our profit margins squeeze. So, there are two moving parts here.

Angel Liu - Pope Asset Management

Okay. And you say, 80 tons for this calendar year, what’s the expectation for next year or any sales growth?

James Jiayuan Tong

We are targeting – so when you say 5 to 8 tons, our target is 10 tons per year. So, that will be 120 tons, right. 120 tons, that’s pretty much for each, the design capacity for JCM. The JCM capacity totals 20 tons per month. And then they will provide some of our own Azithromycin tablets. So, if the 10 tons per month all for export, so you are talking about maybe 12 to 15 tons per month production. So, that pretty much reached the original designed volume. So, that is the target we are aiming.

Angel Liu - Pope Asset Management

Okay. And I am a little bit surprised – confused by the income tax, your value making (indiscernible) maintained pretty much the same for the income tax, is that because of different units, one is losing money, one is making money?

James Jiayuan Tong

Yes, yes, it is true. This is – so even TPI is conglomerate of four divisions, where you have pre-extraction, formulation, JCM and then also TMT, but it’s taxed differently. So, it’s – the profit or the loss in JCM cannot be used to offset although it does cover, it does carry a deferred tax credit. I think good for 3 to 5 years, but it can only offset itself, not necessarily offset like the profit-making divisions now.

Angel Liu - Pope Asset Management

Okay, so maybe it’s from the loss of JCM?

James Jiayuan Tong

Yes.

Angel Liu - Pope Asset Management

Okay. And my last question is the regarding your cash, you had about $28 million, $29 million in that cash on the balance and because it’s complete place to do?

James Jiayuan Tong

I think we are – just because the Hugan incident, we have actually delayed the QLF GMP certification, because it is extension and relocation of the original plan. So, that we are going to use that purchase equipment and then get the GMP ready status for inspection. So, I think that, that cash at this moment is towards that. And then certainly that we have promised previously that we will use towards the capital market if we finish these relocation projects yes, but we can – that is the time, yes.

Angel Liu - Pope Asset Management

Thanks so much. Last for relocation?

James Jiayuan Tong

We haven’t spent too much in this quarter, just because the one is Chinese New Year and then followed by GMP inspection. So, I think this quarter and the following quarter, so the first quarter of 2015, especially this quarter we actually purchased those large equipment purchase and then final payment for the construction, facility construction. So, yes, that is a delay by a quarter and quarter half. Yes, how much it will be $10 million?

Angel Liu - Pope Asset Management

$10 million?

James Jiayuan Tong

Yes.

Angel Liu - Pope Asset Management

Okay, alright (indiscernible). Thank you, James.

James Jiayuan Tong

Thank a lot, Angel.

Operator

(Operator Instructions) There are no further questions at this time. Please continue.

James Jiayuan Tong - Chief Financial Officer

Okay. Ladies and gentlemen, thank you very much for listening to Tianyin Pharmaceutical’s third quarter’s earnings conference call. Look forward to communicating with you during the meetings and correspondence e-mails and phone calls. Thanks again and have a great day.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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