China Aoxing Pharmaceutical: Roth Capital Conference Presentation Transcript

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China Aoxing Pharmaceutical Co., Inc. (CAXG.OB)
Roth Capital Conference
February 21, 2007 3:30 pm ET

Executives

John Ma - International Research Analyst at Roth Capital Partners
Zhenjiang Yue - CEO
David Shao - SVP of Finance

Presentation

John Ma

The next company is China Aoxing Pharmaceutical Company. With us today is the Chairman and CEO, Mr. Zhenjiang Yue, here at my right. And presenting for the company is David Shao. He is Senior Vice President of Finance.

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David Shao

Yeah. Thank you, John. Thank you for your kind introduction. I think our CEO, Zhenjiang Yue, would like to say a couple of words for everyone here.

Zhenjiang Yue

Yeah. Welcome everyone coming to our presentation today. China Aoxing is in the business of narcotic drugs research and development. Next, I'll let David Shao, our VP of Finance, to give the presentation. Thank you, everyone.

David Shao

Good afternoon, ladies and gentlemen. My name is David Shao. I'm VP of Finance with China Aoxing Pharmaceutical Company. At this time, I would like to welcome everyone to our company presentation. The presentation today is a brief overview of our company, including our business, our products, the markets that we are in, our financial situation, and our future growth strategy. Next slide.

Before we get started, I need to show you this slide about forward-looking statements. This presentation may contain, in addition to historic information, forward-looking statements within the meaning of the federal security laws regarding China Aoxing Pharmaceutical Company.

Let's start with a very brief introduction. Then, we can move to the first slide. With that out of way, I would like to start with our company overview. China Aoxing is five-year-old and a rapidly growing company. The goal of the Company is to be the leading manufacturer of pain management pharmaceuticals in China. We do research, development, manufacturing and the distribution of specialty pharmaceutical narcotic drugs.

Our current market is in Mainland China. Go to the previous slide. The company became a public listed company in last April 2006. The current market cap is around $160 million with shares outstanding around 14 million shares. The company is located at the Shijiazhuang City, which is also called the pharmaceutical capital of China, which is about 2.5-hour drive from Beijing.

The company has been granted exclusive manufacturing rights to leading opioid drugs. We also received licenses to manufacture over seven pain management drugs with some exclusivity. We believe we have the largest facility for new narcotic drugs in China. We have annual output capacity around 600 million units, including capsule, tablet, injectable and other formulation products. Next slide, please?

I would like to start with a very quick review about the narcotic drug approval process by the China State FDA. Here, SFDA approval for narcotic drugs takes place in three steps and includes significant scrutiny from the state level, unlike the regular general medicine application process.

It's really up to the State FDA to decide -- first, which product line the agency would like to bring to the China market. It's not really up to the individual company. Then, the drug company can submit their initial proposals for products application. Even at this step, there is involved a lot of specific requirements for narcotic drugs set up by the State FDA including like the facility design, the laboratory setup, and the overall operation process.

Since the raw material for narcotic drugs are also highly controlled substances, the company needs to get approval from the SFDA for the access of such material even before they start their research project. If importation is needed, then the company is to work with other countries for importation of such chemicals, which is also a very tedious process.

Basically, there are three steps for drug approval: first, to obtain the research and development license, then obtain the production license, and get the GMP certificate at step three. Next slide, please?

Why invest in China Aoxing Pharmaceutical? We believe these are very important and attractive parts for investing in our company. First, we have a very compelling product pipeline with exclusive manufacturing rights in China. Second, we have a proven ability to attain State FDA approvals and the new product launches.

We also believe we have a well defined growth strategy in this sector. Number four, the narcotic drug sector is largely an untapped market opportunity in China. Also, the narcotic drugs business also involves high barriers to entry for new players. And then, lastly, we have a well experienced and fully committed management team for the Company. Next slide, please?

Since many investors haven't been to our company yet, we would like to show you a few pictures of our campus. Most of the buildings here were constructed about three years ago, between 2003 and 2004, including our administrative building, R&D centers, and most of the workshop buildings.

The whole campus is really monitored by highly security and surveillance network, which is very important piece for narcotic drug makers. Our facility has received five regards by the China SFDA related to narcotic drugs production. Next slide, please?

These are the few pictures for our manufacturing and narcotics workshop. Right now, we have two products on the market. The first one is a narcotic hydrochloride injectable solution. This is a latest milestone in our company's history. After five years of dedicated research and development as well as collaboration with the China SFDA, we now have entered the commercialization stage in a sector with significant growth opportunity and a very limited supply of products.

Today, we announced the product launch of Naloxone Hydrochloride. This product is opioid antagonist used to reverse the effects of narcotic drugs and is used widely during surgery and also used to reverse the effects of opioid overdose. This is a highly controlled substance, and our company is one of the only three manufacturers for narcotic raw material production in China.

We have another product, Shuanghuanglian, is [oral] medicine, which was launched late last year. This traditional Chinese oral medicine is used to treat cough and cold symptoms and is widely used in China. We have obtained GMP certificate and SFDA license. And in the recent quarter we just reported today, this product is the only contributor of revenue for the quarter report.

So what are the catalysts for the next 12 to 20 months? One of the growth drivers would be Oxycodone hydrochloride. Right now, there are no domestic producers of this drug in China market, and the China market basically takes imported Oxycodone directly from overseas drug makers.

We have obtained the research and development license to work on this product. We are currently working with State FDA for the production approval and the GMP certificate. We expect this drug potentially to be launched by end of year 2007.

Another important driver would be Tilidine. This product is not available in China market. We are conducting research and development, right now. We also expect a human clinical study for this product, since this product is regarded as a new product to the SFDA.

This product is a leading narcotic drug in the European market and continues to enjoy a 20% figure worldwide. We believe this product would be a significant medication for patients in China and we expect the product to be launched by the yearend of 2008.

As we pointed out, this company only has a five-year operational history. The company was registered in year 2002 and obtained new drug approval for Tilidine compound, Naloxone Hydrochloride. Then, the company entered the construction phase between 2003 and 2004. We also secured the State FDA approval for importation of narcotic drugs and active pharmaceutical ingredients.

In year 2005, we continued building our pipeline and then received SFDA approval for several product lines.

The year 2006 was a very important year in the company's history. We were listed on the OTC Bulletin Board and completed the final production facilitation work for injectable products, and we're also able to produce and launch the Naloxone.

This year is a transforming year for the company. With Naloxone product launched, we are entering the commercialization stage in narcotic drugs business. We are working towards a fully integrated pharmaceutical company in China market, right now.

We have a well defined growth strategy. We will continue to capitalize on early and the first mover advantage in narcotic drugs business. We will continue to secure sufficient funding for continued growth. Over the years, we have accumulated important expertise in developing narcotic drugs, and we have obtained very important expertise and regulatory approval, which is very important for the Company in the future.

At the same time, we also look at specific opportunities outside the company development. We are very active looking at potential acquisition targets with compelling valuation and growth potential. With new product launches this year, we will work very hard to build a strong brand name and awareness in the marketplace.

In the next couple of few slides, I would like to show you the outlook of narcotic drug markets. Thebaine is a starting material for many narcotic drugs manufacturing. The demand of this particle is a good indicator for the underlying demand for narcotic drugs. This is the data provided by the International Narcotics Control Board in year 2005.

On the chart on the left, between year 2000 -- between the year 1994 and the year 2004, the production and the utilization of this starting material was significantly increased. If we look at the consumption of morphine over the last 10 years -- over year 2004, we also find that this is a very interesting market.

But the US market consumes almost 50% of morphine products, but they only have 5% of the global population. And if you look at countries like China and India, which are included in the area in black and they're over 80% of the population, they only consume 6% of the morphine. That's really telling you the biggest gap between the developed and the developing countries in this drug sector. That's the opportunity we are in right now.

We believe the market drive in China is coming from the following. First, we got a strong government support for most domestic made narcotic products. More and more doctors demand stress and pain management for their patients. Also in China, we have over 5 million cancer patients. About 40% of them need effective pain management. This is a very important factor of this business.

Also, the long-term pain management, such as arthritis, low back pain and other medical conditions, also require effective narcotic drugs on a daily basis. Finally, we believe the new formulations of narcotic products coming from domestic makers or foreign makers also drive the market in the next few years.

So in China market, before year 2000, China market was only about 1% of the US market. There were only six narcotic drugs available. And China was ranked number 83 among 94 countries, surveyed by International Narcotics Control Board.

After year 2000, the government really made a strong push to increase the access and availability of this class of medication for the patients. So we saw 11 new narcotic drug approvals for domestic, and we've also got 19 drug approvals from importation. This in fact has really enjoyed 30% annual growth rate. And the market size is expected to reach $6 billion by year 2010.

Narcotic drugs business involves a high barrier to entry for new players, not only because research and development is, of course, prohibited such as like facility is very different from the regular pharmaceutical manufacturing, but also this industry is hardly regulated by the central government.

For example, if the Central Government suddenly wants to see many drug makers in this sector just for the sake of potential management and the regulation issue, the business operations are prompted by the government and the companies are constantly inspected by the agency. Even the access for the raw material is controlled by the agency. In addition, this business operation requires highly sophisticated infrastructure and operation management.

Over the last five years, the company has built well experienced and a highly effective management. Our CEO and the Chairman, Mr. Zhenjiang Yue, has 25 years of experience in Chinese private enterprise, including the pharmaceutical business. Mr. Leo is the General Manager, or we also call COO, of the company. He has 25 years of experience in pharmaceutical R&D, manufacturing and operation management.

Ms. Tam is the Vice President and General Manager. She has over 30 years experience in pharmaceutical technology, engineering and the development of the products. She has been in senior management positions in several leading competitive companies in China. Ms. Pierre -- she has over 14 years experience in pharmaceutical marketing and sales for hospital and OTC products.

Myself -- I have about over 10 years experience in various aspects of the pharmaceutical industry. I started as a scientist at the Roche Pharmaceuticals. I have been -- I have a several years working experience on Wall Street as a healthcare analyst. Recently, I joined the company.

So here is a brief financial snapshot of the company. In year 2006, we became a US public company through a reverse merger. We also raised $2.1 million gross proceeds late last year in a private placement. We initiated the product launch of Shuanghuanglian by end of last year also.

In year 2007, we expect two products in the marketplace and we expect more products approved and also we expect more financing to fuel the product launch and the strategic application.

Our balance sheet -- we have cash around $1.4 million, with total assets of $31 million, and our current liabilities almost $11 million including a portion of the long-term debt. And we have long-term debt around $30 million. In our recent income statement report, the three months quarter ended December 31st 2006, we had revenue around $350,000 because we just started the first product launch about two months ago. And we had losses around $1 million.

So I would like to conclude our presentation today with an investment summary. First, we have a compelling product pipeline with approved manufacturing rights in China. We have a proven ability to attain SFDA approval in the new product launch. We have a well defined growth strategy in place.

And we believe we are in a sweet spot in the narcotic drugs business, which is a largely untapped market opportunity in China. We believe this offers a high barrier to entry for the newcomers. And lastly, we have a well experienced and a fully committed management team for the company.

With that, thank you everyone for interest in our company. We would like to take a couple of questions, if time allows.

Question-and-Answer-Session

Unidentified Audience Member

[Inaudible Question]

David Shao

We have about 200 people. I think we just have -- R&D people just below 50 -- between 40 and 50 employees in R&D.

Unidentified Audience Member

[Inaudible Question]

David Shao

Well, yeah. Yeah. I think, you know, if you look at the company's history -- we only have five-year history -- but the location of the company is really important. We are in Shijiazhuang. We can recruit pretty much any type of expertise in this industry over there. And we -- you know, this company has been working on recently for the last four or five years. That's where we are coming from, and that's where we are right now.

Unidentified Audience Member

[Inaudible Question]

David Shao

Right.

Unidentified Audience Member

[Inaudible Question]

David Shao

I'm not sure we are the right people to comment on this part. Based on our experience, we believe, you know, this type of situation didn't happen overnight. It has been there over the years. I think it's a good thing to address this type of issue right now. Of course, we could expect some slow approvals from SFDA point of view.

But I think, you know, look at this way -- the pharmaceutical industry is a very important thing for China. I don't think we will take a [listings] delay to the approval process, because that would hurt the whole industry. And many companies have these type of issues. So I think you could say, maybe, there are some delays. But we feel that, you know, after a few months, usually the government will fix the problems in their structure.

John Ma

Thanks, David.

David Shao

Thank you.

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