China Pharma Delivers on Improved Financials Promise

| About: China Pharma (CPHI)

Earlier this week, China Pharma Holdings (NYSEMKT:CPHI) told investors to expect a better than 60% increase in its Q1 revenues and net income (year over year). Not surprisingly, the company made good on its promise. Revenue was up 62% at $11.7 million, gross profits climbed 76% to $5.8 million, and net income rose 77% to $4.2 million. Earnings per share were 72% higher at 11 cps.

The company makes pharmaceuticals and nutritional supplements. China Pharma attributes much of its improved performance to its growing list of new drugs. During 2007, it launched two new products, Alginic Sodium Diester, a treatment for stroke, and Granisetron hydrochloride, a drug given to counteract the nausea and vomiting caused by chemotherapy. Bumetanide, a diuretic given to patients suffering from heart failure, will be launched in 2008.

Existing products also contributed to the growth. Cold remedy Pusen OK produced $1.9 million of revenue, about 16% of the total and an increase of 99%. A single distributor signed a contract for $5.6 million of Pusen at the beginning of 2008. Other existing drugs reported increases between 23% and 198%.

China Pharma continues to enjoy a favorable tax rate. Its “tax holiday” cuts the usual taxes by 50% through 2010 and results in a 9% rate for this year.

The major negative in this otherwise positive report is the increase in accounts receivable, which were already high but which grew bigger during the quarter. This issue was discussed on the Seeking Alpha blogsite (link).

China OTC Player pointed out that China Pharma’s Accounts Receivable grew from $18.6 million to $24.8 million. The article did not specify that this growth was in just the three months of Q1 and that the net change, $6.2 million, was equal to more than 50% of the revenues reported by China Pharma. On top of the accounts receivables is $3 million of written-off bad debts, which grew by $600,000 from the end of 2007.

Various respondents to the China OTC Post have attempted to ratchet down the alarm caused by the increase in Accounts Receivable. Their arguments are: 1) the Accounts Receivables are up just 32% while sales climbed 62%, and average days outstanding on the Accounts Receivable are lower, and 2) the company sells mainly to hospitals, which are famous for being slow payers, though they are considered ultimately good for the money.

The latter blogger also makes the point that China Pharma’s situation – strong growth, slow collections – makes its effect felt most immediately in terms of available cash. The balance sheet bears out the truth of this statement as the cash levels of China Pharma dropped from $1.8 million at the end of 2007 to just $700,000 at the end of March, despite the large profit reported in the quarter.

These are all good points. China Pharma must somehow strike a balance between making its products readily available and stuffing the distribution channel in an attempt to drive up quarter-over-quarter revenues. We’ll have to watch to see whether the Accounts Receivable numbers begin to moderate in the future as payers catch up to the increase in sales. If not, it’s a bad sign.

Disclosure: none.