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Executives

David Gao – Chief Executive Officer and Director, BMP China

Fred M. Powell – Chief Financial Officer

Ashley Ammon MacFarlane – ICR Inc.

Analysts

Jerry Tang – Roth Capital Partners

Julie Chen – CRT Capital

Katherine Lu – Oppenheimer

Hongbo Lu – Piper Jaffray

BMP Sunstone Corporation (BJGP) Q1 2008 Earnings Call May 19, 2008 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 BMP Sunstone Corporation Earnings Conference Call. My name is [Shekwana], and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. If at any time during the call, you require assistance, please press * followed by 0 and the coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’s call, Ms. Ashley Ammon MacFarlane from ICR. Please proceed, ma’am.

Ashley Ammon MacFarlane

Thank you operator. Please bear with me as I take you through the company’s Safe Harbor Policy. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC. BMP Sunstone does not undertake any obligation to update forward-looking statements except as required by applicable law. Now, allow me to turn the call over to David for a strategic overview of the business and then to Fred who will review the financials. David?

David Gao

Thank you Ashley. Ladies and gentlemen, thank you for participating in our First Quarter Earnings Conference Call. I want to begin today’s conference call by commenting on the devastating earthquake in China. This was the worst earthquake to hit China in three decades and has caused a massive destruction in taking thousands of lives in Central China. We have been closely monitoring the aftermath of this disaster and extend our heartfelt sympathy to those impacted by the event. We are most thankful that none of our employees nor our operations were impacted by the quake. We are aggressively supporting the current relief efforts in China and have donated funds as well as over 1 million RNB of Good Baby products. We will continue to monitor the catastrophe, but at this point, we believe we are extremely fortunate and will not have any material impact on our operations. Any changes to that thinking will be quickly communicated to you, and we encourage all of you to support the relief efforts for the less fortunate impacted by this devastation. So now, let me move onto highlight our performance for the quarter.

Today, we reported record revenue and gross margin results which really demonstrate our transitioning the company from a low-margin distribution business of the past into a high-margin OTC and the prescription specialty pharmaceutical company in the future. Our goal is to be one of the biggest and the most profitable healthcare companies in China, and we intend to utilize our different businesses, acquisitions, and the JVs to achieve this goal. Revenue increased to 118% and our gross margin was 43%, and it was actually 46% excluding our non-cash accounting expense. This performance reflects the initial revenue and the gross margin contributions from Sunstone. Our growing licensed products business also drove gross margin improvements and we are excited about the increasing presence we are realizing at BMP China. As many of you know, through the Sunstone acquisition, we significantly enhanced our product offering with two of China’s certified national brands, in the pediatrics and women’s health, which are therapeutic areas that we find to be extremely competing. We also gained our formidable retail prices with Sunstone and have expanded our distribution reach into more than 50,000 retail pharmacies in China because of this acquisition. With a stronger brand portfolio and a materially larger retail presence, we remain dedicated to realizing synergies across our organization in 2008 and well into the future.

In addition to the completion of the Sunstone acquisition, several other significant developments occurred this year, and let me briefly review those. The GP Corp transaction solidifies our relationship with these two world class organizations. Guangzhou Pharma is one of the largest pharmaceutical wholesalers in China and Alliance Boots is one of Europe’s leading health and beauty groups. Our 10% investment in GP Corp gave us access to over 12,000 hospitals, pharmacies, and other distributors in Southern China. This endeavor is progressing as planned as of today. Our Rongheng acquisition continues to move forward and we were pleased to receive the MOFCOM approval in the first quarter. We haven’t closed this transaction yet but MOFCOM approval was an important step. This acquisition will further increase our sales force and expand our distribution capabilities geographically to include all the top-tier hospitals in Shanghai. Rongheng has relationships with 30 distributors and maintained our product portfolio consisting of approximately 450 products. Recently, we also received acceptance of the clinical trial application for Enablex by China’s SFDA. This approval enabled us to pursue clinical trials and ultimately complete the commercialization process for the product. Enablex which treats the symptoms of incontinence, urgency, and overreactive bladder is a product that we are very excited about. We estimate that approximately 200 million people in China are afflicted with OAP, but less than 13% of sufferers in China actually seek treatment. Consequently, we believe we have the right products at the right time and so we are aggressively pursuing its commercialization.

Our growth strategy is to continue to grow the existing business by expanding and increasing penetration in hospitals covered as well as increasing the market penetration of Sunstone’s products. We intend to expand our product portfolio with additional women’s health and the pediatrics products, continue to license drugs from leading pharmaceutical companies and to acquire therapeutic Rx and OTC products. In addition, our strategy calls for us to leverage the national distribution network we have in place with reciprocal distribution of products between Shanghai, Beijing, and Guangzhou. Expand in underdeveloped markets utilizing the GP strong venture to bring products to Southern China and distribute additional products through Sunstone’s national pharmacy presence. Overall, for the remainder of the 2008, we are intently focused on successfully achieving our goals which include; first, increase our revenues and expand our gross margin. We expect this will continue to occur as our revenue mix shifts more and more towards branded OTC and the prescription products and away from distribution. You can see we are beginning to achieve this goal as evidenced by our first quarter financial results. We do realize cost and synergy across our organization whenever possible. We must maximize the synergy between our businesses. We believe we have a substantial opportunity to cross sell the strength of each entity and again efficiencies in our overall operation. The third, we intend to secure additional exclusive drug licenses and we intend to market at least two new product launches this year. We view this as a critical competitive advantage that positions us well for future growth.

Additionally, we would like to enhance our internal management process, in particular, our operational and the financial systems so that additional acquisitions can be integrated quickly and efficiently. Although BMP Sunstone continues to evolve at a faster pace, we intend to remain focussed on our goals in the strategies and to continue to enhance shareholder value. At this time, I’ll turn the call over to Fred Powell, our Chief Financial Officer, who will review some key points from our first quarter financial results. Fred?

Fred M. Powell

Thank you David. And now you’ve all seen our press release with our detailed financial results. So, I’ll use this time to highlight key points in the first quarter. The revenue mix shift gross margin enhancements and our operating loss and adjusted EBITDA improved both year over year and sequentially. More specifically, our revenue results reflect increasing OTC and licensed product revenue. Total revenue increased 218% to $18.1 million and includes approximately $9.5 million of OTC revenue from Sunstone, and licensed product sales of roughly $1.2 million which has tripled year over year and is up sequentially. Distribution revenue was $7.4 million in the first quarter of 2008 compared to $5.3 million in the comparable period of 2007. Gross margin improved to 42.7% in the first quarter reflecting the increased revenue from OTC and licensed product sales which generate higher margins than pure distribution. Gross margin would be 46.1% excluding the $600,000 of purchase accounting adjustments for Sunstone inventory. The company’s operating loss in the first quarter improved to $1.4 million loss and includes Sunstone related general administrative expenses as well as cost related to additional senior management, administrative, and corporate staff in China. Our adjusted EBITDA in the first quarter of 2008 was $1.5 million which excludes the impact of $563,000 of stock compensation expense, $977,000 of amortization debt discount and issuing cost, $802,000 of interest expense, $609,000 of amortization of fair value inventory for the Sunstone acquisition, and $470,000 of amortization for the Sunstone acquisition. This compares with adjusted EBITDA the year before that was a loss of $1.4 million. Our cash position was $8.4 million which reflects the $12 million payment for GP Corp made in January. You will see that on our balance sheet we recorded approximately $14.4 million of those receivable which are short-term notes receivable which are redeemable for cash. Including those receivable, our redeemable cash position was approximately $22.8 million. We’re comfortable with our liquidity levels and we believe that we can move forward executing our operating goals within this scenario.

Regarding our guidance, we intend to update our full year 2008 guidance upon the close of the Rongheng acquisition later this year. For the time being, however, we’re comfortable reiterating that we expect revenue of at least $96 million for the full year 2008 with a corresponding net loss of roughly $3 million or 7 cents per share based upon 39.5 million shares outstanding. Please keep in mind that we have approximately $9 million of non-cash expenses in these numbers, so if you’re adjusting your models, please note that we do expect profitability on an operating basis. That concludes our prepared remarks. Operator, we’re ready to take questions.

Question-and-Answer Session

Operator

[Operator instructions]. Your first question comes from the line of Jerry Tang with Roth Capital Partners. Please proceed.

Jerry Tang – Roth Capital Partners

Good morning David and Fred, or should I say good evening.

David Gao

Good morning Jerry.

Jerry Tang – Roth Capital Partners

The first question is for David. David, can you add more color on the consolidation with Sunstone. I am not referring to the near-term action from BMP. For the rest of 2008, what’s the focus on the consolidation plan and should we see a dramatic change between the two sales forces – between BMP and Sunstone operation.

David Gao

Okay. Jerry, thank you for your question, that’s a very good question. Actually, we have been working, myself and also Mr. Han, as you know, Mr. Han was appointed as the President of BMP Sunstone – that is really kind of a significant step for the organization changes within BMP Sunstone. That means, Mr. Han is not just responsible for the Sunstone operation but at the same time and also work with me to focus on the operation side for the whole corporation. We’re going to look for where the synergy is that we can leverage; for example, how are we going to use our distribution channels to enhance the Good Baby and the Sunstone products to increase the sales, and also we’re looking for some products by BMP China which one could basically have the opportunity for the cross selling for both the pharmacy and the hospitals. So, again, to answer your question, we are in the process, but we have to work on kind of a comprehensive plan and we’re [talking to each business] – actually that is an ongoing process, so we’re just started to do the consolidation.

Jerry Tang – Roth Capital Partners

Okay, great. You just mentioned the changes in the management now – besides Mr. Han, you added another female management member, Yanping Zhao, and also we noticed in the fourth quarter you added a new board member, George Bickerstaff – can you comment on the two personnel change, and what’s their roles and what kind of impact will it bring to Sunstone?

David Gao

Yeah. As all of you know, actually Yanping has over 20 years experience in the pharmaceutical business, and especially to enhance the internal management and the integration for the various investments when she worked for another company, the ChinaBio, as the Executive of Board of Directors, and she’s assisting me and Mr. Han to do the integration, and first the focus is going to be to improve the internal management, and also she is going to help me to execute and to evaluate some new opportunities as we move forward. George Bickerstaff is very strong as a CFO at Novartis, IMS, and AC Nielsen. So, I view he is going to be a tremendous asset for the company as we move forward both in the future acquisitions and to improve our financial system.

Jerry Tang – Roth Capital Partners

Okay, great. My next question will be on the BMP product – in the first quarter how many licensed products are generating revenue?

David Gao

Actually, in the first quarter there are three products – Propess, Anpo, which Fred already talked about. We have a basic [inaudible] to sales and the revenue, and [inaudible] also launched Galake; that is a pain management product, and those are the three products to generate revenue.

Jerry Tang – Roth Capital Partners

Okay. [In what way do you expect] Ferriprox to generate revenue this year?

David Gao

Right now I just can tell you that the product is on the shipment – so, once the product is ready, as we receive the products, we’re going to start selling the products because there is no other procedure we need to go through because that is already approved and we already did the marketing, also the seminars, and aligned with the hospitals. Right now, we’re just waiting for the product to come into China.

Jerry Tang – Roth Capital Partners

Okay. [I also did notice] while the revenue generated from the licensed product increasing which I believe are mostly [inaudible] to see, we noticed the revenue generated from distribution are dropping, is that considered because of a seasonality issue or is that also a strategic move from the management?

David Gao

Yeah. Actually as you know, Jerry, our distribution revenue, absolute number is also significantly increased, but the percentage has dropped. That is our intention. Our focus is more like a change to the product mix so that basically we move the low-margin products to the high-margin products. We may want to even reduce some number of the product that we distribute – other people’s products. But by changing the product mix, we want to also enhance their profitability. Yeah, answering your question, yes, we are intentionally reducing their percentage of the total business, but on the absolute numbers, they are still increasing, they are still growing.

Jerry Tang – Roth Capital Partners

Okay. This will be last question I think, and later I will follow up if I have more number of questions – can you comment on the Rongheng timeline because it seems this transaction has been there for a while. Is there a more solid timeline?

David Gao

Rongheng timeline, yes. Rongheng, we announced. We still anticipate expecting to complete the transaction within the first half of this year. We’re still on track.

Jerry Tang – Roth Capital Partners

Okay. Great. Thank you.

Operator

Your next question comes from the line of Julie Chen with CRT Capital. Please proceed.

Julie Chen – CRT Capital

Yes. Good morning. Congratulations on a good quarter Dave and Fred. The first question, just would like to follow up on the Sunstone integration update. If we compare in terms of the operating expenses, just like to get some color in terms of; one, where does the integration update stand as of today, and two, essentially are we looking at down the road cost cutting measures to streamline this business into the legacy business and turn the company into profitability.

Fred M. Powell

Julie, I guess maybe I’ll handle the first part of that one and cover the second half when it comes to looking at cost cutting measures. As you know, the Sunstone operation is a separate operation that we’re looking to synergize with additional revenues going through our distribution channels that we have. So we would not necessarily expect to see cost reductions; however, what we would expect to see would be reduced increases in costs. And by that I mean instead of having additional sales force selling each product, whether it’s a hospital product and then a separate sales force selling the OTC products; we hope that the increased cost will actually be reduced. The same thing would take place when it comes to looking at our overall systems that we put in place. Again, it’s for a larger base. So, therefore we don’t have to double the costs, but in terms of the absolute dollars we would now be able to cut the dollars that are currently being spent at Sunstone.

Julie Chen – CRT Capital

Okay. And in terms of the integration, where do you stand today?

David Gao

Julie, is this a question for me or for Fred?

Julie Chen – CRT Capital

Anyone would do. Thank you.

David Gao

Okay. You asked about the integration?

Julie Chen – CRT Capital

Yep.

David Gao

With Sunstone?

Julie Chen – CRT Capital

With Sunstone.

David Gao

Okay. Again, as I said to answer Jerry’s question, we’re starting to the integration from the top. So the board appointed Mr. Han as the President of the company. He is going to focus on more operation side, not just to focus on Sunstone alone, but also looking for BMP China and the Wanwei and the Rongheng while I am more working with the GPC joint venture. So the first things that we’re going to look, by each business, what kind of synergy we can leverage so that we can use this synergy. So, the process as I said, we already started the process. We’re discussing with the management, the head of each business, to find out how are we going to maximize our synergy within each business unit.

Julie Chen – CRT Capital

Great. So, let me just understand something…

David Gao

Again, Julie, I am expecting we would have much more results within the next 3 months.

Julie Chen – CRT Capital

Thank you. So, if I make a clarification on the Rongheng acquisition timeline – let me just try to tie a few things together if I may – on your financial results today, you have about $8.4 million of cash on your balance sheet. You have a line item that Fred just clarified on the bills receivable which he said it’s actually deemed as for cash – about $14.4 million.

Fred M. Powell

Yes.

Julie Chen – CRT Capital

So, is there a timeline when this bills receivable will be turning cash. Will it meet the timeline for the Rongheng acquisition or is it something that will happen afterwards?

Fred M. Powell

I can handle that one David. With the bills receivables, what happens specifically between 3 months and 6 months receivables set up with the customer as well as a bank and the company; if we allow it to mature we would get 100% of the amount that’s receivable. We’re able to at anytime cash in that bill receivable early at a discount. So, our goal would be to keep our existing cash that we have and only pull from it when we need an additional cash payment. So therefore it is available to us at anytime that we would need cash going forward.

Julie Chen – CRT Capital

Okay. So in terms of a cash position moving forward for the year, as you go through some of your clinical trials and so forth and launching new products, it won’t be – if I may use the word – a strain – moving forward for the year 2008.

Fred M. Powell

We believe we have sufficient cash at this time in both the cash as well as bills receivable for 2008.

David Gao

Yes. Julie, again, let me add some points because you mentioned about the Rongheng financial situation – we already paid the transaction money – it actually is already paid – 6 million – and we already injected 5 million RMB as a capital increase. So actually we already fulfilled most of our obligations for that acquisition. Right now, the only thing we have pending is for the business license.

Julie Chen – CRT Capital

Great. Thank you.

Fred M. Powell

Just to add a little bit on that – and that payment took place in the second quarter of this year Julie; so that cash indeed has been paid.

Julie Chen – CRT Capital

Great. Thank you very much.

Operator

[Operator instructions]. Your next question comes from the line of Katherine Lu with Oppenheimer. Please proceed.

Katherine Lu – Oppenheimer

Hi. Good morning. Thank you for taking my question. First for David, you talked about your impressive goal of two new product launches each year. I am just wondering if you can share with us a little bit more detail on this. For example, I am just wondering if you can put the potential product launches in the chronological order and which product or products do you expect to be your home run product.

David Gao

Katherine, I wish I could answer your question – because of some confidential with our partners whom we’re negotiating – and so unfortunately I cannot tell exactly the name, the company’s name, and the products, but I would say most of the products right now is currently under negotiation. Either that is SFDA approved products and also they are in the similar therapeutic area for women and pediatrics. So, that’s the thing I can tell you, but that’s our strategy. Unfortunately, I cannot disclose the product before the media announcement.

Katherine Lu – Oppenheimer

Okay. Sure. I understand. Since you touched on SFDA approval, I am just wondering if there’s any update in terms of environment of SFDA approval sentiments and specifically, do you see any impact to BJGP’s business.

David Gao

SFDA approval right now is just too slow. Everybody knows, this is still very slow. Actually SFDA almost stopped to approve any new domestic publications and that very few can go through. Actually, for the BMP China business, that is a positive, because some of our products – especially the foreign products – I don’t see a slowdown of foreign products, but a significant delay for the local products.

Katherine Lu – Oppenheimer

Okay. Just one final question. In terms of the review period – how long does it take for SFDA to review and approve a foreign product.

David Gao

That depends on which stage – if there is active approval – we still plan like 3 years.

Katherine Lu – Oppenheimer

Okay.

David Gao

Yeah. Because you still have to [go through what they the bridging] study, right classified as phase III study, but that is similar, but this still takes 3 years when you think of all the filings and other requirements.

Katherine Lu – Oppenheimer

Okay, how about specifically from filing to approval – after you submit the application – how long does that take?

David Gao

We just recently submitted the approval for Enablex; as I said, this is already approved; now we’re starting to do the clinical trials. So, in our announcement we anticipate that we would be able to launch that product by 2011 – so that’s to give you some flavor about how long this will take.

Katherine Lu – Oppenheimer

Okay, great. Thank you very much.

Operator

You next question comes from the line of Hongbo Lu with Piper Jaffray. Please proceed

Hongbo Lu – Piper Jaffray

Thank you. Hi Fred and David. I have quite a few questions here – one is actually to clarify on the product launch. David, when you said two more product launches this year; that excludes the Galake and Ferriprox right? Ferriprox is going to be launched this year, but two more additional products besides…

David Gao

Yes. The answer to your question is yes.

Hongbo Lu – Piper Jaffray

Okay, and then, for your in-licensed product revenue, the $260,000 increase – can we think that actually mainly from Galake or actually portions of that from the increase – there is contribution from Anpo as well – from the existing products.

Fred Powell

I can answer that one Hongbo. We saw increases in each of products; Galake, that was launched in the fourth quarter had significant growth in the first quarter, and Propess and Anpo were both significantly over the prior year sales; so all three products had significant growth.

Hongbo Lu – Piper Jaffray

Okay, and then, going through the financials – Sunstone, they’re paying their tax just as if they are a standalone company right?

Fred Powell

That’s correct. They’re at a 25% tax rate.

Hongbo Lu – Piper Jaffray

25%. Okay. And then if you look at sales and marketing and G&A; is there a substantial increase or is it pretty much in line if you take just Beijing BMP in terms of percentage of sales – the expenses – is it pretty much in line with 2007?

Fred Powell

Well, Sunstone’s largest single cost on the income statement is their sales and marketing, and that is a significant shift from our prior existing businesses of distribution, and our BMP China’s sales that we had. So, therefore we will see a shift take place in 2008 with an increase in the gross margin as we discussed, and we’ll also see an increase take place on the sales and marketing line almost exclusively because of the Sunstone acquisition.

Hongbo Lu – Piper Jaffray

Okay. If you look at the combined sales and marketing, and G&A expenses, it is around $9 million for this quarter based on my very rough calculation; it is about half and half for Sunstone and for BMP, is that roughly correct?

Fred Powell

Is it half and half between Sunstone as well as the other operations did you say?

Hongbo Lu – Piper Jaffray

Yeah.

Fred Powell

Yes, if you were to include the other as being BMP China corporate as well as distribution and then having Sunstone as a standalone by itself, yes.

Hongbo Lu – Piper Jaffray

Okay, great. Thank you, that’s all.

David Gao

Thank you Hongbo.

Operator

[Operator Instructions]. At this time, there are no further questions. I would now like to turn the call over to Mr. David Gao for closing remarks.

David Goa

So, thank you everybody for joining us on today’s call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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