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Tianyin Pharmaceutical Co, Inc. (NYSEMKT:TPI)

F4Q12 Earnings Conference Call

September 28, 2012 09:00 am ET

Executives

James J. Tong – Chief Financial Officer, Chief Business & Development Officer

Victor Yang Tao – Chief Operating Officer

Analysts

Adam Waldo – Lismore Partners LLC

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Tianyin Pharmaceutical Inc.’s Fiscal Year 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, September 28, 2012.

I’d now like to turn the conference over to our host, Dr. James Tong, Chief Financial Officer. Please go ahead sir.

James J. Tong

Thank you, operator. Good morning, good evening, ladies and gentlemen. Welcome to Tianyin Pharmaceutical, TPI fiscal 2012 earnings conference call. I am James Jiayuan Tong, Chief Financial Officer and Chief Business Development Officer of TPI along with Dr. Victor Yang Tao, Chief Operating Officer; Simon Min Ren, Director of Investor Relations of the Company.

During this conference call, we’ll be reviewing the fiscal 2012 financial highlights followed by the question-and-answer period. Before we continue, please know that this call will contain forward-looking statements made under the Safe Harbor provisions of the US 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 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 this presentation are made only for this date and TPI is under no obligation to revise or update these forward-looking statements.

Fiscal year 2012 financial highlights. Revenue delivered $69.6 million, compared with $95.2 million in fiscal year 2011. Operating income delivered $8.5 million, compared with $18.1 million in fiscal year 2011.

Net income was $6.4 million compared with $15.7 million in fiscal year 2011. Earnings per share of $0.22 per basic share and $0.22 per diluted share compared with $0.55 per basic share or $0.53 per diluted share in fiscal year 2011.

Cash and cash equivalents totaled $35.2 million on June 30, 2012; operating cash flow for the fiscal year 2012 was $8 million compared with $14.2 million in the fiscal year 2011.

Sales for the fiscal year 2012 was $69.6 million, decreased 26.9% from $95.2 million (inaudible) for the fiscal year 2011. The decrease was due to the generic pricing pressure under ongoing healthcare reform. We witnessed a 17% reduction of TPI's organic portfolio revenue from $63.9 million for the fiscal year 2011 to $53 million for the fiscal year 2012.

Our core product sales are: Ginkgo Mihuan Oral Liquid (GMOL): $17.1 million; Apu Shuangxin Granules (NYSE:APU) $2.7 million; Xuelian Chongcao (XLCC): $2.2 million; Azithromycin Dispersible Tablets (AZI): $3 million; Qingre Jiedu Oral Liquid (NYSE:QRE): $3.5 million. The core product portfolio totaled [$28.5 million] or 53.8% of the organic portfolio revenue.

Gross profit for fiscal year 2012 was $24.3 million at 35% gross margin compared with $42.5 million at 44.6% gross margin for fiscal year 2011. The decrease in gross margins was the result of 1) wide generic pricing pressure by competition and healthcare reform policies, 2) government policies prioritize the Essential Drug List (EDL) drug sales that simultaneously reduce and negatively impact the sales and margins of our generic pharmaceuticals.

During the fiscal year 2012, our organic product portfolio delivered 45% gross margins, about 7% lower than 52% in fiscal year 2011. Provided the blend of the TMT, Tianyin Medicine Trading, distribution revenue and gross margin reduction associated with our proprietary portfolio as the current pricing trend continues, we anticipate our overall gross margin in the near term to stabilize around 35% for the fiscal year 2013.

Operating and R&D expenses were $15.8 million in fiscal year 2012 compared with $24.4 million in fiscal year ended June 30, 2011. The decrease is in line with the sales and margin decrease under the current market [environment]. We expect the operating expense percentage to stabilize between 20% to 25% of the revenue for the coming year.

Net income was $6.4 million in fiscal year 2012 compared with the $15.6 million in fiscal year 2011. The decrease was caused by the revenue decrease and margin compression due to the ongoing healthcare reform policies [Audio Dip] products particularly generics. Diluted earnings per share for the fiscal year 2012 were $0.22 based on 29.3 million shares compared with the earnings of $0.53 per diluted share for the fiscal year 2011, based on 29.8 million shares.

Balance sheet and cash flow; as of June 30, 2012, we had cash and cash equivalents of $35.2 million. Net cash generated from operating activities was $8 million for the year ended June 30, 2012, compared with $14.2 million operating cash flow for fiscal year 2011. We believe that TPI is adequately funded to meet all of the working capital and capital expenditure needs for fiscal 2013.

Business Development & Outlook; R&D for additional indications of flagship product Gingko Mihuan. Our flagship product Gingko Mihuan Oral Liquid contributes close to 25% of our total revenue. Clinical application and information gathered from our physicians showed that in addition to our approved indication for the usage of GMOL: cardiovascular disorders, and heart disease and cerebral ischemic attack including strokes. Off-label use of GMOL has been indicated in hepatic and ophthalmological diseases. The validity and mechanism are being investigated in a number of hospitals.

Under the ongoing healthcare reform policy that favors the sale in EDL drugs in China, the national or provincial EDL listings could substantially support the market position of these products. Recently, GMOL has been selected as an EDL drug in Henan province, Shandong province and City of Chongqing with a combined population of approximately 230 million people.

EDL provincial supplementary lists; The EDL status grants a full insurance coverage or 100% government reimbursement for patients. Jiangchuan Macrolide Project (JCM); After the completion of 240-ton JCM facility for the R&D and manufacturing of API and chemical intermediates of macrolide antibiotics, JCM was approved for its GMP certification designated as "CHUAN M0799," which is valid for the period of December 31, 2011 until December 31, 2015. The JCM underwent efficiency improvement and calibration for large scale production for the initial six months of testing operation.

Under the current volatile macrolide API pricing environment, we are cautious in ramping up the production of JCM. We target the revenue contribution from JCM approximately $20 million for next 12 months. TPI will utilize about 40% of the Azithromycin raw material manufactured from JCM.

Pre-extraction and formulation plant development at Qionglai Facility. TPI has initiated the process of optimizing the manufacturing facilities and production lines in compliance with the new GMP standards by calendar year 2013. Concurrently, the city of Chengdu has re-designated various industrial parks for particular industries such as automobile, biotechnologies, pharmaceutical.

As a consequence, TPI's current manufacturing facility at Longquan district, east of Chengdu, is designated for use by the automotive industry, is scheduled to be relocated to Qionglai city, south of Chengdu, designated for the pharmaceutical industry. The Qionglai facility, QLF is approximately 18 miles from the Company's JCM facility. The proposed relocation project also includes our TCM pre-extraction plant, which is located near the center of city of Chengdu, a rapidly expanding residential area.

The QLF is estimated to be 80 mu or 13 acres. Both pre-extraction plant and the formulation plant are to be relocated. The combined QLF plant, designed and constructed according to the latest GMP standards, is expected to relieve the current capacity saturation at TPI's facilities. The re-location and construction cost is estimated at $25 million for Phase I which expected to completed in early 2013, will expand the current capacity by 30%. Since the beginning of the QLF project in early February, the relocation project has been on track as of September, 2012.

Fiscal year 2013 financial guidance. We have met and exceeded the $66.0 million fiscal year 2012 revenue forecast. The net income for fiscal year 2012 is $6.4 million, which is slightly below our forecast net income of $6.5 million. The forecast net income excludes any non-cash expenses associated with stock compensation plans and stock option expenses. We believe the following factors will influence the future growth perspectives of the Company.

Market expansion and revenue growth of TPI’s core [product portfolio] led by flagship product and other major product; Two, ramp up of JCM revenue in the fiscal year 2013; Three, the gradual stabilization of generic sales following the progressive pricing restrictions caused by the ongoing healthcare reform; Four, steady TMT distribution revenue contribution; Five, QLF relocation and smooth transition of production capacity.

Our market analysis leads us to believe that the generic pricing pressure is likely to continue, but the JCM along with the TMT distribution revenue are expected to offset a generic sales decrease and support the revenue growth of the Company at the percentage about 10% to 15% for the coming year. We forecast the fiscal 2013 revenue between $75 million to $80 million and a net margin around 10%.

Management will continue to evaluate the Company’s business outlook and communicate any changes on the quarterly basis or as when appropriate.

Thank you operator, please open the question-and-answer period.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Adam Waldo with Lismore Partners. Please go ahead.

Adam Waldo – Lismore Partners LLC

Yes, good day, Adam Waldo from Lismore Partners. James, thank you for taking the questions. Couple of house keeping questions on differences (inaudible) more just, but on the conference call and what appeared in the press release and then some more subsequent questions. On the conference call you’ve referred to management believing that TPI is adequately funded to meet all working capital and capital expenditure needs for fiscal 2013. The press release states fiscal 2012, should we (inaudible) from your comments on the call that the press release as amount of type of there and will be corrected.

James J. Tong

Adam, thanks for the question and we noticed that consists in our fiscal year is in the mid of the year, and then during the typing or rearranging some of the text we did make the era on the 2012 and 2013, yes you’re right.

Adam Waldo – Lismore Partners LLC

So in the 8-K you file with the SEC, you’ll correct that?

James J. Tong

Yes, of course.

Adam Waldo – Lismore Partners LLC

Okay, thank you. And then the same for that section heading our fiscal year 2012 financial guidance in the press release, you refer to it is fiscal 2013 financial guidance in your comments on the call and I assume that you tend to correct that type as well.

James J. Tong

Yes, you’re right.

Adam Waldo – Lismore Partners LLC

Okay. Turning to subsequent questions on balance sheet and liquidity and your fiscal 2013 outlook, the $35.2 million of unrestricted cash at the end of the year, I mean, any cash going out with the work for the QLF relocation project as of the end of fiscal 2012 at June 30 or is that still to come through the financial statements in fiscal 2013?

James J. Tong

For the construction has not been the large outflow of the cash, because usually you have a deposit for the construction start and then when the construction is finish at certain segment and we’re actually going to began the progress, and then we’ll pay follow the steps of the construction. So does the first step is on track, but has not reach the payment time, and as soon as they finish at the end of this year or early next year and then the payment will go out. So, you can see that in terms of cash flow the men use right, has been paid, but now on the construction side.

Adam Waldo – Lismore Partners LLC

Okay.

James J. Tong

But it will be following very [strict].

Adam Waldo – Lismore Partners LLC

So, net-net in fiscal 2013, we have low $30 million, probably the low $20 million is to go out the door for the construction against which we’ll be seeing some cash come back in from Chengdu for the land that we are giving them in the city center is that, is that (inaudible) previously estimated that $5 million to $7 million coming back to us. So net, we might have something on the order of $15 million to $17 million of cash going out for the remainder of QLF Phase I project during fiscal 2013; will that be an accurate estimate on my part?

James J. Tong

The same is that, we’re not going to see the cash inflow from sales of land, because we will build the new plant and then move the old plant towards the new plant. And then when the old plant is completely moved out, and then we’ll negotiate with the government for the price in land. So it might take some time.

Adam Waldo – Lismore Partners LLC

So that might go into fiscal 2014, James, it might not be completed in fiscal 2013?

James J. Tong

Yes, that is correct.

Adam Waldo – Lismore Partners LLC

Okay. But the $5 million to $7 million preliminary estimate is still your best estimate at this point in terms of what we’ll see back from Chengdu municipality where the land that we’re giving up right.

James J. Tong

Yes.

Adam Waldo – Lismore Partners LLC

Okay. And then final question on liquidity, the stock is trading at a fraction of it’s approximately $3 per share book value. You had various points examined financing some of the (inaudible) like QLF Phase I and potentially Phase II through bank debt. Can you update us on what you are thinking as with respect to bank debt financing for the plant relocation projects for QLF and then your updated project – share repurchase with the stock trading at less than 20% of book value.

James J. Tong

Yes, you are right. So at the moment you can see that we have $6 million of bank debt and then some of them are restricted cash. So if the trade notes payable, related trade notes payable, so we have the restricted cash put in the bank and then collect an interest, and then these trade notes will give us the six month of paying [form]. Some of those debts will be used for the QLF relocation. At the moment we are in the mode of conserving cash and until the finishing up of the QLF facility relocation.

So by that time, we will be moving certain substantial amount of capital for the share repurchase to some extent as we have disclosed previously that we wanted to focus our capital and effort to finish the QLF construction because it is indeed mandatory.

Adam Waldo – Lismore Partners LLC

Understood and thank you. That was a very helpful update.

James J. Tong

Thank you, Adam and the questions.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of [Al Graf], a private investor. Please go ahead.

Unidentified Analyst

Yes, James. I got a couple of questions. One for the June quarter, what did JCM contribute to those revenues if anything?

James J. Tong

The JCM is delayed and previously we have reported that we expected that can start in the late 2012 fiscal year and now it has just started in September. So we expected that the next 12 months contribution of $20 million. It has already started; it’s gradually ranking up the capacity. It could be ramping up quicker, but under the current API volatile market condition that we would do fairly cautiously.

Unidentified Analyst

Okay. So that means revenues were more or less based on your TCM business and they were over $18 million for that June quarter, correct?

James J. Tong

Yes, you are right. So the contribution from the TCM business would be larger than we previously forecast, yes.

Unidentified Analyst

And then drop in revenue from fiscal year 2011 to 2012 have strictly been through pricing issues or have you had a decrease in unit volume as well?

James J. Tong

Also decrease in the unit volume as well. Certainly pricing restriction is a main factor and also as you can see that in the disclosure is that, the government policy has restrict the sales of generic in the low AA hospital, which had just completing the policy, completely whip out the sales in the – you can say rural areas or agricultural areas. Previously some of the generic sales can be made there and then quite profitable even though there are fairly [despicably] relocated, but due to the policy as those generics no longer can be sold there, so that certainly reduce some of the volume there as well.

Unidentified Analyst

So are you still running your TCM facility at roughly 90% operating capacity?

James J. Tong

At this moment yes. As you can see that, I think it is a good question for our COO, let me translate it for him, but let me just add one word that you didn’t see that our main product, the percentage is higher, so we are gradually focusing on the major product that doing larger sales instead of spreading our effort in the various 58 product, just stand on one second.

[Foreign Language]

Victor Yang Tao

[Foreign Language]

James J. Tong

Okay. So our COO's answers are, there is a product structure change, so if you can see the high margin product sales decrease, for example Apu Shuangxin (APU) and Xuelian Chongcao (XLCC) and there are low margin product and low pricing product actually increased. So roughly the saturation rate is around 90%, and also that again the product structure change the cheaper EDL like drugs, we have seven of them, are experiencing higher volume.

Unidentified Analyst

Okay. And what capacity is the JCM facility running at now?

James J. Tong

The capacity at this moment, it’s less than five tons per month.

Unidentified Analyst

Less than five which is 60 tons a year, which means you’re running at roughly 25% capacity?

James J. Tong

Yes, as you projected for 12 months, but as soon as we started, we have already started, so we expected a gradual ramp up. So the next month or next quarter we’ll have a different number.

Unidentified Analyst

Right, I understand that. And what is the price per ton of API going for these [days]?

James J. Tong

$140,000 per ton and roughly 800 yuan per kilogram.

Unidentified Analyst

And that’s down from 200,000 when you first started this full process if I’m not mistake?

James J. Tong

Yes.

Unidentified Analyst

And then my last question is, when do you expect to begin the GMP certification process on the new QLF Phase I project? When do you expect to be able to start that GMP process?

James J. Tong

Our expectation is early 2013.

Unidentified Analyst

And that's fairly roughly about a four week to six week process?

James J. Tong

The GMP, let me check with our COO.

[Foreign Language]

Victor Yang Tao

[Foreign Language]

James J. Tong

Relocation is expected to complete by February next year, GMP certification.

Unidentified Analyst

Yeah, that would be right, so you would be able to ramp that up pretty, right of the back, so we’re looking at February and March of 2013 before that facility is up and running and contributing.

James J. Tong

Yes, you’re right.

Unidentified Analyst

Okay, thanks for your time. Appreciate it

James J. Tong

Any further question?

Operator

Thank you. And our next question is a follow-up from Adam Waldo with Lismore Partners, please go ahead.

Adam Waldo – Lismore Partners LLC

Just a couple of follow-up questions on your fiscal 2013 guidance James and the decomposition of it, you’ve given guidance for $75 million to $80 million of fiscal year 2013 revenue with a net margin around 10%. As we think about the components of the revenue guidance, how would you decompose the $75 million to $80 million total revenue guidance into contribution from the organic portfolio, TMT distribution revenue and revenue from the JCM, which I think you put a $20 million, so I guess, I need to go back to that but how much of the remaining $55 million to $60 million would be organic portfolio versus TMT in your fiscal ’13 guidance.

James J. Tong

Sure. So, if you look at – so we’ve put a $75 million and $80 million under this annual report is that we did not offer more resolution on this because we wanted after the first quarter, probably we’ll have better resolution. If we just (inaudible) if you look at the $80 million or $75 million, let’s say (inaudible) $15 million to $20 million for JCM and then we are expecting about $60 million for the Tianyin business, and Tianyin business together with TMT distribution revenue. But if you look at – if the time progress is that if the JCM ramp up increase higher or expected first two quarters higher than the – we projected $20 million then we will be revise up our guidance. That depends on the condition of the TCM product sales because at this moment we did not see the market further deteriorate and our local product has been listed in the provincial EDL which is the plus.

So we are impacting a flat or gradual increase of the growth but all these things could change because the policy in healthcare reform could be changing as well. That’s why we, so far I think the short answer will be that we put $75 million to $80 million as pretty good visibility, but the division of that should be JCM and then a moderate growth for the TCM business, but then also could be a expected JCM revenue, a higher growth trend for the Tianyin business.

Adam Waldo – Lismore Partners LLC

Okay. And given the organic portfolio to $53 million in fiscal year 2012 without the benefit of the new approvals in several major provinces plus Chongqing where you have access to 230 million new population that you didn’t before, should we feel pretty good about the conservatism at the implicit organic portfolio guidance in your fiscal 2013 revenue outlook at least initially here.

James J. Tong

Yeah, we try to – we want to stay conservative and projecting, I think for ahead, and we are certainly very excited for the listing of EDL, provincial EDL for GMOL and there are other products that we’re making efforts and listed ultimately in EDL as well, which we’ll be updating for our investors, yes so we’re (inaudible).

Adam Waldo – Lismore Partners LLC

Glad to here it. Thank you.

James J. Tong

Thanks, Adam.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of (inaudible) please go ahead.

Unidentified Analyst

Thank you. I’ll start with my question. Hello, James, this is (inaudible).

James J. Tong

Hi, (inaudible).

Unidentified Analyst

And my first question is about GMOL, i.e. it was great. I think that (inaudible) GMOL in Q4 is on a high and we met higher than the – in the first three quarter and I would like to, can you give more color on that?

James J. Tong

Can you repeat the question because there was a little bit of noise there when you were talking?

Unidentified Analyst

I’m sorry, yeah. I think the sales growth rate for GMOL in Q4 has increased 2% year-over-year but GMOL sales and (inaudible) year-over-year basis and but (inaudible).

James J. Tong

Can you repeat the question? You meant that GMOL sales is higher in the fourth quarter than the other quarters, right?

Unidentified Analyst

Yes.

James J. Tong

Yeah, okay. Those have seasonality during the summer. We do experience a higher GMOL sales due to the increase of stroke patients. It could be due to various reasons, one of them we can think of it is that the summer, there is a higher chance of increase of blood viscosity and then there are certain cardiovascular diseases related to the increase of blood viscosity and that can certainly stimulate with sales in GMOL. And that has been the case for the past several years when GMOL introduced in the market. So in the fourth quarter usually we do experience a higher GMOL sale.

Unidentified Analyst

Okay. And my second question is about the tax. How much is the tax for upgrading the facilities on (inaudible) spend there?

James J. Tong

The tax (inaudible) expenditure?

Unidentified Analyst

Yes.

James J. Tong

We expect a $25 million in total which I think the $3 million to $5 million for the land use right and the rest of it will be for the construction.

Unidentified Analyst

Okay. Thank you. That’s my question.

James J. Tong

Thank you.

Operator

Thank you. And our next question is a follow-up from (inaudible) please go ahead.

Unidentified Analyst

Yes, James. Has there been any headway made on deals with Bangladesh or believe at the annual meeting there was a talk of possibly doing something with JCM change in the United States. Is there any headway been obtained on either one of those?

James J. Tong

So for the Bangladesh, due to the JCM delay, you meant RELATIONS International, we have been working with them and previously updated for other investors that we have signed the agreement of distribution. JCM testing operation took longer, so and that front, there is delay for further progress but as soon as we have really started JCM operation. And we are certainly moving ahead with that project. If there is any substantive progress we’ll be updating for you. For the U.S. side, we have already sent our samples to distribution company in U.S. with our name disclosed and we are certainly waiting for the response from them to see what type of collaboration we actually will be a pursuing going forward for our export business, yeah.

Unidentified Analyst

So for Bangladesh, you pretty much can’t count anything on that for fiscal year 2013, right?

James J. Tong

Towards the end of it 2013, we are talking about nine months from now, but there could be something substantive but not as early as this quarter or the next quarter.

Unidentified Analyst

Okay, thank you.

Operator

Thank you. And I’m showing there are no further questions. I’ll turn the call back to Mr. Tong for closing remarks.

James J. Tong

Thank you, operator. It’s been a pleasure to speak with you regarding the fiscal year 2012. Thanks for the questions. We will be updating with you the progress of Tianyin Pharmaceuticals from time to time and please feel free (inaudible) for any further question and follow-up. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.

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