BMP Sunstone Corporation Q2 2008 Earnings Call Transcript

Aug.11.08 | About: BMP Sunstone (BJGP)

BMP Sunstone Corporation (BJGP) Q2 2008 Earnings Call Transcript August 11, 2008 8:30 AM ET

Executives

Ashley Ammon MacFarlane – IR, Integrated Corporate Relations, Inc.

David Gao – CEO

Fred Powell – CFO

Martyn Greenacre – Chairman

Analysts

Jerry Skochin – Philadelphia Brokerage

Julie Chen – CRT Capital Holdings

James Tong – Roth Capital

Sanheram – Wachovia Securities

Hongbo Lu – Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 BMP Sunstone Corporation Earnings Conference Call. My name is Lorene and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference (Operator instructions) As a reminder, this conference in being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Ms. Ashley Ammon from ICR.

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, please allow me to turn the call over to David for a strategic overview of the business and then to Fred will provide a financial review. David?

David Gao

Thank you, Ashley. Ladies and gentlemen, thank you for participating in our second quarter earnings conference call. I want to begin today’s conference call by expressing my sincere appreciation to our investors for their continuing support and the confidence in our management team. We remain focused on executing our strategy to be a leading specialty pharmaceutical Company in China, especially in women’s health and the pediatrics market. And we are more focused than ever to drive sales and deliver consistent operating profitability.

I am very pleased to emphasize that we delivered operating profitability in our second quarter 2008 results, which are the strongest in our Company’s history. We are particularly encouraged with our revenue improvement and our operating performance. Through our increased revenues from Sunstone and our growing licensed products business, we are now a high-margin branded OTC and a prescription specialty pharmaceutical Company.

Let me briefly review recent significant developments. On the product development side, we launched Ferriprox in China and the advanced Enablex into the preclinical trial stage. We started marketing and distributing Ferriprox under a five-year licensing agreement with Apotex, Inc. in June 2008. Ferriprox is a cost-effective thalassemia treatment, which will result in greater drug compliance than competing injectible formulations. We believe that our sales and marketing capabilities can capture our competing addressable market and our distribution relationships can bolster our sales performance. Ferriprox can have a meaningful revenue contribution to BMP Sunstone in 2009 and beyond.

In May, we announced that the clinical trial application for Enablex in the treatment of overactive bladder was officially accepted by the State Food and Drug Administration. Enablex was licensed from Novartis. The Company expects to start the pivotal clinical trial in the first half of 2009. (inaudible) sales of Enablex exceeded 2450 (inaudible) in 2007. This drug represents a significant opportunity for BMP Sunstone’s future growth.

On the corporate product development side, we disclosed in the first quarter conference call that we would soon close the Rongheng deal. In early July, we received our New Business License and completed acquisition of 63.3% of Rongheng. This acquisition will further increase our market presence and expand our distribution capabilities geographically to include all the top-tier hospitals in Shanghai. Rongheng distributes over 400 pharmaceutical products to more than 140 top-tier hospitals and thousand retail pharmacies in Shanghai. The closing of the Rongheng acquisition is one more important step in our corporate objective to ensure direct access to the high-end pharmaceutical market in Beijing, Shanghai, and Guangdong province.

More recently, we also signed a non-binding letter of intent to acquire 75% of Shengda Pharmaceuticals for up to 30 million RMB, approximately $4.4 million US. Shengda is a leading manufacturer of pediatric pharmaceuticals, specializing in antibiotic research and development and has approximately 75 product licenses approved by SFDA in China. We look forward to the partnership with Shengda and expect to close this transaction by the end of the year. The Shengda products we intend to acquire specifically targeted (inaudible) pediatrics market, which fits strategically under out Good Baby brand, and also complements our pediatrics franchise in both the OTC and Rx markets.

Utilizing our extensive [ph] sales coverage internationally recognized brands we intend to realized synergies immediately by increasing sales volume and improving sales margin. As previously announced, we expect to finance this transaction with funds available at Sunstone.

At this time, I will turn the call over to Fred Powell, our Chief Financial Officer, who will review our second quarter financial results. Fred?

Fred Powell

Thank you, David. By now you have all seen our press release with detailed financial results, so I will use this time to highlight the key points. In the second quarter, we demonstrated significant progress in reaching sustainable profitability at the operating income line. We have improved revenue and gross margin performance on year-over-year and quarterly basis and our operating income improved from a loss at this time last year.

We also continue to believe our financial performance should be viewed on a non-GAAP basis, excluding amortization related to acquisitions, debt discount and issuance amortization and stock-based compensation. On a non-GAAP basis, you can see that we generated $1.3 million net income this quarter, which is a significant improvement from a loss of $1.1 million in the second quarter of last year.

Revenues for the second quarter of 2008 were $29.6 million compared with $7.2 million in the second quarter of 2007. Sunstone contributed $19.6 million in revenue during the second quarter of 2008, and was not yet in the prior year period. Revenues from licensed products were $1.4 million in the second quarter of 2008 as compared to $671,000 in the prior year period. Revenues from distribution were $8.6 million in the second quarter 2008, compared to $6.5 million in the comparable period of 2007.

Non-GAAP gross profit increased to $16.7 million from $976,000 in the second quarter of 2007. This reflects a gross margin of 56.2%, which is a substantial year-over-year increase from 13.6% in the second quarter of 2007. The increase in gross margin was due to Sunstone revenue contribution as well as increased licensed product sales; both carry a higher gross margin than distribution revenue.

Non-GAAP income from operations reached $3.2 million compared with a non-GAAP loss of $1.2 million in the second quarter of 2007.

General and administration expenses as a percentage of revenue improved significantly, decreasing to 10.8% of net revenues from 20.6% for 2007.

Non-GAAP net income was $1.3 million, or $0.03 per diluted share relative to a net loss of $1.1 million, or $0.04 per diluted share in the second quarter of 2007.

Our cash position was $4.7 million. You will see that on our balance sheet we record approximately $17.5 million of notes receivable, which are short-term notes receivable, which are redeemable for cash. Notes receivables are notes which are received from customers for the settlement of trade receivable balances. All notes receivables are guaranteed by established banks in China, and have maturities of six months or less.

The company had long-term debt of $2.9 million as of June 30th, 2008. The Company paid $12.3 million in January 2008 for the establishment of Guangzhou Pharmaceuticals Corporation joint venture, and $1.6 million for the completion of the Rongheng acquisition during 2008.

The Company is raising its guidance for 2008 revenues from at least $96 million to a range of $110 million to $120 million. This increase is attributable to the addition of Rongheng as well as stronger than expected organic growth from our existing business. The company is expecting to have non-GAAP net income of $4 million to $5 million. Our non-GAAP guidance of net income excludes stock-bases compensation, amortization related to the acquisition of Sunstone and Wanwei, and debt discount amortization and issuance cost related to the $23 million debt issued in November 2007.

The Company’s financial guidance also excludes any potential or pending acquisitions, new product launches, and profit sharing from Alliance BMP Limited.

Next, I will turn the call back to David who’ll provide an outlook for the second half of 2008. David?

David Gao

Thank you, Fred. As you can see – as you can appreciate from of course my remarks in the press the first half of 2008 has been transformational for our Company. We now have all the strategic elements of our business plan in place and demonstrated successful execution leading to strong growth in the profitability.

Moving forward into the second half of 2008, we are focused on the following initiatives. First, continued revenue growth and the profitability. We expect the revenues from Sunstone and BMP China to accelerate as we continue successful marketing of existing products and the introduction of new products through our fully integrated national distribution network.

Second, strict expense controls. We intend to realize cost-cutting opportunities across our organization. As an example, we recently started to consolidate our hospital sales force within BMP China into Sunstone, a measure aimed at optimizing costs and increasing the effectiveness of our sales force.

Third, product portfolio expansion. We are actively pursuing new product opportunities for both our branded OTC and Rx portfolios. We intend to launch at least two new products per year.

That concludes our prepared remarks. Operator, we are ready to take the questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Sean McDermott with Philadelphia Brokerage.

Jerry Skochin – Philadelphia Brokerage

Hi good morning, this is Jerry Skochin at Philadelphia Brokerage. First of all, I would like to congratulate the Company on a very, very good quarter. Secondly, I would like to ask two questions, the first one to Fred Powell. Fred, is it my understanding that the notes receivable are redeemable for cash at any time? Hello?

Operator

Pardon the interruption as we are experiencing some technical difficulties. The speakers have accidentally disconnected. They will be dialing in shortly. Please standby.

Martyn Greenacre

Is Lorene, the operator there?

Operator

Yes, sir, you are in the main call. You may proceed.

Martyn Greenacre

Yes. We come back and call us post to the host line?

Operator

Yes sir.

Martyn Greenacre

Alright, thank you.

Jerry Skochin – Philadelphia Brokerage

Well, Martyn?

Martyn Greenacre

Yes.

Jerry Skochin – Philadelphia Brokerage

I have a couple of questions. First of all, I’d like to – I don’t know whether you heard my question, this is Jerry Skochin from Philadelphia Brokerage.

Martyn Greenacre

Right.

Jerry Skochin – Philadelphia Brokerage

First of all, I’d like to congratulate the Company on a very, very good quarter. Secondly, I have two questions for Fred Powell, the first one, Fred, do I understand it that the notes receivable are redeemable for cash at any time?

Fred Powell

That’s right, Jerry. What we do is, we take a look at the notes receivable almost as a cash equivalent. We are able to go to the bank and cash in the notes at any time. There obviously –there is going to be a very slight discount that we’ll pay for interest, but we are able to use that cash. Therefore, we are able to keep a relatively low amount of cash balance at Sunstone knowing that we have the cash balance available in our notes receivable.

Jerry Skochin – Philadelphia Brokerage

Okay, and then just a second question, Fred. Do I understand it also I guess we are changing our guidance to a non-GAAP net income basis. Could you please explain that decision?

Fred Powell

Sure. Let me just get close to the phone here. Starting with last quarter when we started focusing on adjusted EBITDA, we now are looking at our non-GAAP presentation of our operating results, and we believe it makes more sense to interpret our results excluding some of the non-cash expenses and some of the (inaudible) related expenses. Our new guidance methodology simply reflects this decision report our results on a non-GAAP basis because we feel it more accurately portrays our ongoing business and financial performance.

The main difference -- I want to make this clear – between our previous bottom line guidance and today’s bottom line guidance, is that we now exclude the following items from the calculation – stock-based compensation, amortization related to the acquisition of Sunstone Wanwei, as well as the debt discount amortization and issuance which is related to the $23 million debt issued in November 2007. In our earnings release today, you can see we (inaudible) reconciliation in there going from the non-GAAP measure to the GAAP measurements.

Jerry Skochin – Philadelphia Brokerage

Alright, Fred, thank you.

Fred Powell

Sure.

Operator

Next question comes from the line of Julie Chen with CRT Capital.

Julie Chen – CRT Capital Holdings

Yes, good morning, David and Fred, congratulations on a good quarter. Two questions please. In terms of the long-term debt that you stated on your balance sheet press release, you have about $2.9 million. Does that exclude the $23 million senior convertible note that you have outstanding?

Fred Powell

Yes, it does, Julie. The note comes due in May 1st of 2009, so that is now part of our current liabilities.

Julie Chen – CRT Capital Holdings

And that is in the – I am just trying to figure out which line item dealt with the – as I am looking at the balance sheet because I don’t – that’s in the total current liabilities line or is that in the total liabilities line?

Fred Powell

Look at the liabilities, you will see the first line there is notes payable, the –

Julie Chen – CRT Capital Holdings

That’s the one. Okay great.

Fred Powell

The majority is the note that comes due May 1st of next year.

Julie Chen – CRT Capital Holdings

Okay great. The second item is on tax rate. Currently, the tax rate for this quarter is very high. It’s now at about 44% for this quarter, 44.7% to be precise. How should we be looking at the tax rate moving forward?

Fred Powell

Sure. With the taxes in China, we are not permitted to consolidate our standalone companies. The result of that is those operations that are profitable are paying taxes and those that are not we are not able to offset the losses. In addition, we don’t have a tax benefit in the U.S. and expense line item. So when we are taking a look at the tax item on the financial statements, it’s on a company-by-company basis. When you take a look at the 10-Q that will be issued today you will see the operating income for this quarter came from Sunstone. So, it’s really the 25% tax rate on the Sunstone operating income.

Julie Chen – CRT Capital Holdings

But that – I am sorry, I am just trying to do the math – that 25% (inaudible) 45% or are you saying that Sunstone has a higher contribution in terms of percentage of revenue, and that’s the reason why it’s at a higher tax rate.

Fred Powell

Sunstone at this time is generating the profits in the Company where we have offset with the other companies and the G&A cost. Unfortunately, for tax purposes, we cannot net them to get a lower tax rate. So we have to pay the 25% based upon each separate company’s --

Julie Chen – CRT Capital Holdings

I got you. Okay, great, thank you. I will move back to the queue. Thank you very much.

Fred Powell

Thank you, Julie.

Operator

(Operator instructions) And your next question comes from the line of James Tong with Roth Capital.

James Tong – Roth Capital

Hi, Fred and David, congratulations.

David Gao

Thank you.

James Tong – Roth Capital

I have a – can you help me out with the 2007, 2006 – if I used non-GAAP and what the earning per share would be?

Fred Powell

2007, if we were to use the non-GAAP for 2007 for the – just for the three – if you are looking at a six – we would be looking at GAAP loss of $0.06, a non-GAAP EPS loss of $0.04.

James Tong – Roth Capital

Yes, and then the whole year so I think it’s not going to put you on stand too, I will calculate it right away. Just I will probably can go over with you what is the non-GAAP at least to go back for a year to see how it affects the-

Fred Powell

Right, no, we can come back to you, James, on that one, if you have availability.

James Tong – Roth Capital

Sure, sure, and also that think – can you tell me -- I think in some of the press releases about Sunstone that they are moving into prescription market, can you elaborate on that a little bit or David, Fred?

Martyn Greenacre

David, you may want to handle it.

Fred Powell

Sorry, James had asked that in some of our press releases as well our 10-Q we made the announcement that Sunstone has prescription drugs. Are we moving back direction into more prescription in Sunstone or is that an existing part of the business?

David Gao

Sunstone actually right now is a – their prescription target is around 20%. So 80% is OTC. But, however, so actually we develop the both side, actually. It’s not just moving toward any directions but as the OTC business right now is growing very fast that you will see as we move forward we also is going to increase more products, is putting more product before the prescriptions. And so develop the both sides. And especially with a combination of Sunstone Rx BMP Rx both are focused on the women and the pediatrics. So we would be across (inaudible) come across signing opportunities for the both business.

James Tong – Roth Capital

Okay, thank you.

David Gao

Thank you.

Operator

And your next question is a followup from the line of Julie Chen with CRT Capital.

Julie Chen – CRT Capital Holdings

Thank you. I just wanted to go back to the notes receivable question that was asked earlier, just a clarification. While you have the notes receivable, you mentioned earlier in the conference call this is – can be converted into cash within what within a six months timeframe. At the Q&A session the question was asked whether this notes receivable can be converted into cash immediately. So, I just like a further clarification on what—

Fred Powell

Sure. What happens is well we enter into a notes receivable with the customer is for a period typically up to six months. If we wait till that note mature, we receive full value for that note. However, if we were to cash in the note early, which we are permitted to do, we will get a discount against that notes receivables. So we are able to (inaudible) in ahead of time even though the original maturity may be up to six months.

Julie Chen – CRT Capital Holdings

Great. So, just for my clarification, this is a notes receivable based on the bank note, is that correct?

Fred Powell

Correct.

Julie Chen – CRT Capital Holdings

It’s not from a company note?

Fred Powell

That’s correct. Based on a bank guarantee. You are right about that, Julie.

Julie Chen – CRT Capital Holdings

Okay, great, in terms of Guangzhou Pharmaceutical, you have 10% minority interest or ownership in Guangzhou Pharmaceutical. Is this a bottom line contribution or is it – should we be looking at it more from a minority interest contribution?

Fred Powell

Well, with the Guangzhou contribution, what we are looking at right now is the investment had talked [ph]. What I mean by that is we will recognize our income from Guangzhou once we receive in cash dividends. As we earlier—or previously we made known that we would receive an at least 30% in cash of the net income for our joint venture. The reason it’s recorded this way is GPC is part of a parent company, which is a public company listed in Hong Kong as well as Shanghai exchanges. The parent company will not permit disclosure to us on a timely to use public financial statements of our joint venture in our quarterly financial statement. There – because of that restriction that they have since they are a public company and they can't release non-public information of ahead time (inaudible) recorded at cost.

Julie Chen – CRT Capital Holdings

Okay, great. Another follow – actually a different side of the question is R&D and (inaudible) with Shengda Pharmaceutical acquisition, so you signed non-binding agreement to acquire Shengda. You stated earlier that they have 75 products SFDA approved. Are we – can we think of this 75 as a pipeline to become a Sunstone Good Baby product or are we more thinking of launching the 75 potential products and later on become a full product portfolio down the road, how shall we think about this potential acquisition moving forward?

David Gao

Let me answer for this question, Julie. Here is David. The – so right now, so actually this company Shengda has 75 product is already approved. However, it is not the intention that we want to launch all of them. As you see right now we (inaudible) there is several priorities especially (inaudible) one or two products is going to be the main focus, which is – we are very specially interested. And also actually right now they have four or five products in their main product portfolio. But to answer your question, it’s just like Sunstone. Sunstone has 75 product licenses too. Recently, they only launched like 34 products. This will really depends on how the market is required okay?

Julie Chen – CRT Capital Holdings

And this four or five main products will be branded under Sunstone Good Baby?

David Gao

Exactly. That is the synergy we want to leverage. Once we take over the company, we are into rebranding, so product repackaging, which are relatively quicker, very quicker. So that is why we talk about this could be immediate impact our both top line and bottom line.

Julie Chen – CRT Capital Holdings

Okay, so if I may step back a little bit in terms of Sunstone R&D, will Sunstone actually have the ability to produce its own pipeline in term of its own R&D for new products down the road or do you need to depend on future acquisitions to provide that kind of new product pipeline for Sunstone?

David Gao

Okay, yes. To answer your question, yes. Actually, Sunstone spending (inaudible) 3% to 5% depends on which year on the R&D -- and on the – to develop their own product. As we also said, Sunstone has over 70 products also pending (inaudible) SFDA approval. So that is – but at the same time actually we will continue still develop our own product at Sunstone but at the same time we are also looking for some kind of new opportunities that which could very quick to acquire the new product to putting our pipeline.

Julie Chen – CRT Capital Holdings

Got you. Thank you very much. Yeah, I am sorry.

Operator

(Operator instructions) Next question comes from the line of Sanheram [ph] with Wachovia Securities.

Sanheram – Wachovia Securities

Yes, good morning, David and Fred. You mentioned Enablex entering clinical trials. When do you see that contributing to revenue?

David Gao

So, actually as you know the Enablex we talk about this is in the -- SFDA already approved. To be honest, that is a significant aspect. So for the – in the process before the launch. We are expecting typically (inaudible) process is going to take -- the clinical trial is going to take about a year, one year. And now you have got – you have to get all the document and proof (inaudible) SFDA another year, so it’s going to be two years process.

Sanheram – Wachovia Securities

Okay, thank you very much.

David Gao

Thank you.

Operator

And your next question is a followup from the line of Sean McDermott with Philadelphia Brokerage.

Jerry Skochin – Philadelphia Brokerage

Hi this is Jerry Skochin again. David, it looks like in the first half you had net income of $1.3 million as reported, but you are guiding to non-GAAP net income now of $4 million to $5 million for the year. Will you give us some color about the second half which looks like you are going to have a substantial increase in net income?

David Gao

Okay. The guideline that we are using actually we opted as a guideline – let me give you a little more color about what is this business in China. Typically in China Business Sunstone, Wanwei, and also even BMP typically the second half is always a strong – stronger than the first half. That is basically so like 40% or 45% versus 55% kind of relationship. But sometimes in – for Sunstone business I have to talk about is third quarter sometimes that is a little bit seasonal because third quarter is – the nice weather and sort of people so that typically third quarter is a little bit soft, typically. However, the fourth quarter is always the strongest quarter in Sunstone.

Jerry Skochin – Philadelphia Brokerage

Alright. Thank you.

David Gao

Yeah. Alright.

Operator

And your next question comes from the line of Hongbo Lu with Piper Jaffray.

Hongbo Lu – Piper Jaffray

Hi, good morning, David, Fred, and Martyn. I actually just have a quick one, sales and marketing expenses this quarter $10 million it’s 35% of your revenue. It’s kind of high. Can you kind of elaborate to us why and then going forward how should we think about sales and marketing expenses.

David Gao

You mean sales and the marketing?

Hongbo Lu – Piper Jaffray

David, Sales and marketing expenses.

Fred Powell

Well, and I will handle part of this, Hongbo.

Hongbo Lu – Piper Jaffray

Yes.

Fred Powell

When you take a look at the sales and marketing expenses, the components in there which we are specifically pulling out as part of our guidance – as part of the acquisition of Sunstone we have amortization that flows through the sales and marketing line because the benefit we received and the intangibles for customer relationships as well as favorable contract. So on a quarterly basis, we have approximately $850,000 of non-cash charges related to the acquisition. So, that’s one of the reasons why you see the significant percentage for sales and marketing. It does have that amount in there on a quarterly (inaudible) so for our non-GAAP guidance we have removed that.

Hongbo Lu – Piper Jaffray

Okay, but on a GAAP basis should we expect the sales and marketing spend maintain at 33% to 35% or total revenue?

Fred Powell

Well, we would expect it for the – with the amortization it’s on an accelerating method, so we will see that start to decline in 2009, but for the first year it’s going to be relatively flat as a percentage of sales – of net revenues.

Hongbo Lu – Piper Jaffray

Thank you.

Operator

(Operator instructions)

David Gao

Okay.

Operator

And there are currently no questions in the queue.

David Gao

Okay, thank you, operator. So, again, thank you everyone for joining us on today’s call.

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