China Pharma Holdings, Inc. (CPHI) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2015 China Pharma Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise, this conference is being recorded today 17, November 2015. I would now like to hand the conference over to your first speaker for today Ms. Diana Huang. Please go ahead ma’am.

Thank you, Lesley. Good morning ladies and gentlemen and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ third quarter 2015 earnings conference call. I am Diana Huang, the company’s Investor Relations Manager. Speaking on the call today are China Pharma’s President and CEO and Interim CFO Ms. Zhilin Li; and Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of the call. The Company’s earnings press release issued earlier this morning is available on our website at www.chinapharmaholdings.com. I would like to remind our listeners that on this call management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as market and customer acceptance and demand for our products, our ability to market our products, the impact of competitive products and pricing, the ability to develop and launch new products on a timely basis, the regulatory environment including government regulation in the PRC, our ability to obtain the requisite regulatory approvals to commercialize our products, fluctuations in operating results including spending for Research and Development and sales and marketing activities, and other risks detailed from time-to-time in our filings with the SEC. In addition, any projections as to the Company's future performance represent management's estimates as of today, November 17, 2015. China Pharma assumes no obligation to update those projections in the future as market conditions change. Now, it is my pleasure to turn the call over to China Pharma’s CEO and Interim CFO, Ms. Li to make her opening remarks in Chinese, which will be translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the Company's third quarter 2015 financial results.

[Foreign Language]

Thank you, Diana, and good morning, everyone. I would like to thank each of you for joining us today, and for your continued support of China Pharma. Due to the new GMP standards for quality control improvements, which lead to a increase in our production costs and increased sales efforts to recover our market share. Our costs and expenses have experienced certain increase in this quarter. Although the financial performance in this quarter did not immediately reflect the improvement of our production ability, through continuous efforts, we are very confident on recovering and expanding market. The CNY 9.6 million, approximately $1.6 million government subsidies we received in July 2015 also reflects the recognition from the government on the fundamentals of our business In addition, we are currently upgrading the granule and cephalosporin production lines in our old factories, and expect to receive new GMP certificates for the two production lines by the end of this year. I will now read the rest of the Ms. Li’s prepared remarks in English. Revenue for the three months ended September 30, 2015 was $4.5 million, a decrease of the 20% from $5.6 million for the three months ended September 30, 2014. This was mainly because we were in the middle of the GMP upgrading process in 2014 which completed in later of 2014, the upgraded works results in our missing certain drug tenders in several provinces affecting the sales of the subsequent quarters. In addition, the uncertainties of the PRC’s health reform, cost-control and policy instability also contributes to this decrease. These effects are likely to continue. The Company will continue to open up the market in order to mitigate the impact of the elements mentioned above. For the three months ended September 30, 2015, our cost of revenue was $3.7 million, or 83% of total revenue, which represented a decrease of $0.3 million from $4.1 million, or 73% of the total revenue, from the third quarter of 2014. The increase in the percentage of cost to revenue in the third quarter of 2015 was mainly caused by the compliance with new GMP standards for quality control improvement, which leads to an increase in our production costs, such as energy consumption and depreciation. There was $0.4 million of inventory obsolescence recorded for the three months ended September 30, 2015, and no inventory obsolescence for the three months ended September 30, 2014. We started recording inventory obsolescence allowance on a quarterly basis during the first quarter of 2015 as we believe otherwise it may result in material modification in our financial statements at the interim periods. Gross profit for the three months ended September 30, 2015 was $0.03 million, compared to $1.5 million in the same period of 2014. Our gross profit margin in the third quarter of 2015 was 7.2% compared to 27.1% in the same period of 2014. Without considering the effect of inventory obsolescence in the three months ended September 30, 2015, management estimates that our gross profit margin would have been approximately 16.9% in this period. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, as well as the inventory obsolescence incurred in the third quarter of 2015. Our selling expenses for the three months ended September 30, 2015 were $1.2 million, compared to $0.7 million in the same period last year. Selling expenses accounted for 25.8% of the total revenue in the third quarter of 2015 compared to 13.4% in the same period of 2014. Due to many adjustments in our selling processes under healthcare reform policies, despite the decrease in sales, we still rely on fixed personnel and expenses to support our revenue and collection of accounts receivable. In addition, once we receive the new GMP certificates, we are aiming to recover our market share and therefore require more sales expenses and marketing efforts. Our bad debt expenses for the three months ended September 30, 2015 and 2014 were both $3.9 million. In order to collect cash to support the construction of our new plant and to meet the policy requirements for new GMP upgrading, we have shifted to prudent sales strategies in the recent two years. This strategy strengthened the preference on sales to customers with good credit performance, while reduced the supplies to customers with poor credit. On the one hand, this strategy contributed to the recovery of funds; on the other hand, it negatively impacted our sales and indirectly prolonged the payment from the estranged customers. These two factors results in increased proportion of our older-aged accounts receivable balance. The Company received $1.6 million subsidy income in the three months ended September 30, 2015, which mainly include RMB9.6 million approximately $1.56 million, and RMB0.6 million approximately $0.1 million subsidiary from the government. In the name of interest discount due to the technological innovation and industrial upgrading related to our new GMP; while in the same period of 2014, we received $0.07 million subsidy income. Net loss for three months ended September 30, 2015 was $4.1 million and $0.1 per basic and diluted common share compared to net loss of $6.3 million or $ 0.15 per basic and diluted share in the same period of the 2014. The decrease in net loss was primarily due to the increase in subsidy income and partially offset by the decrease in revenue in the third quarter of the 2015. Nine months result, for the nine months ended September 30, 2015, our sales revenue was $15.8 million, which represented a decrease of $3.0 million, or 16%, from the $18.8 million in the corresponding period of 2014. For the nine months ended September 30, 2015, our cost of revenue was $12.7 million, or 80% of the total revenue, which represented an increase of $0.5 million from $12.2 million, or 65% of total revenue, in the same period of 2014. The increase in cost of revenue in the nine months ended September 30, 2015 was mainly due to the new GMP standards for quality control improvements, which leads to an increase in our production costs, such as energy consumption, depreciation. Gross profit for the nine months ended September 30, 2015 was $1.3 million, compared to $6.6 million in the same period of 2014. Gross profit margin for the nine months ended September 30, 2015 and 2014 were 8.4% and 35%, respectively. Without considering the effect of inventory obsolescence in the nine months ended September 30, 2015, management estimates that our gross profit margin would have been approximately 20%. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, as well as the inventory obsolescence incurred in the nine months ended September 30, 2015. Gross profit for the nine months ended September 30, 2015 was $1.3 million, compared to $6.6 million in the same period of 2014. Gross profit margin for the nine months ended September 30, 2015 and 2014 were 8.4% and 35%, respectively. Without considering the effect of the inventory obsolescence in the nine months ended September 30, 2015, management estimates that our gross profit margin would have been approximately 20%. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, as well as the inventory obsolescence incurred in the nine months ended September 30, 2015. Our net loss for the nine months ended September 30, 2015 and 2014 was $16.2 million and $17.4 million respectively, the decrease of the $1.1 million in net loss year-over-year. The decrease in net loss was primarily due to a lower R&D expenses and the non-occurrence of any loss from nature disaster which occurred the same period last year, while partially offset by the decrease in revenue and increase in inventory obsolescence in the current period compared to the corresponding period one year ago. Turning to the balance sheet. As of the September 30, 2015, the Company had cash and cash equivalents of $5.7 million, compared to $5.3 million as of December 31, 2014. Our accounts receivable balance decreased to $11.8 million in September 30, 2015 from $24.9 million in the December 31, 2014. Our receivable decreased due to our decrease in sales, and increase in bad debt allowance. Overall, we will continue focusing on our business developments and believe that this will support the fair evaluation of our shareholder’s interest in the future. With that, we will now open the call out to question. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of the Bill Wells. Please ask the question.

Thank you. My question is on the bad debt allowance. Who are we selling to the isn’t paying, is it hospitals and it’s so – why are they defaulting on the payments and why are we not pursuing it instead writing-off the payment?

[Foreign Language]

This is the answer. That’s we draw the allowance for our bad debts percentage, also bad debts aging as always detailed in the NDA this is for the consideration of the risks associated with our customer. And we mainly sell our products to hospitals and as you may be now in China, the hospital in general intends to pay their accounts payable in a long time pay roads and besides this general information will seem enough here 2014, the company will concentrate on the construction of our new GMP Building and new GMP certificates process. Therefore we kind of adopted the sales policy to encourage sales to customers with good accounts receivable payment history and gradually turn down the customers with bad accounts receivable payment history. That’s a general background of our accounts receivable.

Do you expect at some point that these hospitals will pay late and that will recapture these sales in these write-offs.

[Foreign Language]

The management currently feel, it’s necessary to literally write-off the accounts receivable we have so far. And we feel confident to collect the account receivable shorter or later.

Okay. Thank you.

Thank you.

We have the next question from the line of Peter Shears. Please ask your question.

[indiscernible] I have two questions. I’d like to first follow up on Bill’s question. All these people that owe you this $44 million that you have written off, did their government hospitals and that some of them haven’t paid due for more than two years. And is there anything that you can do [indiscernible] eventually. Is there anything you could do to collect from them.

[Foreign Language]

This is the answer that, yes, we’re trying very hard to speed up the collection of our accounts receivable such as the history. We have used as the program to offer discounts to the customers if they pay the accounts receivable in a shorter time. And the – another aspect we see also mentioned that because we – in our recent years, we have for shifted our selling strategy to concentrate on the supplier to customer with good performance of accounts receivable collection. On one hand, this strategy decrease our newly in terms account receivable and on the other hand, this prudent strategy also decrease our revenue as you could see from the financial statements. And hopefully, along with government to compromise their work to pay a – makes a payment gradually from the healthcare, healthcare program, healthcare insurance program, we hope our collection of accounts receivable will be closed gradually. Thank you.

No. I understand. All right, Jian. The question I was asking is, is there anything you could do to collect from people who you are no longer selling to that was my question.

[Foreign Language]

This is the answer. First of all, we will aggressively push our sales force to followup with those customers. And offer discount for their accounts receivable payment. And secondly, we will also try to rebuild the sales relation with those customers. Of course, with the new terms of cash on good not under sale on credit. As of now with the new build relationship we will gradually we will communicate and follow-up with those customers to push their payments.

Okay. My second question is now that you had the GMP and you getting the next GMP, but you still haven’t had any new drugs approval within a long time, can you tell us what’s in the pipeline and is there any hope for any new drugs getting approved.

[Foreign Language]

This is the answer. The pipeline development has been our concern for a long time. And we think the main reason for these extremely long-term, long time process it’s mainly because that there are too many candidates waiting in the queue in the CFDA reviewing process. And in order to sell these with a few the authority has determined to adopt some solution, but the whether those so called solutions will really incur to good results, we still simply [indiscernible].

[Foreign Language]

We see added that the government from the policy and that direction of the government. It seems they intend to use a higher criteria to review those partner products, which is require most rich statistics from the R&D study such as the PK and PD study. Therefore from time to time, the Company has been required from the authority to supply new data. That’s for sure will prolong the proceeds of the patented product review.

I understand what the government is doing. What I’m asking is, is there any visibility on any new drugs getting approved in the next quarter or two quarters.

[Foreign Language]

She think that a very, very slim chance for us to receive any new approval from the CFDA in this year. Well, for next year, she really cannot make any definite forecast. As you know, we have some product in the Phase II clinical trial study and some other products in Phase III and even a few other have completed their clinic trial. The Chinese government has recently issued some new requirement to improve their criteria for the review, which will require more studies and more data, which will for sure didn’t perform this process. And but if we mentioned that there maybe one to two timeline products, which have finished their clinic trial study has a good chance to receive their CFDA approval in next year.

Thank you, Zhilin Li.

Thank you.

[Foreign Language]

[Operator Instructions] As there are no further questions at this time, I’d like to hand the conference back to your presenters for any closing remarks.

Thank you. On behalf of the entire China Pharma team, we would like to thank you for your interest in the company and participation on this call. For any of you traveling to China, we always welcome and encourage any visitors from our shareholders, potential investors and analysts. This concludes the China Pharma’s third quarter 2015 earnings call. Thanks.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all disconnect.