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| CPHI.OB > SEC Filings for CPHI.OB > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following discussion should be read in conjunction with China Pharma Holdings, Inc.'s ("China Pharma" or "the Company) consolidated financial statements and related notes included elsewhere in this Current Report on Form 10-Q.
This filing contains forward-looking statements. The words "anticipated", "believe", "expect", "plan", "intend", "seek", "estimate", "project", "could", "may" and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect management's current views with respect to future events and financial performance and involve risks and uncertainties, including but not limited to changes in general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to increase market share, and various other matters, many of which are beyond China Pharma's control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
China Pharma Holdings, Inc. is a specialty pharmaceutical company with rapidly growing profit that develops, manufactures, and markets treatments for a wide range of high incidence and high mortality conditions in China, including cardiovascular, central nervous system (CNS), infectious, and digestive diseases. The Company's cost- effective, high margin business model is driven by market demand and supported by 8 scalable Good Manufacturing Practice Regulations (GMP)-certified production lines covering the major dosage forms. In addition, the Company has a broad and expanding distribution network across more than 29 provinces, municipalities and autonomous regions and possesses a strong research and development (R&D) platform from numerous well-established collaborations with prestigious universities. The Company is registered in Delaware, USA. Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson), located in Haikou City, Hainan Province, China, is a wholly owned subsidiary of Onny Investment Limited, which is wholly owned by China Pharma Holdings, Inc.
Strong Revenue Growth and High Margins - For the nine months ended September 30, 2008, the Company generated $35.61 million in revenue from therapeutic sales compared to $24.10 million over the same period in 2007, an increase of $11,508,969 or 47.76%. The gross margin achieved by our company was 50.21% of total revenue for the nine months ended September 30, 2008, which is higher than the 45.98% of the corresponding period in 2007, and higher than the industry average gross margin of 34.2%. We are able to compete in the highly fragmented pharmaceutical industry through our diversified therapeutics line, cost control and strong sales network. Our experienced management team, market insights and strong R&D capabilities that enable us to develop and launch new and improved generic products based on market demand.
Proven Record of Success - We have a proven track record of success. We are a
profitable company with a low cost, high margin business model. We are seeing a
rapid growth in sales with a constant growth in income, due to our focus on the
largest segments of China's pharmaceutical market. We have eight different types
of modern production lines with capacity to meet future demands. We have a
portfolio of over 30 specifications of drugs that focus on the treatment of:
CNS, cardiovascular, cerebrovascular, infectious diseases and other therapeutic
areas of high incidence in China. Among these two are market leaders:
PuSenOK(TM) and Buflomedil hydrochloride for which we were awarded the "National
Key New Product" by the Ministry of Science and Technology of the People's
Republic of China (PRC) with the State Administration of Taxation, Ministry of
Commerce of the PRC, General Administration of Quality Supervision, Inspection
and Quarantine of the PRC, and State Environmental Protection Administration of
China. In addition, our growth strategy is supported by the needs of a dynamic
pharmaceutical industry.
Clear Strategy for Growth - We are part of a rapidly growing industry, in which we are a leader in generic drugs. Directed by market needs, we combine our internal R&D with strategic alliances and co-operation, to promote new and improved products targeting China's most prevalent diseases such as CNS disease, cardio-/cerebrovascular disease, digestive disease, and infectious disease. In addition, we produce products in a variety of delivery forms which target specific patient groups, and research and develop new or improved dosage-forms of existing products. We have nine drugs on track to launch, including a new anti-drug-resistance antibiotic which has already passed the PRC State Food and Drug Administration (SFDA) technical evaluation and entered clinical trials, and three drugs waiting for SFDA production approval. Through strategic mergers and acquisition (M&A) and through capitalization of this fragmented market, we will improve our product portfolio and push our integrated growth; maintain and develop new marketing channels; and leverage our existing retailing network in China's newly expanded market to raise our overall market share. The organic growth of the Chinese pharmaceutical market has already and will continue to direct the company's development.
I. Summary of nine months ended September 30, 2008
In the nine months ended September 30, 2008, China Pharma continued to display stable growth and outstanding financial achievement. For the nine months ended September 30, 2008, the Company's total revenue increased by over 47.76% to $35.61 million, compared to $24.10 million for the nine months ended September 30, 2007. This rapid growth was due to increased sales of existing products, and increase in market share of new products.
The operational performance for the nine months ended September 30, 2008 was clearly improved compared to the nine months ended September 30, 2007. Gross
profit increased 61.36% to $17.88 million and net income, not including foreign currency translation adjustment, increased 42.05% to $12.48 million. This growth was attributable to increased promotion of sales, and increased efforts in accounts receivable (A/R) collection. These benefits are from China Pharma's low cost, high margin business model, and experienced management team, as well as from R&D which follows market needs.
For the nine months ended September 30, 2008, earnings per common share increased 32.75% to $0.32 per share compared to $0.24 per share for the nine months ended September 30, 2007. China Pharma is working closely with various pharmaceutical research institutions to develop more products to meet customers' needs. Our focus is to create a steady increase in revenue. We have seen in the past that a successful strategy is the key to company operation. Full exploration of the potential of the pharmaceutical domain is essential to our success.
We have also enhanced internal controls for accounting and reporting. In the near future, we will develop a more systematic and continuous internal control system for the long-term development of the company and the benefit of our stakeholders and prospective investors.
II. Business Overview
China Pharma Holdings, Inc., is one of China's leading pharmaceutical manufacturers which engages research and development institutions for market-ready formulas to mass produce. In 2008, we launched a new diuretic product: Bumetanide; in November 2008, we were granted approval for our new formula antibiotic to enter clinical trials.
We plan to expand our biotechnology product portfolio. Based on the foundation established by some of our widely recognized medicine brands such as Cerebroprotein, for the treatment of memory decline and attention deficit disorder (ADD), we have offered and will continue to offer a variety of biological medicines. These products, including the injected hepatocyte growth-promoting factors, are expected to fuel additional growth in revenue beyond what Cerebroprotein has provided.
One of our products, Buflomedil Hydrochloride (which includes the raw material, the injectable form of the product, and tablet form) has received the following recognitions, awards and designations:
o The key technology project in Hainan in 2003 by Haikou Municipality.
o The "National Key New Products" certificate in 2003 by the State Science and Technology Department, State Taxation Bureau, Ministry of Commerce, State Bureau of Quality Supervision, Inspection and Quarantine, and State Environmental Protection Bureau.
o The "Best Commercialized Technology" award in Hainan in 2004 by Hainan Scientific and Technological Result Examination Committee.
Our scalable, GMP-certified manufacturing has been recognized in China. In 2003, our manufacturing capabilities attained GMP authentication and we were awarded "Best Enterprise for Supporting SARS Medicine" by Hainan Food and Drug Administration. We have an extensive distribution network with 16 sales offices and approximately 680 proxy agents covering 30 provinces, municipalities, and autonomous regions around China. Our main market channels are generalized schemes of preferences (GSP) certified medical companies which directly distribute to hospitals and the final market.
Our subsidiary, Onny Investment Limited ("Onny") was incorporated in the British Virgin Islands on January 12, 2005 and was a development stage enterprise through June 15, 2005. On June 16, 2005, Onny acquired all of the outstanding shares of Hainan Helpson Medical & Biotechnology Co., Ltd, a privately held Chinese joint venture (Helpson) and emerged from the development stage. On October 19, 2005, Onny was reorganized as a wholly owned subsidiary of China Pharma Holdings, Inc. formerly TS Electronics, Inc. ("the Company").
Furthermore, on May 30, 2008 the Company completed an offering and issued five million shares of common stock at a purchase price of $2.00 per share and three-year warrants to purchase an aggregate of 1.25 million shares of the Company's common stock at an exercise price of $2.80 per share. Net proceeds from the offering of approximately $9.3 million are expected to be used for the expansion of the Company's existing product line, new drug development, sales and marketing, and to supplement general working capital purposes.
III. Market Trends
Statistics show that the rise in the world's aging population has led to an increasing incidence of age-related diseases, such as cancer, Alzheimer's disease, diabetes, and heart disease. These diseases have already become prevalent, particularly in developed areas. China Pharma is dedicated to delivering more effective treatments for these diseases of high incidence and high mortality.
The growth of China's pharmaceutical market is driven by the country's rapid economic growth, the highest in economic history. Increased healthcare spending by the Chinese Government to reform the healthcare system has already greatly improved the accessibility to and desire for medical care. Important additional factors include: the aging of the population and the consequent increase in age-related disorders; the urban migration of the population; and improved awareness of self-health care. According to IMS forecasts, China will become the seventh largest pharmaceutical market in the world in 2009 and the second largest in 2020, with a market capacity of US$220 billion.
We view this market trend as an opportunity. However, the best way to take advantage of this opportunity is to identify our business risks beforehand. There are three areas of risk:
o External Risk
In recent years, the Chinese medical system has been reformed, resulting in the State Department's establishment of a basic medical insurance system for employees. Considering the effects of the social environment, local government involvement and government policies on the pharmaceutical industry in the PRC, a large increase in sales can be expected. Competition will also be strong across the industry overall. Currently, our existing products are competitive in the market and possess growth potential. However, from a long-term perspective, some major western medicine producers are also seeking Chinese market share. This may present us with strong competition in the China pharma market.
o Operation Risk
One of the major uncertainties in our industry is the purchase of raw materials. Raw materials are primarily affected by the geography and island environment of
Hainan Province. Because of high transportation costs and the need to guarantee
production supply requirements, we have to store large amounts of inventory to
maintain consistent production levels. In addition, part of the raw materials
need to be specially ordered which further increases the need to store
inventory. Finally, due to the increasing sales, we must store a large volume of
finished product and packaging material.
o Foreign Currency Risk
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in Chinese Renminbi (RMB). As a result,
the effect of the exchange rate fluctuation would inevitably be considered to be
material to our business operations.
All of our revenues and expenses are accounted for in (RMB). However, we use the
United States Dollar (USD) for financial reporting purposes. Conversion of
Renminbi into foreign currencies is regulated by the People's Bank of China
through a unified floating exchange rate system. Although the PRC government has
stated its intention to support the value of the Renminbi, there can be no
assurance that such exchange rate will not become volatile again or that the
Renminbi will not devalue significantly against the USD. Exchange rate
fluctuations may adversely affect the value, in USD terms, of our net assets and
income derived from its operations in the PRC.
IV. Analysis for the three months ended September 30, 2008
The following table presents the operations of the Company for the three months
ended September 30, 2008 and September 30, 2007; both are given in USD.
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months
ended September 30,
------------------------------------------------------------
2008 2007 change variance
------------ ------------ ------------ ------------
Revenue $ 12,610,642 $ 8,293,497 4,317,145 52.05%
Cost of revenue 6,494,266 4,413,052 2,081,214 47.16%
------------ ------------ ------------ ------------
Gross profit 6,116,376 3,880,445 2,235,931 57.62%
------------ ------------ ------------ ------------
Operating expenses:
Selling expenses 529,432 591,193 (61,761) -10.45%
General and administrative 427,399 328,743 98,656 30.01%
Research and development 5,581 5,941 (360) -6.06%
Bad debt expense, net of recoveries 459,500 (169,095) 628,595 -371.74%
------------ ------------ ------------ ------------
Total operating expenses 1,421,912 756,782 665,130 87.89%
------------ ------------ ------------ ------------
Income from operations 4,694,464 3,123,663 1,570,801 50.29%
------------ ------------ ------------ ------------
14
For the three months
ended September 30,
------------------------------------------------------------
2008 2007 change variance
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income 26,224 4,400 21,824 496.00%
Interest expense (34,629) (50,857) 16,228 -31.91%
Other (expense) income (9,588) 7,549 (17,137) -227.01%
------------ ------------ ------------ ------------
Total non-operating income (expense) (17,993) (38,908) 20,915 -53.76%
------------ ------------ ------------ ------------
Income before taxes 4,676,471 3,084,755 1,591,716 51.60%
Income tax expense 424,993 -- 424,993
------------ ------------ ------------ ------------
Net income $ 4,251,478 $ 3,084,755 1,166,723 37.82%
============ ============ ============ ============
Comprehensive income - foreign currency
translation adjustments 133,713 570,646 (436,933) -76.57%
------------ ------------ ------------ ------------
Comprehensive income $ 4,385,191 $ 3,655,401 729,790 19.96%
============ ============ ============ ============
Basic and Diluted Earnings Per Share $ 0.10 $ 0.08 0.02 21.36%
============ ============ ============ ============
Basic and Diluted Weighted Average
Shares Outstanding 42,278,938 37,228,938 5,050,000 13.56%
============ ============ ============ ============
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Revenue
We generated approximately $12.61 million revenue for the three months ended September 30, 2008, an increase of $4.31 million, which means a 52.05% increase compared to $8.29 million of the corresponding period in 2007. This increase was primarily due to increased marketing and promotional activities to increase sales of existing products as well as contribution from the expansion of market share by new products. In the third quarter, Pusen OK continued its strong growth trend, and realized revenue of $1.75 million or 14.18% of the total income for the period, an increase of approximately $0.972 million or 124.23% on the same period in 2007. Pusen OK, the company's flagship product, is China's only generic version of Aleve-D TM, and is the most efficient, non-drowsy, 12-hour slow release nasal decongestant, fever reducing and pain relief agent. Aside from this, during this period, another product with a large contribution to sales revenue was Buflomedil with approximately $1.11 million, or 9.01% of total sales revenue, an increase of $265,413 or 31.27% on the same period in 2007, Roxithromycin revenue increased 135.24% to approximately $0.920 million, or 7.44% of the total revenue. This year's launch, Bumetanide, due to increases in market recognition and market acceptance also made a significant contribution to the sales revenue, this period it generated revenue of $0.972 million, accounting for 7.86% of total sales revenue. Another aspect is that because of the government reorganization of the pharmaceutical industry the pharmaceutical marketing environment has greater transparency than previously. The Company's distribution network in China has already expanded to reach 30 provinces, municipalities and autonomous regions. Moreover, the improvements in production capacity have facilitated large growth in sales of the new and existing products.
The cost of revenue for the three months ended September 30, 2008, was approximately $6.49 million or 51.50% of total revenue, compared to the corresponding period of 2007, which was $4.41 million or 53.21% of total revenue. The main reason for the increase in the cost of revenue was because of the corresponding increase in revenue for the three months up to September 30, 2008, the cost margin also fell slightly.
Gross Profit
Gross Profit for the three months ended September 30, 2008 was $6.12 million, and accounted for 48.50% of total revenue. It has increased by 57.65%, or $2.24 million, compared to $3.88 million or 46.79% of total revenue of the third quarter of 2007. The increased sales in new products and high margin products resulted in the corresponding substantial increase in gross profit.
Selling Expense
The selling expense of the three months ended September 30 2008 was approximately $0.53 million, a decrease of approximately $60,000, or 10.45%, compared to approximately $0.59 million of the three months ended September 30 2007. The main reason for this drop was our strict control of expenditure while investing in our distribution channels and the marketing of our products.
G & A Expenses
The general and administrative expenses of the three months ended September 30, 2008 has increased to approximately $0.43 million, an increase of $0.10 million, or 30.01%, compared to $0.33 million of the same period of 2007. The main reasons for this increase were increases in the cost of consumables as well as the expansion of business scale. The expenditure on each item is also correspondingly raised.
Collection of Bad Debt
For the three months ended September 30, 2008, allowance for bad debt was approximately $0.46 million; however, for the three months ended September 30, 2007, the allowance for bad debt was negative $170,000. This is an increase of 371.74%; the main reason for the increase is that at September 30, 2007, we had collected some long-aged bad debt, according to the calculations, the collected bad debt offset the bad debt allowance of the previous two quarters.
During the normal course of business, we give unsecured credit to our customers. We record an allowance for bad debts based on age of outstanding accounts receivables at the end of the period in accordance with generally accepted accounting principles in the PRC. The percentage of a trade receivables that is deemed doubtful is as follows: 100% after 720 days; 50 % after 360 days; and 7.5% up to 360 days. During the 15 years of operating history, the company has never had any uncollected receivables.
In the Chinese pharmaceutical market environment, deferments in collections from state owned hospitals are normal. Over 90% of our drugs are sold to state-owned hospitals, which makes collections slow, but reliably collectible demonstrated by our collection of all receivables in the past.
Income from Operation
The operating income for the three months ended September 30, 2008 is
approximately $4.69 million, compared to $3.12 million of the same period of
2007, an increase of $1.57 million, or 50.29%. The main reason was due to large
increases in revenue and gross profit, in addition to a fall in expenditures.
16
Interest Income
Interest income for the three months ended September 30, 2008 is $26,224,
compared to $4,400 of the same period of 2007. The main reason is the increase
in the bank deposit, which leads to an increase in the interest returns.
Interest Expense
Interest expense for the three months ended September 30, 2008 is approximately
$35,000, compared to $50,000 of the same period of 2007. The main reason is the
reduction in the company's working capital loan, leading to a corresponding
reduction in the interest on the loan.
Income Tax Expense
Income tax expense for the three months ended September 30, 2008 was $424,993 or
3.37% of revenue, while the company did not have any income tax in the
corresponding period in 2007, as the company was still in the preferential tax
period. We have been granted a `tax holiday' granting a favorable rate of 50% of
the tax rates. This year we pay our tax at the rate of 9%.
Net Income
The net income for the three months ended September 30, 2008, excluding the
effect of foreign exchange transactions, was approximately $4.25 million, which
was $1.17 million higher than that for the three months ended September 30,
2007, of approximately $3.08 million. It has increased by 37.82%.
V. Analysis for the nine months ended September 30, 2008
The following table presents the operations of the Company for the nine months
ended September 30, 2008 and September 30, 2007; both are given in USD.
For the nine months
ended September 30,
--------------------------------------------------------------
2008 2007 change variance
------------- ------------- ------------- -------------
Revenue $ 35,606,490 $ 24,097,521 11,508,969 47.76%
Cost of revenue 17,730,026 13,018,566 4,711,460 36.19%
------------- ------------- ------------- -------------
Gross profit 17,876,464 11,078,955 6,797,509 61.36%
------------- ------------- ------------- -------------
Operating expenses:
Selling expenses 1,323,854 896,128 427,726 47.73%
General and administrative 1,226,888 927,162 299,726 32.33%
17
Research and development 42,807 5,942 36,865 620.41%
Bad debt expense, net of recoveries 1,539,313 910,718 628,595 69.02%
------------- ------------- ------------- -------------
. . .
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