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CBPO > SEC Filings for CBPO > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CHINA BIOLOGIC PRODUCTS, INC.

Form 10-Q for CHINA BIOLOGIC PRODUCTS, INC.


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; expectations regarding governmental approvals of our new products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A "Risk Factors" described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

"China Biologic", the "Company", "we", "us", or "our", are to the combined business of China Biologic Products, Inc., a Delaware corporation, and its direct and indirect subsidiaries;

"Taibang Biological" are to our wholly owned subsidiary Taibang Biological Limited, a BVI company, formerly Logic Express Limited;

"Taibang Holdings" are to our wholly-owned subsidiary Taibang Holdings (Hong Kong) Limited, a Hong Kong company, formerly Logic Holdings (Hong Kong) Limited;

"Taibang Biotech" are to our wholly owned subsidiary Taibang Biotech (Shandong) Co., Ltd., a PRC company, formerly Logic Management and Consulting (China) Co., Ltd.;

"Taibang Beijing" are to our wholly owned subsidiary Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd., a PRC company, formerly Logic Taibang Biotech Institute (Beijing);

"Dalin" are to our wholly owned subsidiary Guiyang Dalin Biologic Technologies Co., Ltd., a PRC company;

"Shandong Taibang" are to our majority owned subsidiary Shandong Taibang Biological Products Co. Ltd., a sino-foreign joint venture incorporated in China;

"Taibang Medical" are to our wholly owned subsidiary Shandong Taibang Medical Company, a PRC company;

"Guizhou Taibang" are to our majority owned subsidiary Guizhou Taibang Biological Products Co., Ltd., a PRC company, formerly Guiyang Qianfeng Biological Products Co., Ltd.;

"Huitian" are to our minority owned investee Xi'an Huitian Blood Products Co., Ltd., a PRC company;

"BVI" are to the British Virgin Islands;

"Hong Kong" are to the Hong Kong Special Administrative Region of the People's Republic of China;

"PRC" and "China" are to the People's Republic of China;

"SEC" are to the Securities and Exchange Commission;

"Securities Act" are to the Securities Act of 1933, as amended;

"Exchange Act" are to the Securities Exchange Act of 1934, as amended;

"Renminbi" and "RMB" are to the legal currency of China; and

"U.S. dollars", "dollars" and "$" are to the legal currency of the United States.


Overview of Our Business

We are a biopharmaceutical company, through our indirect majority-owned PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our minority-owned PRC investee, Huitian, principally engaged in the research, development, production and sales of human plasma-based pharmaceutical products in China. Shandong Taibang operates from our production facility located in Tai'an, Shandong Province and Guizhou Taibang operates from our production facility located in Guiyang, Guizhou Province. Our minority owned investee, Huitian, operates from its facility in Shaanxi Province. The human plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products.

Our principal products include our approved human albumin and immunoglobulin products. Human albumin is principally used to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure while immunoglobulin is used for certain disease prevention and treatment. Our approved human albumin and immunoglobulin products use human plasma as the basic raw material. We are approved to sell human albumin with dosages of 20%/10ml, 20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our top-selling product. Sales of human albumin products represented approximately 43.3% and 54.4% of our total sales for each of the three months ended September 30, 2012 and 2011, respectively, and 45.3% and 54.1% of our total sales for the nine months ended September 30, 2012 and 2011, respectively. All of our products are prescription medicines administered in the form of injections.

We sell our products directly or through approved distributors to customers in the PRC, mainly hospitals and inoculation centers. We usually sign short-term contracts with customers and therefore our largest customers have changed over the years. For the three months ended September 30, 2012 and 2011, our top 5 customers accounted for approximately 8.5% and 16.3%, respectively, of our total sales. For the nine months ended September 30, 2012 and 2011, our largest 5 customers accounted for approximately 11.6% and 15.0% of our total sales, respectively. As we continue to expand our geographic presence and diversify our customer base and product mix, we expect that our largest customers will continue to change from year to year.

We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.

Our principal executive offices are located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, the People's Republic of China. Our corporate telephone number is + (86) 10-6598-3111 and our fax number is + (86) 10-6598-3222. We maintain a website at http://www.chinabiologic.com that contains information about our company, but that information is not part of this report.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the three months ended September 30, 2012:

Sales: Sales increased by $11,820,349, or 28.6%, to $53,124,050 for the three months ended September 30, 2012, from $41,303,701 for the same period in 2011.

Gross profit: Gross profit increased by $8,673,574, or 31.5%, to $36,202,766 for the three months ended September 30, 2012, from $27,529,192 for the same period in 2011.

Income /(loss) from operations: Income from operations increased by $29,815,157, or 317.4%, to $20,420,212 for the three months ended September 30, 2012, from loss of $9,394,945 for the same period in 2011.

Net income /(loss) attributable to the Company: Net income increased by $22,978,827 , or 245.5%, to $13,617,150 for the three months ended September 30, 2012, from net loss attributable to the Company of $9,361,677 for the same period in 2011.

Diluted net income /(loss) per share: Diluted net income per share was $0.50 for the three months ended September 30, 2012, as compared to diluted net loss per share of $0.37 for the same period in 2011.

Recent Development

In June 2012, we received the manufacturing approval certificate from the State Food and Drug Administration ("SFDA") for human coagulation factor VIII ("FVIII"). In October 2012, we obtained the GMP certification for our production facility of FVIII from SFDA and commenced the commercial production of FVIII shortly thereafter.

In an announcement published in September 2012 (the "September Announcement"), Chinese National Development and Reform Commission ("NDRC") adjusted retail price ceilings for 95 oncology, immunology and hematology drug products, which came into effect on October 8, 2012. Two of our approved products, human immunoglobulin for intravenous injection ("IVIG") and FVIII are affected by the September Announcement. According to the September Announcement, the new retail price ceilings for our IVIG products are RMB327 (5%/25ml), RMB561 (5%/50ml), RMB954 (5%/100ml) and RMB1,622 (5%/200ml), and the new retail price ceilings for our FVIII products are RMB396 (200IU) and RMB540 (300IU). The new retail price ceilings for IVIG products are lower than the current prevailing market prices in some of our regional markets while those for FVIII are close to the current prevailing market prices. As a result, some of local governments start to impose tender price ceilings for IVIG products. We are in the process of appealing to local governments for favorable pricing policy in selective regional markets. So far, we have successfully gained support from Guizhou and Shandong provincial governments in lifting the tender price ceilings for IVIG products. We are in the process of evaluating the impact of the new price ceiling on our future IVIG sales and margin.


By the end of year 2013, a more stringent Good Manufacturing Practice standard (the "2013 GMP Standard") enacted by SFDA will become applicable to all of our production facilities. We do not expect the current plasma production facilities of Guizhou Taibang and Huitian would be able to meet the 2013 GMP Standard and therefore will cease the production in these facilities by the end of 2013. We plan to construct a new production facility for Guizhou Taibang at a new site to meet the 2013 GMP Standard. We expect to commence preparation work for this project in late 2012 and complete the project in mid 2014. The existing production facility producing plasma-based pharmaceutical products in Guizhou Taibang will be abandoned by the end of 2013, and as a result, all related assets in such facility to be abandoned are depreciated over a shortened use period. Huitian is also considering constructing a new production facility. We plan to take appropriate actions to minimize the impact of production suspension to ensure a smooth transition.


 Results of Operations

 Comparison of Three Months Ended September 30, 2012 and
September 30, 2011

 The following table sets forth key components of our
results of operations for the periods indicated.

 (All amounts, other
than percentages, in
U.S. dollars)

                                  Three Months Ended
                                    September 30,                   $               %
                                                                 Increase        Increase
                                2012               2011         (Decrease)      (Decrease)
SALES
           External     $      53,124,050    $   41,137,473   $  11,986,577          29.1%
customers
           Related                      -           166,228        (166,228 )      (100.0% )
party
Total sales                    53,124,050        41,303,701      11,820,349          28.6%
COST OF SALES
           External            16,921,284        13,741,811       3,179,473          23.1%
customers
           Related                      -            32,698         (32,698 )      (100.0% )
party
Total cost of sales            16,921,284        13,774,509       3,146,775          22.8%
GROSS PROFIT                   36,202,766        27,529,192       8,673,574          31.5%
OPERATING EXPENSES
           Selling              3,545,378         3,703,683        (158,305 )        (4.3% )
expenses
           General and         11,599,779         8,110,693       3,489,086          43.0%
administrative expenses
           Research and           637,397           509,061         128,336          25.2%
development expenses
           Impairment                   -        18,064,183     (18,064,183 )      (100.0% )
loss of goodwill
           Loss on                      -         6,536,517      (6,536,517 )      (100.0% )
abandonment of
long-lived assets
Total operating                15,782,554        36,924,137     (21,141,583 )       (57.3% )
expenses
INCOME/(LOSS) FROM             20,420,212        (9,394,945 )    29,815,157        (317.4% )

OPERATIONS
OTHER (INCOME) /
EXPENSES
           Equity in             (744,976 )        (712,320 )       (32,656 )         4.6%
income of equity method
investee
           Change in                    -        (2,863,870 )     2,863,870        (100.0% )
fair value of
derivative liabilities
           Interest               223,992           404,349        (180,357 )       (44.6% )
expense
           Interest              (561,761 )        (473,278 )       (88,483 )        18.7%
income
           Other                 (449,815 )          63,773        (513,588 )      (805.3% )
(income)/expenses, net
Total other income, net        (1,532,560 )      (3,581,346 )     2,048,786         (57.2% )
EARNINGS/(LOSS) BEFORE         21,952,772        (5,813,599 )    27,766,371        (477.6% )
INCOME TAX EXPENSE
INCOME TAX EXPENSE              3,479,683         1,022,310       2,457,373         240.4%
NET INCOME/(LOSS)       $      18,473,089    $   (6,835,909 ) $  25,308,998        (370.2% )
Less: Net income                4,855,939         2,525,768       2,330,171          92.3%
attributable to
noncontrolling interest
NET INCOME/(LOSS)       $      13,617,150    $   (9,361,677 ) $  22,978,827        (245.5% )


ATTRIBUTABLE TO THE
COMPANY

Sales. Our sales increased by 28.6%, or $11,820,349, to $53,124,050 for the three months ended September 30, 2012, compared to $41,303,701 for the three months ended September 30, 2011. The increase in sales during 2012 was primarily attributable to a mix of price and volume increases in certain of our plasma based products, as well as a substantial increase in sales of placenta polypeptide products. In addition, foreign exchange translation accounted for 1.8% of the sales increase.

During the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, most of our approved plasma products recorded price increases ranging from approximately 7.6% to 68.7%, except for human hepatitis B immunoglobulin products, which decreased by approximately 37.5% . For the three months ended September 30, 2012 as compared to the three months ended September 30, 2011:

The average price for our approved human albumin products, which accounted for 43.3% of our total sales for the three months ended September 30, 2012, increased by approximately 7.6% and, excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 6.2%.

The average price for our approved IVIG products, which accounted for 44.1% of our total sales for the three months ended September 30, 2012, increased by approximately 8.4%, and excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 7.1%.



The average price for our approved human tetanus immunoglobulin products, which accounted for 3.0% of our total sales for the three months ended September 30, 2012, increased by approximately 16.7% and, excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 14.5%.

The average price for our approved human hepatitis B immunoglobulin products, which accounted for 2.4% of our total sales for the three months ended September 30, 2012, decreased by approximately 37.5% and, excluding the foreign exchange translation effect, their average price in RMB term decreased by approximately 38.2%.

The general price increase of our human albumin products and immunoglobulin products other than human hepatitis B immunoglobulin products was primarily attributable to the shortage in supply of such products in 2012 as a result of the closure of several plasma collection stations in Guizhou. The price decrease of human hepatitis B immunoglobulin products was mainly due to newly implemented government program sponsored by PRC Ministry of Health with respect to these products. The sales prices of participating products in this program are generally lower than normal retail prices for public interest purposes.

The sales volumes of our products in general depend on market demands and our production volumes. The production volumes of our IVIG and human albumin products depend primarily on general plasma supply. The production volumes of our hyper-immune products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, are subject to the availabilities of specific vaccinated plasma and our production capacity. The supply of specific vaccinated plasma in general requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production of different types of hyper-immune products from time to time in response to market demand. As such, the sales volume of any given type of hyper-immune products may vary significantly from quarter to quarter.

During the three months ended September 30, 2012, sales volumes for our IVIG products and human hepatitis B immunoglobulin products increased by 68.4% and 10.5%, respectively, while human tetanus immunoglobulin products and human albumin products decreased by 56.2% and 4.8%, respectively, as compared to the three months ended September 30, 2011.

The increase of sales volumes of IVIG products was primarily due to the increased market demand in the three months ended September 30, 2012 and our increased inventory level in the later part of 2011 in anticipation of such demand increase. Since IVIG products are the primary medicine for treating Hand-Foot-and-Mouth Disease ("HFMD"), which often has outbreaks in late spring and summer time, the market demand for IVIG products is generally higher during these periods as well. The increase of the sales volumes of hepatitis B immunoglobulin products was primarily due to the increase of market demand and the fact that the Company successfully secured several major provincial government contracts. The decrease of sales volumes of human tetanus immunoglobulin products was primarily due to the decrease of its production volumes. The decrease of sales volumes of human albumin products was primarily due to the decrease of its production volumes caused by the reduced raw material supply as a result of the closure of several plasma collection stations in Guizhou.

Sales of placenta polypeptide products increased substantially during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. We began manufacturing and selling placenta polypeptide products since December 2011. Prior to December 2011, we provided processing service for Guizhou Eakan Co., Ltd. ("Eakan"), an affiliate of one of Guizhou Taibang's noncontrolling interest holders, for placenta polypeptide products. The revenue we derived from the sales of placenta polypeptide products is substantially higher than the processing fees we used to charge for these products.

Cost of sales. Our cost of sales increased by $3,146,775, or 22.8%, to $16,921,284 for the three months ended September 30, 2012, from $13,774,509 for the same period in 2011. Cost of sales as a percentage of sales was 31.9% for the three months ended September 30, 2012, as compared to 33.3% for the same period in 2011. The increase in cost of sales was mainly due to the increase in sales volumes and the increase in cost of plasma. In an effort to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors, which was in line with the industry practice. The decrease in cost of sales as a percentage of sales was mainly due to the change of our product mix to include higher margin products.

Gross profit and gross margin. As a result of the foregoing factors, our gross profit increased by $8,673,574, or 31.5%, to $36,202,766 for the three months ended September 30, 2012, from $27,529,192 for the same period in 2011. As a percentage of sales, our gross profit margin increased by 1.4% to 68.1% for the three months ended September 30, 2012, from 66.7% for the same period in 2011.

Operating expenses. Our total operating expenses decreased by $21,141,583, or 57.3%, to $15,782,554, for the three months ended September 30, 2012, from $36,924,137 for the same period in 2011 primarily due to decrease in impairment loss. We incurred an impairment loss of $24,600,700, including both goodwill and abandonment of long-lived assets as a result of the closure of several plasma collection stations in Guizhou in August 2011. No impairment loss was recorded during the three months ended September 30, 2012. As a percentage of sales, total expenses decreased by 59.7% to 29.7% for the three months ended September 30, 2012, from 89.4% for the same period in 2011.


Selling expenses. For the three months ended September 30, 2012, our selling expenses decreased to $3,545,378, from $3,703,683 for the three months ended September 30, 2011, a decrease of $158,305, or 4.3% . As a percentage of sales, our selling expenses for the three months ended September 30, 2012 decreased by 2.3% to 6.7%, from 9.0% for the three months ended September 30, 2011. The decrease in selling expenses as a percentage of sales was primarily due to the decrease in commission expenses paid to distributors as a result of the change of our sales strategy to focus more on direct sales to hospitals and inoculation centers.

General and administrative expenses. For the three months ended September 30, 2012, our general and administrative expenses increased to $11,599,779, from $8,110,693 for the three months ended September 30, 2011, an increase of $3,489,086, or 43.0% . General and administrative expenses as a percentage of sales increased by 2.2% to 21.8% for the three months ended September 30, 2012, from 19.6% for the three months ended September 30, 2011. The increase in general and administrative expenses was mainly due to new business development cost in connection with exploring additional growth opportunities during the three months ended September 30, 2012. Additionally, we incurred higher payroll expenses associated with hiring of several senior management team members since the second quarter of 2012.

Research and development expenses. For the three months ended September 30, 2012 and 2011, our research and development expenses were $637,397 and $509,061, respectively, representing an increase of $128,336, or 25.2% . As a percentage of sales, our research and development expenses for the three months ended September 30, 2012 and 2011 were 1.2% and 1.2%, respectively. The increase in research and development expenses was mainly due to the expenditure paid to a research and development institute in relation to a project during the three months ended September 30, 2012.

Impairment loss of goodwill. Following the closure of plasma collection stations of Guizhou Taibang in August 2011, we revised our earnings guidance for the year of 2011 and experienced decrease in our stock price and market capitalization in the third quarter of 2011. The closure of the plasma collection stations was considered to be a triggering event that may cause the fair value of the Company's reporting unit to fall below its book value. Therefore we performed two-step goodwill impairment test and concluded that the carrying amount of our single reporting unit was greater than the fair value of the reporting unit (as determined based on the quoted market price) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill. As a result, we recognized a goodwill impairment loss of $18,064,183 for the three months ended September 30, 2011.

Loss on abandonment of long-lived assets. As a result of the closure of the plasma collection stations of Guizhou Taibang, certain equipment, office furniture, building improvement and plasma collection permits were abandoned during the three months ended September 30, 2011. Loss on these long-lived assets of $6,536,517 was recognized in the three months ended September 30, 2011.

Change in fair value of derivative liabilities. The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the three months ended September 30, 2012 and 2011, we recognized a gain from the change in fair value of derivative liabilities in the amounts of nil and $2,863,870, respectively. The recognized gain from the change in the fair value of derivative liabilities in the third quarter of 2011 was mainly due to a decrease in the price of our common stock from $10.20 as of June 30, 2011 to $6.81 as of September 30, 2011. The warrants have been fully exercised by the end of June 2012 and there were no warrants outstanding as of September 30, 2012.

Interest (income) expense. Our interest expense decreased by $180,357 to $223,992 for the three months ended September 30, 2012, from $404,349 for the same period in 2011. Our interest income increased by $88,483 to $561,761, for the three months ended September 30, 2012, from $473,278 for the same period in 2011. The decrease in interest expense was primarily due to the fact that all previous short-term bank loans were fully repaid in May 2012 and most of the current short-term bank loans were made in August and early September 2012, resulting in a decrease in the average bank loan balances for the three months ended September 30, 2012 as compared to the same period in 2011. The increase in interest income is primarily due to short-term investment with higher interest rates held by the Company as well as the increase in the cash deposit.

Income tax. Our provision for income taxes increased by $2,457,373, or 240.4%, to $3,479,683 for the three months ended September 30, 2012, from $1,022,310 for the same period in 2011. Our effective income tax rates were 15.9% and negative 17.6% for the three months ended September 30, 2012 and 2011, respectively. As compared to the PRC statutory tax rate applicable to our major operating subsidiaries, the difference in the effective income tax rates was primarily due . . .

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