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| BSPM > SEC Filings for BSPM > Form 10-Q on 19-Nov-2012 | All Recent SEC Filings |
19-Nov-2012
Quarterly Report
The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plan," "project," "predict," "potential," "continue," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on information available to the management on the date hereof. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.
You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report as well as the audited financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors" contained in our Annual Report on Form 10-K, as amended to date, for the fiscal year ended December 31, 2011. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
Overview
Biostar Pharmaceuticals, Inc. ("we", the "Company" or "Biostar") was incorporated on March 27, 2007 in the State of Maryland. Our business operation is conducted in China primarily through our variable interest entity ("VIE"), Shaanxi Aoxing Pharmaceutical Co., Ltd. ("Aoxing Pharmaceutical"), which we control through contractual arrangements between Aoxing Pharmaceutical and our wholly owned subsidiary, Shaanxi Biostar Biotech Ltd. ("Shaanxi Biostar").
On March 28, 2010, we, through Shaanxi Biostar, entered into an agreement to acquire the assets of Xi'an Meipude Bio-Technology Co., Ltd., a Xi'an-based medical equipment manufacturer ("Meipude"), for Chinese Yuan Renminbi ("RMB") 7.85 million ($1.2 million), including certain assets registered to a family member of an original Meipude shareholder. We took control over the assets of Meipude on March 29, 2010. To facilitate the transfer of some of the assets, however, we were required to acquire all of the outstanding equity interests of Meipude, which we subsequently applied for deregistration on January 18, 2011.
In October 2011, Aoxing Pharmaceutical entered into a Share Transfer Agreement to acquire Shaanxi Weinan Huaren Pharmaceuticals, Ltd ("Shaanxi Weinan") from the holders of 100% of equity interests in Shaanxi Weinan. The aggregate purchase price is RMB61 million (approximately $9.55 million), in cash and payable in several tranches.
Shaanxi Weinan owns drug approvals and permits for a portfolio of 86 drugs and one health product, all of which, were added to the Company's current drug portfolio following the completion of this acquisition. The Company completed this acquisition on October 25, 2011, and the name of the acquired company changed to Shaanxi Weinan Aoxing Pharmaceuticals, LLC. (DBA: Shaanxi Weinan Huaren Pharmaceuticals, Ltd)
Our products also include six over-the-counter ("OTC") medicines, eight prescription-based pharmaceuticals, six health products, three hospital special supply drugs and one medical device which are sold and distributed in over 25 provinces and provincial-level cities throughout China. Our best-selling product, Xin Ao Xing Oleanolic Acid Capsule ("Xin Ao Xing Capsule"), is a state-approved OTC drug for treatment of Hepatitis B.
Recent Developments
Gel Capsule Related Developments and Effects on the Company's Sales
In April 2012, PRC State Food and Drug Administration (SFDA) launched an investigation of several capsule manufacturers based in Zhejiang, Hebei and Jiangxi provinces into their use of industrial gelatin, which contained impermissibly high chromium content. On May 25, 2012, following a nationwide inspection, SFDA authorities reported that 669 batches of gel capsules from 254 drug manufacturers in 28 provinces were found to have high chromium levels. The results of this inspection were publicly distributed in China, including publication on SFDA's website http://www.sda.gov.cn/WS01/CL0001. As a result, SFDA effectively suspended sales of gel capsules nationwide until the investigation was completed.
In May 2012, following an onsite inspection by the Xianyang State Food and Drug Administration (SFDA), samples from a batch of our Xin Aoxing capsules were found to contain chromium content higher than edible gelatin. Specifically, samples from a batch of 150 cases of the Xin Aoxing capsules (each of the 150 cases contains 8,000 capsules), representing Biostar sales of approximately RMB1,188,000 or approximately $188,000 were also found to contain high levels of chromium, which capsules, in the Company's estimation, were sold in the market in mid-2011. The Company did not check the batch in question for the chromium levels at that time since PRC pharmaceutical companies were not required to test their gel capsule inventories and purchases for chromium levels in 2011.
As required by SFDA in April 2012, the Company purchased gel capsule inspection equipment to measure the chromium levels in gel capsules it used. The Company also undertook a thorough inspection of all samples of drugs sold and its current product inventory to ensure that all of the gel capsules it had purchased and currently uses comply with the SFDA chromium content requirements. In addition, the Company conducted checks of every batch of raw materials it uses in every production category and, except as discussed above, found no violations of the chromium content requirements. Further, the Company recalled all such affected capsules as promptly and thoroughly as possible, and imposed heightened quality control and assurance measures going forward.
On July 30, 2012, the SFDA approved the Company's resumption of sales of its gel capsules following a thorough inspection of raw materials used in every production category, all samples of drugs sold and the current product inventory. However, the suspension of sales of gel capsule products severely affected all China-based pharmaceutical companies that use gelatin capsules to manufacture their drugs. The Company was not immune to the industry-wide losses and, as discussed below, the Company's sales and overall results for the 2012 second and third quarter were similarly adversely affected. The Company has been taking a number of steps to restart sales of gel capsule drugs immediately following the SFDA approval, including, among others, engaging its employees to work overtime, adding a second shift, launching an aggressive advertising campaign to help improve consumer confidence, establishing incentives for the sales force in all of the distribution offices nationwide, and launching an innovating B2C call center to take order and provide hands-on sales support.
Results of Operations
Net Sales
Following the decrease discussed above, our sales started to increase after the SFDA approved of the resumption of capsule products sales during the third quarter this year. Our net sale increased 22.2% for the three months ended September 30, 2012 from the previous quarter. Compared to the same periods in 2011, our total sales declined approximately $14.8 million or 60%, and $31.9 million or 48% for the three and nine months ended September 30, 2012, respectively. Sales from our flagship product Xin Aoxing Oleanolic Acid Capsule dropped approximately 82% and 63% for the three and nine months ended September 30, 2012, respectively, compared to the same period of last year. Starting from the third quarter this year we added three new products manufactured to specifically supply Xijing Military Hospital. We started test production for these three products in July this year, and after all the products passed the test we signed the supply agreement in September 2012. These three new products brought in $1.3 million or 13.0% of total revenue for the current quarter. Our Shaanxi Weinan facility contributed approximately 20% and 16% sales for the three and nine months ended September 30, 2012, respectively. Shaanxi Weinan facility was acquired during the fourth quarter of 2011.
Three Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 3,026,779 30.4 % $ 16,265,914 65.7 %
Gan Wang Compound
Paracetamol Capsule 412,988 4.1 % 1,780,322 7.2 %
Tianqi Dysmenorrhea
Capsule 454,127 4.6 % 1,859,092 7.5 %
Danshen Granule 1,269,800 12.7 % 1,241,407 5.0 %
Taohuasan Pediatrics
Medicine 1,093,058 11.0 % 1,201,331 4.8 %
Subtotal 6,256,752 62.8 % 22,348,066 90.2 %
Health products
Tangning Capsule 112,726 1.1 % 607,489 2.5 %
Yizi Capsule 239,030 2.4 % 1,388,538 5.6 %
Shengjing Capsule 53,532 0.5 % 299,266 1.2 %
Aoxing Ointment 45,686 0.5 % 123,373 0.5 %
Subtotal 450,974 4.5 % 2,418,666 9.8 %
Hospital products
Pharyngitis Granule 649,370 6.5 % - -
Gastritis Granule 199,374 2.0 % - -
Nasosinusitis
Granule 446,511 4.5 % - -
Subtotal 1,295,255 13.0 % - -
Medical device - Hernia belt 4,599 0.0 % 12,688 0.0 %
Shaanxi Weinan Products 1,961,795 19.7 % - -
Total sales $ 9,969,375 100 % $ 24,779,420 100 %
Nine Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 16,310,838 47.9 % $ 44,534,244 67.5 %
Gan Wang Compound
Paracetamol Capsule 1,498,110 4.4 % 4,447,430 6.7 %
Tianqi Dysmenorrhea
Capsule 1,614,920 4.8 % 4,824,068 7.3 %
Danshen Granule 2,981,084 8.8 % 2,998,280 4.5 %
Taohuasan Pediatrics
Medicine 3,546,371 10.4 % 3,660,142 5.6 %
Subtotal 25,951,323 76.3 % 60,464,164 91.6 %
Health products
Tangning Capsule 397,775 1.2 % 1,535,521 2.3 %
Yizi Capsule 674,656 2.0 % 2,994,746 4.6 %
Shengjing Capsule 264,319 0.8 % 707,956 1.1 %
Aoxing Ointment 121,084 0.3 % 265,405 0.4 %
Subtotal 1,457,834 4.3 % 5,503,628 8.4 %
Hospital products
Pharyngitis Granule 649,370 1.9 % - -
Gastritis Granule 199,374 0.6 % - -
Nasosinusitis
Granule 446,511 1.3 % - -
Subtotal 1,295,255 3.8 % - -
Medical device - Hernia belt 18,259 0.1 % 12,689 0.0 %
Shaanxi Weinan Products 5,305,493 15.5 % - -
Total revenue $ 34,028,164 100 % $ 65,980,481 100 %
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Cost of sales
Total cost of sales decreased by about $2.7 million or 37%, and $6.0 million or 31% for the three and nine months ended September 30, 2012, respectively, compared to the same period last year. The decline in sales of capsule products was the main reason for the cost decrease. When compared to the second quarter this year, total cost increased by 32% for the three months ended September 30, 2012. Cost from Weinan facility counted for approximately 18% of the total cost for both the three and nine months ended September 30, 2012. Cost of the three new drugs started manufacturing this quarter for Xijing Military Hospital was approximately 20% of the total cost for the three months ended September 30, 2012.
Three Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 549,205 11.6 % $ 2,854,158 38.2 %
Gan Wang Compound
Paracetamol Capsule 227,887 4.8 % 943,908 12.6 %
Tianqi Dysmenorrhea
Capsule 285,974 6.0 % 1,035,874 13.9 %
Danshen Granule 1,149,069 24.3 % 1,052,944 14.1 %
Taohuasan Pediatrics
Medicine 527,002 11.1 % 525,581 7.1 %
Subtotal 2,739,137 57.8 % 6,412,465 85.9 %
Health
products
Tangning Capsule 36,165 0.8 % 194,759 2.6 %
Yizi Capsule 91,548 1.9 % 531,796 7.2 %
Shengjing Capsule 41,775 0.9 % 233,380 3.1 %
Aoxing Ointment 31,640 0.7 % 83,311 1.1 %
Subtotal 201,128 4.3 % 1,043,246 14.0 %
Hospital
products
Pharyngitis Granule 493,547 10.4 % - -
Gastritis Granule 123,306 2.6 % - -
Nasosinusitis
Granule 325,198 6.9 % - -
Subtotal 942,051 19.9 % - -
Medical device - Hernia belt 3,106 0.1 % 10,255 0.1 %
Shaanxi Weinan
Products 844,472 17.9 % - -
Total cost $ 4,729,894 100 % $ 7,465,966 100 %
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Nine Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 3,236,039 24.2 % $ 7,106,736 36.7 %
Gan Wang Compound
Paracetamol Capsule 813,473 6.1 % 2,353,309 12.2 %
Tianqi Dysmenorrhea
Capsule 950,124 7.1 % 2,675,904 13.8 %
Danshen Granule 2,699,893 20.2 % 2,547,681 13.2 %
Taohuasan Pediatrics
Medicine 1,667,768 12.5 % 2,290,466 11.8 %
Subtotal 9,367,297 70.1 % 16,974,096 87.7 %
Health
products
Tangning Capsule 127,573 1.0 % 491,143 2.5 %
Yizi Capsule 258,374 1.9 % 1,146,549 5.9 %
Shengjing Capsule 206,256 1.5 % 550,999 2.9 %
Aoxing Ointment 83,505 0.6 % 179,222 0.9 %
Subtotal 675,708 5.0 % 2,367,913 12.2 %
Hospital
products
Pharyngitis Granule 493,547 3.7 % - -
Gastritis Granule 123,306 0.9 % - -
Nasosinusitis
Granule 325,198 2.4 % - -
Subtotal 942,051 7.0 % - -
Medical device - Hernia belt 12,638 0.1 % 10,255 0.1 %
Shaanxi Weinan
Products 2,381,593 17.8 % - -
Total cost $ 13,379,287 100 % $ 19,352,264 100 %
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Gross Profit
Total gross profit declined by approximately $12.1 million or 70%, and $26.0 million or 56% for the three and nine months ended September 30, 2012 respectively, compared to the same periods in 2011. Gross profits of Xin Aoxing Oleanolic Acid Capsule decreased by approximately 82%, and 65% for the three and nine months ended September 30, 2012, respectively. Shaanxi Weinan products contributed approximately $1.1 million or 21%, and $2.9 million or 14% of the total gross profit for the three and nine months ended September 30, 2012.Total gross margin was 53% and 61% for the three and nine months ended September 30, 2012 compared to 70% and 71% at the same periods last year. Gross margins for Shaanxi Weinan products were 55% and 57% for the three and nine months ended September 30, 2012. Gross margins of the three new drugs started manufacturing this quarter for Xijing Military Hospital was approximately 27%.
Three Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 2,477,574 47.3 % $ 13,411,756 77.5 %
Gan Wang Compound
Paracetamol Capsule 185,101 3.5 % 836,414 4.8 %
Tianqi Dysmenorrhea
Capsule 168,153 3.2 % 823,218 4.8 %
Danshen Granule 120,731 2.3 % 188,463 1.0 %
Taohuasan Pediatrics
Medicine 566,056 10.8 % 675,750 3.9 %
Subtotal 3,517,615 67.1 % 15,935,601 92.0 %
Health
products
Tangning Capsule 76,561 1.5 % 412,730 2.4 %
Yizi Capsule 147,482 2.8 % 856,742 5.0 %
Shengjing Capsule 11,757 0.2 % 65,886 0.4 %
Aoxing Ointment 14,046 0.3 % 40,062 0.2 %
Subtotal 249,846 4.8 % 1,375,420 8.0 %
Hospital
products
Pharyngitis Granule 155,823 3.0 % - -
Gastritis Granule 76,068 1.5 % - -
Nasosinusitis
Granule 121,313 2.3 % - -
Subtotal 353,204 6.8 % - -
Medical device - Hernia belt 1,493 0.0 % 2,433 0.0 %
Shaanxi Weinan
Products 1,117,323 21.3 % - -
Total gross profit $ 5,239,481 100 % $ 17,313,454 100 %
Nine Months Ended September 30,
2012 2011
Drugs
Xin Aoxing Oleanolic
Acid Capsule $ 13,074,799 63.3 % $ 37,427,508 80.3 %
Gan Wang Compound
Paracetamol Capsule 684,637 3.3 % 2,094,121 4.5 %
Tianqi Dysmenorrhea
Capsule 664,796 3.2 % 2,148,164 4.6 %
Danshen Granule 281,191 1.4 % 450,599 1.0 %
Taohuasan Pediatrics
Medicine 1,878,603 9.1 % 1,369,676 2.9 %
Subtotal 16,584,026 80.3 % 43,490,068 93.3 %
Health products
Tangning Capsule 270,202 1.3 % 1,044,378 2.2 %
Yizi Capsule 416,282 2.0 % 1,848,197 4.0 %
Shengjing Capsule 58,063 0.3 % 156,957 0.3 %
Aoxing Ointment 37,579 0.2 % 86,183 0.2 %
Subtotal 782,126 3.8 % 3,135,715 6.7 %
Hospital products
Pharyngitis Granule 155,823 0.7 % - -
Gastritis Granule 76,068 0.4 % - -
Nasosinusitis
Granule 121,313 0.6 % - -
Subtotal 353,204 1.7 % - -
Medical device - Hernia belt 5,621 0.0 % 2,434 0.0 %
Shaanxi Weinan Products 2,923,900 14.2 % - -
Total gross profit $ 20,648,877 100 % $ 46,628,217 100 %
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Selling, General and Administrative, and Research and Development Expenses
Three Months Ended September 30,
2012 2011
Amount % of Net Sales Amount % of Net Sales % of Change
Selling expenses $ 6,009,227 60 % $ 10,391,335 42 % -42 %
General and
administrative expenses 2,640,240 26 % 983,778 4 % 168 %
Research and development
expenses 789,702 8 % - - 100 %
Administrative penalty 1,596,174 16 % - - 100 %
Nine Months Ended September 30,
2012 2011
Amount % of Net Sales Amount % of Net Sales % of Change
Selling expenses $ 18,498,671 54 % $ 26,908,239 41 % -31 %
General and
administrative expenses 5,124,789 15 % 4,103,154 6 % 25 %
Research and development
expenses 2,370,605 7 % - - 100 %
Administrative penalty 1,596,174 5 % - - 100 %
Credits for negative
publicity 7,904,513 23 % - - 100 %
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Selling expenses decreased by approximately $4.4 million or 42%, and $8.4 million or 31% for the three and nine months ended September 30, 2012, respectively, compared to the same periods last year, due to the lower net sales. Advertising expenses were approximately $4.1 million and $11.3 million for the three and nine months ended September 30, 2012 respectively, compared to approximately $5.7 million and $14.9 million for the three and nine months ended September 30, 2011, respectively.
General and administrative expenses increased by approximately $1.7 million or 168%, and $1 million or 25% for the three and nine months ended September 30, 2012, respectively, compared to the same periods last year. The significant increase of G&A expenses during the third quarter this year was mainly due to the issuance of incentive stock during this period resulting in approximately $0.7 million expenses and made an allowance for doubtful accounts of $0.9 million.
In the third quarter this year the Company paid a one-time, non-appealable administrative penalty of approximately $1.6 million to the local government related to the capsule incident discussed above.
Research and development expenses accounted for 8% and 7% of total net sales for the three and nine months ended September 30, 2012, respectively. The Company did not incur research and development expenses for the same periods last year. During the year 2011, the Company deposited Chinese Yuan Renminbi ("RMB") 20,000,000 (approximately $3.2 million) to a university as part of a four year research and development contract to develop a new drug for the treatment cardiovascular disease. The Company recorded it as a long-term deposit at December 31, 2011. During the first quarter of the year 2012, the Company evaluated the progress of the clinic tests (stage one and stage two) of the . . .
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