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BSPM > SEC Filings for BSPM > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for BIOSTAR PHARMACEUTICALS, INC.

Form 10-Q for BIOSTAR PHARMACEUTICALS, INC.


19-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.


Table of Contents

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.


Table of Contents

                                                    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 %


Table of Contents

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 %


Table of Contents

                                                    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 %

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%.


Table of Contents

                                                   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 %


Table of Contents

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 %

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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