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TPI > SEC Filings for TPI > Form 10-Q on 14-Feb-2014All Recent SEC Filings




Quarterly Report

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

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Tianyin Pharmaceutical Co., Inc. for the periods ended December 31, 2013 and 2012 and should be read in conjunction with such financial statements and related notes included in this report and the Company's Annual Report on Form 10-K for the year ended June 30, 2013.

The information set forth below includes forward-looking statements. Certain factors that could cause results to differ materially from those projected in the forward-looking statements are set forth below. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.


We are engaged in the development, manufacturing, marketing and sale of patented biopharmaceutical, modernized traditional Chinese medicines (mTCM), branded generics and other pharmaceuticals in China. We currently manufacture and market a portfolio of 58 products, 24 of which are listed in the National Medical Reimbursement program, including the patent protected Ginkgo Mihuan Oral Liquid (GMOL) and a series of drug candidates that target various high incidence healthcare conditions in China.

Established in 1994, Chengdu Tianyin Pharmaceutical Co., Ltd ("Chengdu Tianyin") is a pharmaceutical company that manufactures and sells modernized TCMs and branded generics. The current management acquired 100% of the equity interest of Chengdu Tianyin in 2003. On October 30, 2007, Grandway Groups Holdings Ltd. ("Grandway") completed the acquisition of the 100% of the equity interest and now owns 100% of the equity interest of Chengdu Tianyin.

In June 2009, Chengdu Tianyin invested approximately $0.7 million (RMB 5 million) to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd ("TMT") for the sale and distribution of pharmaceutical products to optimize our business model through our distribution channels.

On August 21, 2009, Chengdu Tianyin, Sichuan Mingxin Pharmaceutical and an individual investor established Sichuan Jiangchuan Pharmaceutical Co., Ltd ("JCM"), whose major business is to produce macrolide antibiotic active pharmaceutical ingredients (API). Total registered capital of JCM is approximately $3.2 million (RMB 20 million), of which Chengdu Tianyin accounts for 87%. JCM is regarded as the foundation for a broader strategy to establish a significant presence in the macrolide antibiotics industry in China.

In order to facilitate the relocation of Chengdu Tianyin's business operation to Qionglai County and to secure land use rights for the relocation of manufacturing facilities, Chengdu Tianyin needed to establish its presence at Qionglai County during the process of construction while all operating subsidiaries of Chengdu Tianyin are registered outside of Qionglai. Therefore, the Company decided to acquire a pharmaceutical distribution company and registered it at Qionglai County as a subsidiary of Chengdu Tianyin. On August 29, 2012, Chengdu Tianyin entered into a Share Transfer Agreement with the shareholders of Sichuan Hengshuo Pharmaceutical Co., Ltd ("Sichuan Hengshuo" or "HSP"), a PRC pharmaceutical trading company, to acquire 100% ownership of HSP for a total consideration of approximately $0.2 million (RMB 1.3 million). The share transfer was closed on November 30, 2012, pursuant to which Chengdu Tianyin now owns 100% of HSP and Dr. Guoqing Jiang has become the legal representative of HSP.

Competitive Environment

The market for pharmaceutical products is highly competitive. Our operations may be affected by technological advances by competitors, industry consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies.

Development and Growth Strategy

Research and Development (R&D)

The partnership-based R&D strategy supports TPI to commercialize, produce, and broaden our product pipeline and to market those products through our sales and marketing infrastructure. Currently, we have been monitoring the development of several pipeline drugs with our partnership research institutes, of which we could register intellectual property rights upon milestone results.

R&D for additional indications of flagship product Gingko Mihuan (GMOL)

Our flagship product GMOL (CFDA certification number: H20013079; patent number:
20061007800225) contributes approximately 40% to our total quarterly revenue. Clinical application and information gathered from physicians showed that in addition to our approved indication for GMOL: cardiovascular disorders, coronary heart disease and cerebral ischemic attack including strokes, off-label use of GMOL have been indicated in hepatic diseases and ophthalmological diseases. The validity of these observations is currently being investigated.

Jiangchuan Macrolide Facility (JCM)

In January 2012, the JCM facility for R&D, manufacturing and sale of macrolide APIs received its GMP certification designated as "CHUAN M0799," which is valid for the period of December 31, 2011 until December 31, 2015. Following the efficiency improvement and calibration, JCM started the production of the macrolide API for TPI's Azithromycin Dispersible Tablets (SFDA No: H20074145) since July 2012. Currently the monthly production capacity of JCM is 5 - 10 tons of Azithromycin macrolide API. The API produced by JCM is mainly to supply for TPI's own Azithromycin Tablets.

Tianyin Medicine Trading Distribution Business (TMT)

TMT is established to distribute products manufactured by both TPI and other pharmaceutical companies to fuel our expanding sales network as well as to provide synergy to our existing organic product portfolio. TMT has been distributing mainly TPI's own products since its inception in 2009. Since 2010, TPI has signed and later extended distribution contracts with Jiangsu Lianshui Pharmaceutical ("Lianshui") to distribute Lianshui-branded generic injection products including cough suppressant, antibiotics, anti-inflammatory medicines and other healthcare indications. On average, TMT distribution revenue contributed approximately $1-2 million sales per quarter to our total revenue.

Pre-extraction and formulation plant development at Qionglai Facility (QLF)

In preparation for the new Good Manufacturing Practice (GMP) standards stipulated by the PRC government in early 2011, TPI initiated a process to optimize the manufacturing facilities and production lines of the Company in compliance with the new GMP standards. We received our current GMP certificate for both of our pre-extraction plant and formulate facilities on August 27, 2013 for the next three years until the end of 2015. In addition, under the guidance by provincial government, our facility is scheduled to be relocated to Qionglai County, south of Chengdu, which is designated for the pharmaceutical industry. The Qionglai facility (QLF) is approximately 18 miles from the TPI's JCM facility. The relocation project includes our TCM pre-extraction plant which is currently located near the center of the city of Chengdu surrounded by a rapidly expanding residential area. Both the pre-extraction plant and the formulation plant will subsequently be relocated to form a combined QLF, which is estimated to be 80 mu or approximately 13 acres. The combined QLF, designed and constructed according to the latest GMP standards, is expected to relieve the current capacity saturation at the current facilities. The re-location cost for Phase I (which includes relocation of both the pre-extraction and formulation plant) is estimated at $25 million, which, when completed, is expected to expand the current capacity by approximately 30%. The Phase II QLF, an additional $10 million may be invested to double the current capacity. Since the start of the relocation project in February 2012, the QLF construction project has been progressing on schedule. The relocation of pre-extraction plant is scheduled to start in February 2014, which will be immediately followed by the initiation of the relocation of formulation plant.

Fiscal 2014 Guidance

As a result of the enactment of additional healthcare reform policies in China, TPI continues to experience restrictive pricing pressures in the healthcare market. The prevailing tightened pricing control of generic medicines in China from the government's efforts to promote lower margined essential drugs (EDL) compressed our margins as well as our sale volumes of those generics. These factors, together with the negative market environment of Azithromycin API pricing led to intensified market and pricing competition combined with an excess of capacity that may continue to last for the next few years.

We reiterate the revenue forecast to range from 0% to 5% growth year over year from fiscal year 2013, along with a 10% net margin. The forecasted net income guidance excluded any non-cash expenses associated with stock compensation plans or stock option expenses.

We believe the following factors will influence the future growth perspectives of our Company:

1) Revenue growth of TPI's core product portfolio led by flagship product GMOL;
2) Gradual ramp up of JCM revenue in the fiscal year 2014;
3) Stabilization of generic sales following the progressive pricing restrictions;
4) Meaningful TMT distribution revenue contribution; and
5) QLF relocation and smooth transition of production capacity.

Our current facilities operate at approximately 90% of the total capacity on a 24 hour per day schedule. We are in the process of optimizing the usage of the remaining capacity and expanding the existing capacities to meet any potential additional market demand.

Management will continue to evaluate the Company's business outlook and communicate any changes on a quarterly basis or as when appropriate.

Discussion on Operating Results

The following table shows the results of our business. All references to the
results of operations and financial conditions are on a consolidated basis that
includes Chengdu Tianyin, TMT, JCM and HSP.

Comparison of results for the three months ended December 31, 2013 and 2012:

                               Three Months Ended
                                  December 31,
                               2013           2012
                                  (In millions)
Sales                        $    13.9       $  17.6
Cost of sales                $     7.7       $  10.8
Gross profit                 $     6.2       $   6.8
Total operating expenses     $     3.8       $   4.2

Provision for income taxes   $     0.7       $   0.7
Net income                   $     1.7       $   1.8

Sales for the quarter ended December 31, 2013 was $13.9 million, a decrease of 21% as compared to $17.6 million for the quarter ended December 31, 2012. The sales decrease was a result of the continuous pricing pressure and restrictive sales policies in generic products compared with the same period last year.

In the quarter ended December 31, 2013, our top five core pro duct sales were:

1. Gingko mihuan oral liquid (GMOL) for stroke and cardiovascular disorders:
$6.3 million
2. Mycophenolate mofetil capsules (MM) for renal transplant: $2.1 million
3. Azithromycin tablets (AZI) for infection: $0.6 million
4. Qingre jiedu oral liquid (QR): $0.7 million
5. Qianlie Shule capsules (QS) for prostate conditions: $0.5 million

These core products totaled $10.2 million in sales, representing 73.4% of our revenue in the quarter ended December 31, 2013. With the generic pricing and margin pressure, we expect further concentration of sales in the core product segment. Since the inclusion of GMOL in a number of Provincial EDL lists, such as the provinces of Henan, Shandong, Sichuan and Guangdong, and the City of Chongqing, GMOL has experienced a meaningful sales increase in fiscal year 2013. Before further provincial EDL penetration by GMOL, we consider that the current level of GMOL sales stabilized. The contribution from our distribution business through TMT for the past six months amounted to $2.2 million at 12% gross margin in the six months ended December 31, 2013.

Cost of Sales for the quarter ended December 31, 2013 was $7.7 million or 55.4% of sales, as compared to $10.8 million or 61.4% of sales for the quarter ended December 31, 2012. Our cost of sales primarily consists of the costs of direct raw materials (85% of the cost of goods sold) and production cost (15% of cost of goods sold). The percentage decrease in our cost of sales from the previous period was mainly attributable to a greater mix of higher margin products augmented by a pricing stabilization of our lower margin generic products. We expect the positive trend to stabilize for the next few quarters.

Gross Margin for the quarter ended December 31, 2013 was 44.6% as compared to 38.6% for the quarter ended December 31, 2012. As discussed above in the segment of costs of sales, our gross margin improved, predominately as a result of a greater mix of higher margin products being sold during the period. We expect a gradual improvement of our overall gross margin on a quarter to quarter comparison basis from last year due to the sale of our higher margin products.

Operating Expenses were $3.8 million for the quarter ended December 31, 2013, as compared to $4.2 million for the quarter ended December 31, 2012. The decrease in operating expenses was mainly associated with an optimized sales and marketing costs.

Net Income was $1.7 million with a net margin of 12.2% for the quarter ended December 31, 2013, as compared to net income of $1.8 million with net margin of 10.2% for the quarter ended December 31, 2012. The improvement of net margin was predominately a result of improvements in our gross margins with proportional sales and marketing expenditure.

Foreign Currency Translation Adjustment. Our reporting currency is the US dollar. We have evaluated the determination of its functional currency based on the guidance in ASC Topic, "Foreign Currency Matters," which provides that an entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. We have conducted financings in U.S. dollars, paid operating expenses primarily in U.S. dollars, paid dividends to our shareholders of common stock and expect to receive any dividends that may be declared by our subsidiaries in U.S. dollars. Therefore, we have determined that our functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5. However, the functional currency of Chengdu Tianyin, our indirectly owned operating subsidiary is Renminbi (RMB). Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Currency translation adjustments are included in accumulated other comprehensive income in the consolidated statement of Comprehensive Income and amounted to $0.96 million for the six months ended December 31, 2013. The balance sheet amounts with the exception of equity as of December 31, 2013 were translated at
6.1425 RMB to 1.00 US dollar as compared to 6.3012 RMB to 1.00 US dollar as of December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the quarters ended December 31, 2013 and 2012 were the average exchange rates during the years.

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