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Earnings Transcript for CPHI - Q4 Fiscal Year 2017

Executives: Diana Huang - IR Zhilin Li - President, CEO and Interim CFO Sam Hsing - Corporate VP
Analysts:
Operator: Ladies and gentlemen, thank you for standing by and welcome to China Pharma Holdings' Incorporated Full Year 2017 Earnings Conference Call. At this time all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Please be advice that this conference is being recorded today, Tuesday, 3rd of April 2018. I would now like to hand the conference over to your first speaker today, Ms. Diana Huang. Thank you, please go ahead.
Diana Huang: Thank you, operator. Good morning ladies and gentlemen, and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ full year 2017 earnings conference call. I'm Diana Huang, the company's Investor Relations Manager. Speaking on the call today are China Pharma's President and CEO and Interim CFO, Ms. Zhilin Li; and Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of the call. The company's earnings press release issued earlier this morning is available on our website at www.chinapharmaholdings.com. I would like to remind our listeners that on this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as market and customer acceptance and demands for our products, our ability to market our product, the impact of competitive product and pricing, the ability to develop and launch new product on a timely basis, the regulatory environment including government regulation in the PRC, our ability to obtain the requisite regulatory approvals to commercialize our products, fluctuations in operating results including spending for Research and Development and sales and marketing activities, and other risks detailed from time-to-time in our filings with the SEC. In addition, any projections as to the company's future performance represent management's estimates as of today, April 3, 2018. China Pharma assumes no obligation to update those projections in the future as market conditions change. Now, it is my pleasure to turn the call over to China Pharma's CEO and Interim CFO, Ms. Li to make her opening remarks in Chinese, which will be then translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the company's full year 2017 financial results.
Zhilin Li: Thank you, Diana, and good morning everyone. I would like to thank each of you for joining us today and for your continued support of China Pharma. We tried to increase sales in 2017, but the speed of our sales recovery was not as fast as we expected. Nevertheless, increasing sales remains our top priority. Management will continue to rigorously promote sales through active participation in recent provincial market openings to receive the new drug tender offers and so further research of the basic medical market. The ongoing generic drug consistency evaluations and reform of the China's drug production registration and the review policies will have the major impact on the future development of our industry and may change its business patterns. Under requirements of the consistency evaluation policy, the company actively evaluated the technical difficulty. Investment demand, time requirements and the investment return reach of the all applicable market products and the pipeline products and recognize the significant impairment loss related to our intangible asset in 2017. We will continue to actively adapt to state policy guidance and further evaluate market conditions for our current existing products, pipeline products, and competition in the market in order to optimize our development strategies. I will now read the rest of Ms. Li's prepared remarks in English. Now I would like to review our full year 2017 financial results and balance sheet information. Revenue decreased by 15.2% to $13.2 million for the year ended December 31, 2017, as compared to $15.6 million for the year ended December 31, 2016. This decrease was mainly due to the negative impact around health-care insurance cost-control as well as policies for reducing the proportion of the drug cost to total healthcare spending. Gross profit for the year-ended December 31, 2017 was $2.5 million, compared to $3.2 million in 2016. Our gross profit margin in 2017 was 18.7% compared to 20.7% in 2016. This decline in our gross profit margin was mainly due to that our raw material prices have generally increased in recent quarters along with the improvement of the industry standards and the screening of the environmental protection requirements. In addition, adverse drug pricing control policies have negatively impacted our gross margins. Our selling expenses for the year ended 31, 2017 were $3.5 million a decrease of $0.5 million compared to $4 million for the year-ended December 31, 2016. Selling expenses accounted for 26.2% of the total revenue in 2017 compared to 25.9% in 2016. The increase was mainly the result of additional marketing, consulting and product promotion efforts in certain Chinese provinces. Because of adjustments in our sales practices resulting from healthcare reform policies, despite the overall decrease in sales, we require additional personnel and expenses to support our sales and the collection of accounts receivable. Our general and administrative expenses for the year ended December 31, 2017 were $2 million, which represented an increase of $0.3 million compared to $2.3 million in 2016. General and administrative expenses accounted for 15.3% and 14.6% of our total revenues in 2017 and 2016 respectively. Our bad debt expenses for the year ended December 31, 2017 was $1.4 million, which represented an increase of $0.3 million compared to $1.1 million in 2016. The increase of our bad debt expenses was mainly due to the change in compensation of the aging of the accounts receivables for the year-ended December 31, 2017 compared to December 31, 2016. Our impairments for the year ended December 31, 2017 were $14.2 million compared to $4 million in 2016. It was mainly because of that as a pharmaceutical company, we have been focusing on the development and the maintenance of our intangible assets, mainly in the form of the medical formulas. Because of the recently implemented government policies such as consistency evaluations, our management made certain assessments regarding impairment of our intangible assets as of the December 31, 2017 and December 31, 2016 respectively, and identified six and five formulas that would likely be unable to generate positive cash flow in the foreseeable future, and therefore recognized impairment loss on them accordingly. Net loss for the year ended December 31, 2017 was $19.3 million, compared to net loss of $9.2 million for the year ended December 31, 2016. The decrease in the net loss was mainly a result of the increase in impairment loss and bad debt expenses. Turning to the balance sheet, as of December 31, 2017, the company had cash and cash equivalents of $2 million, compared to $2.7 million as of December 31, 2016. Working capital decreased to $3.1 million as of September 30, 2017 from $7.1 million as of December 31, 2016 and the current [ph] ratio was 1.3 and 1.7 times at December 31, 2017 and December 31, 2016 respectively. As of December 31, 2017, our net accounts receivables was $2.3 million, compared to $4 million as of December 31, 2016, for the year-ended December 31, 2017. Cash flow from operating activities was $0.8 million as compared to $2.9 million in 2016. Overall, we will continue focusing on our business development and promote our sales and believes that this will support the fair evaluation of our shareholders interest in future. With that, we will now open the call up to the questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Peter Ceres [ph] from -- a private investor. Please ask your question.
Unidentified Analyst: I have two questions. First question is, I mean, this has been going on for long time, you've promised with as CFDA [ph] and everything you’ve learned really good facilities doing with investing a lot of money in, do you see any way that you can get the business growing again or do you see any strategic opportunities for the company?
Zhilin Li: Ms. Li said, yes, she did observe a lot of newly issued policies from Chinese CFDA in our industry, especially the very key takeaway should be the GMP upgrading as well as recently issued countries since the evaluation policy. Ms. Li believe those policies should be considered as challenge for all players in our industry. She thinks that those newly to issued policies in all could be considered as national trafficking will push Chinese pharmaceutical manufacturing companies to go international, to increase both manufacturing lender, further upgrading of local entity as well as [indiscernible] standards. So the policy of our business evaluation. Ms. Li believe this environment also put us in a favorable position to leverage our gearing and timing to go fast and try to get the confidence with consistent evaluation in order to touch the potential opportunities to go international. Thank you.
Unidentified Analyst: And I guess the other question I had is, that over the last many, many years, you’ve written or when you may get out some fair number of accounts receivable from these state owned hospitals. And I don’t understand why the stated owned hospitals don’t pay their bills will there ever be a chance to get that money back?
Zhilin Li: Ms. Li, extents that, yes, the company has tried various kinds of methods to try to collect our accounts receivables. Unfortunately we still have significant number of non-current, non-aged accounts receivable. Anyway, the company will try our best to collect such even the historical background as well as recently issues reform policies. The performance of the collection of accounts receivable is not as good as we expected. Thank you.
Operator: [Operator Instructions] There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.
Sam Hsing: On behalf of the China Pharma Team, we would like to thank you for your interest in the company and the participation on this call. For any of you travelling to China, we always welcome and encouraging you any visitors from our shareholders, potential investors and analysts. This concludes China Pharma's full year 2017 earnings call. Thanks.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.
Diana Huang: Thank you very much.