China Pharma Holdings, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report; it does not provide a clear standalone fourth-quarter income statement. The company develops, manufactures and sells prescription medicines in China through its PRC subsidiary.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $81.17 million | $74.39 million | +9% |
| Gross profit | $28.99 million | $30.28 million | -4% |
| Gross margin | 36% | 41% | -5 percentage points |
| Operating income | $22.03 million | $24.66 million | -11% |
| Net income | $19.27 million | $23.41 million | -18% |
| Basic and diluted EPS | $0.44 | $0.54 | -18% |
| Cash from operations | $5.24 million | $7.79 million | -33% |
Net income included derivative warrant gains of $0.93 million in 2011 versus $1.59 million in 2010. Management estimated income excluding those gains at approximately $18 million and $22 million, respectively. The 2011 tax rate was 15%, versus 11% in 2010.
Year-end cash and cash equivalents were $4.05 million; an additional $0.08 million of banker’s acceptances was reported separately. Short-term notes payable were $3.93 million, and related-party payables were $0.90 million. Total assets were $156.39 million and total liabilities were $13.91 million. Management said operating cash flow and existing bank loans should cover working capital and anticipated capital expenditures for the next 12 months, while noting additional financing could be sought for expansion.
Material changes and operating trends
- Revenue growth was led by digestive-disease products, up 33% to $12.4 million, and anti-infection/respiratory products, up 18% to $32.0 million. CNS/cerebral/cardiovascular revenue rose 8% to $25.8 million; “Other” revenue fell 22% to $11.0 million.
- Cost of revenue rose 18%, faster than revenue, and gross margin declined as healthcare reform and competition contributed to pricing pressure. Selling expenses increased 35%; general and administrative expenses increased 22%.
- Operating cash flow fell as receivables and inventory absorbed cash and accounts payable declined. Trade receivables rose to $69.7 million from $61.9 million; inventory rose to $30.4 million from $20.4 million.
- Management reported $51.4 million of receivables past due or more than 90 days old. It said collections had historically been achieved, but disclosed no receivable write-offs to date and maintained an allowance for doubtful accounts.
Outlook, risks and unusual items
- Management expected continued pricing pressure across much of the Chinese pharmaceutical market. It said new products, including Candesartan and Rosuvastatin, could support margins if approved and launched.
- Candesartan had completed clinical trials; the company said it had completed additional procedures requested by the SFDA and expected a production decision by mid-2012. Rosuvastatin’s clinical trial was completed and a production approval application was being pursued. The combination antibiotic was in Phase II; a coronary-heart-disease candidate was in Phase III.
- Approval timing is uncertain, and the company warned that SFDA review delays, clinical outcomes, market acceptance and product competition could affect launches and returns on development spending.
- The company had $8.64 million of milestone-based payments due to laboratories under formula-development and approval contracts, expected to be paid over approximately 48 months. Management said it expected operating cash flows to fund the payments.
- New GMP rules took effect in March 2011. The company said it was preparing facility upgrades, with a three-year grace period for injectables and five years for other products. Existing GMP certificates had expiry dates from 2013 to 2015.
- Cash availability is constrained by PRC currency conversion and remittance rules; $4.03 million of year-end cash and cash equivalents was described as indefinitely reinvested in the PRC subsidiary and not expected to be available for parent-company or shareholder payments.
- One customer accounted for 20.4% of 2011 revenue, and the five largest distributors accounted for 46%. A director provided loans; related-party balances were $0.90 million at year-end. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
- Management concluded internal control over financial reporting was ineffective at year-end and identified a material weakness concerning accounting for and amortization of intangible assets. Management said it was pursuing training and remediation. The auditor gave an unqualified opinion on the financial statements, but did not opine on internal-control effectiveness.
Key facts for investors to verify
- Receivables: aging, subsequent collections, customer concentration, and adequacy of the allowance, especially given the $51.4 million past-due balance.
- Liquidity: the availability of PRC-held cash, the timing and funding of the $8.64 million formula-payment obligation, and renewal or repayment of short-term bank debt.
- Product pipeline: actual SFDA approval dates, launch readiness and commercial performance for Candesartan, Rosuvastatin and clinical-stage candidates.
- GMP compliance: required upgrade costs, progress against deadlines, and renewal of facility certificates.
- Internal controls: whether the intangible-asset accounting weakness was fully remediated and whether reported balances and future filings are reliable.
- Margin and tax outlook: whether pricing pressure persists and whether the 15% high-tech tax benefit remains available through 2013; the filing states a 25% rate is expected from 2014 absent further preferential treatment.