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Renhuang Reports Second Quarter 2010 Results

Tuesday, June 8, 2010 General News J E 4
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HARBIN, China, June 7 RenhuangPharmaceuticals, Inc. (Pink Sheets: RHGP) ("Renhuang" or the "Company"), adeveloper, manufacturer and distributor of botanical products,bio-pharmaceuticals and traditional Chinese medicines ("TCM"), today announcedits financial results for the second quarter ended April 30, 2010 and affirmedfinancial guidance for fiscal year 2010.

"Renhuang continued to deliver robust growth in the second quarter offiscal 2010 with strong increases in revenue and earnings," said Mr. ShaomingLi, the Chairman and CEO of Renhuang. "We are pleased with the rapid marketacceptance of our recently introduced products, Banlangen Granules andCompound Honeysuckle Granules, which were key drivers behind the sales growthand margin expansion to-date. Our operating leverage remained robust in thesecond quarter with a nearly 400 basis point operating margin increaseyear-over-year despite higher operating expenses."

Second Quarter Fiscal 2010 Results

For the second quarter ended April 30, 2010, net sales were $12.1 million,up 39.0% from $8.7 million in the same quarter last year. The sales increasewas largely driven by strong growth in sales of the Company's recentlyintroduced products, Banlangen Granules and Compound Honeysuckle Granules, andan increase in the net average selling price (ASP) of other products.Banlangen Granules and Compound Honeysuckle Granules accounted for 27.2% ofgross sales in the quarter, as compared to 20.2% in the first quarter offiscal 2010. Excluding Banlangen Granules and Compound Honeysuckle Granules,net ASP rose 5.1% year-over-year in the second quarter of fiscal 2010, whichincluded lower average sales rebate.

Gross profit in the quarter increased 44.5% to $6.2 million, as comparedto $4.3 million for the same period of 2009. Gross margin for the quarterended April 30, 2010 increased to 51.4% from 49.4% in the comparable fiscal2009 quarter. The year-over-year margin expansion was mainly due to lowersales rebates and higher average selling prices of several of the Company'sproducts.

Operating expenses for the second quarter of fiscal 2010 were $2.8 million,as compared to $2.2 million in the same period last year. Sales and marketingexpenses rose to $1.3 million from $1.1 million. The spending increasereflected Renhuang's ongoing distribution network expansion, includingpenetration into new rural markets, and direct-to-consumer TV advertising topromote product brand awareness. General and administrative expenses increased63.0% to $1.0 million, primarily as a result of an increase in warrantexpenses related to professional service contracts

Operating income in the fiscal 2010 quarter was $3.4 million, up 63.0%from $2.1 million in the 2009 quarter. Operating margin increasedsignificantly year-over-year to 28.3% from 24.1%, with sales growth and grossmargin expansion more than offsetting higher operating spend. The Company didnot incur income tax expenses as its subsidiary registered in the PRC has beengranted a tax holiday for fiscal 2010. For the second quarter ended April 30,2010, net income grew 63.0% to $3.4 million, or $0.09 per diluted share, from$2.1 million, or $0.06 per diluted share, in the prior year period.

First Half Fiscal 2010 Results

Total revenue for the six month period ended April 30, 2010 was $29.2million, an increase of 30.0% from $22.5 million for the first six months infiscal 2009. Year-over-year growth was mainly due to the introduction ofBanlangen Granules and Compound Honeysuckle Granules in late 2009, and anincrease in ASP across the rest of the product portfolio.

Gross profit in the first half of fiscal 2010 rose 35.4% to $15.7 million,representing a gross margin of 53.7% as compared to 51.6% in the first half offiscal 2009. Operating income grew 29.1% year-over-year to $10.8 million. Inthe first six months of fiscal 2010, net income was $10.8 million or $0.29 perdiluted share, up from $8.4 million or $0.24 per diluted share in the firstsix months of fiscal 2009.

Financial Condition

As of April 30, 2010, Renhuang had $23.4 million in cash and cashequivalents. Working capital was $40.4 million with a current ratio of 17.4x,as compared to $32.0 million and 12.9x as of October 31, 2009. The Company hadno debt on its balance sheet. At the end of the second quarter of 2010,shareholders' equity was $61.1 million, as compared to $50.5 million at theend of fiscal 2009.

Cash flow from operating activities was $19.3 million for the six monthsended April 30, 2010, as compared to $4.2 million during the same period inthe prior year. The cash flow increase was primarily attributable to anincrease in net income and a decrease in trade receivables that reflected achange in credit terms and more aggressive receive collection efforts year-over-year. Average days sales outstanding fell to 118 days in first half offiscal 2010 from 186 in the first half of fiscal 2009.

Recent Events

In April 2010, Renhuang announced several major initiatives that furtherstrengthened the Company's corporate governance practices, including theappointment of three new independent directors to its board of directors.With the addition of the independent board members, the Company alsoestablished a nominating and compensation committee. This represented a majorstep in the Company's active efforts to meet the requirements to move to asenior exchange during the fiscal year.

Additionally in May 2010, Renhuang engaged the global leader inSarbanes-Oxley Section 404 ("SOX 404") compliance consulting,PricewaterhouseCoopers ("PWC"), to assist the Company in establishing andmaintaining its SOX 404 compliance program. Renhuang's management team remainscommitted to work with PWC to further strengthen the Company's internalcontrols, corporate governance and risk management procedures.

During the second quarter of fiscal 2010, Renhuang entered into a purchaseagreement to acquire two office floors for approximately $5.6 million cash.The new office space, intended to become the Company's new headquarters, isalready housing some of Renhuang's offices for administrative and humanresources functions. Of the total purchase price, $3.9 million was paid inApril 2010 as a deposit with the remaining $1.7 million due by December 20,2012.

Outlook - Affirming Fiscal 2010 Guidance

Renhuang is affirming its fiscal 2010 guidance for net sales in the rangeof $54.7-$55.6 million, which represents a 26% to 28% increase over reportedrevenues of $43.4 million in fiscal year 2009. The Company continues to expectfiscal 2010 net income, excluding any non-cash, non-operating gains andexpenses (such as the change in fair market value of warrant liability), to bein the range of $18.6-$18.9 million, up 26% to 28% from net income of $14.8million in fiscal year 2009.

Third quarter sales and net income are historically modestly lower ascompared to those in the first two quarters due to seasonality of Renhuang'sproduct portfolio. Demand for the Company's products often peak in the fourthquarter, which represents the start of the flu season.

In the second half of fiscal 2010, Renhuang continues to expect thecommercial launch of its Qing Re Jie Du Oral Liquid, a TCM for the treatmentof influenza and upper respiratory infections, and Badger Oil, a naturalmedicine for the treatment of burns. The new product introductions andcontinued market penetration of Renhuang's current product portfolio areexpected to drive revenue growth for the remainder of fiscal 2010. The Companyanticipates gross margin to remain above 50% during second half of fiscal 2010.Operating expenses are expected to increase in the second half of the fiscalyear, with higher sales and marketing expenses to support new product roll outand increased R&D expenses as the development pipeline advances and grows.

"Renhuang completed a very strong first half performance with significantmomentum for the remainder of fiscal 2010," added Mr. Li. "Increased marketacceptance of our portfolio of natural products and introduction of newproducts are expected to continue the Company's strong pace of growth in thecoming quarters. In addition to focusing on organic growth, Renhuang continuesto actively evaluate external growth opportunities, including the potentialacquisition of complementary operations and overseas expansion."

Conference Call

The Company will host a conference call at 9:00 a.m. ET on Tuesday, June 8,2010 to discuss the second quarter 2010 results. To participate in theconference call, please dial the following number five to ten minutes prior tothe scheduled conference call time: 877-812-1464. International callers shoulddial +1 706-902-4248. The conference ID number for the call is 79282265.

If you are unable to participate in the call at this time, a replay willbe available from Tuesday, June 8, 2010 at 10:00 a.m. Eastern Time, throughTuesday, June 22, 2010. To access the replay, dial 800-642-1687. Internationalcallers should dial +1 706-645-9291. The conference ID number for the replayis 79282265.

ABOUT RENHUANG PHARMACEUTICALS, INC.

Renhuang Pharmaceuticals, Inc. is engaged in the research, development,manufacturing, and distribution of botanical products, bio-pharmaceuticalproducts, and TCM, in the People's Republic of China. All of the Company'sproducts are produced at its three GMP-certified production facilities in AhCity, Dongfanghong and Qingyang. The Company distributes its botanicalanti-depression and nerve-regulation products, biopharmaceutical products, andbotanical antibiotic and OTC TCMs through its network of over 3,000distributors and over 70 sales centers across 24 provinces in China. CompanyWebsite: http://www.renhuang.com .

Safe Harbor Statement

This press release contains certain statements that may includeforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Such statements are based upon management'sbeliefs, assumptions and expectations of the Company's future operations andeconomic performance, taking into account the information currently availableto management. These statements are not statements of historical fact.Forward-looking statements involve risks and uncertainties, some of which arenot currently known that may cause actual results, performance or financialcondition to be materially different from the expectations of future results,performance or financial condition expressed or implied in any forward-lookingstatements. These forward-looking statements are based on current plans andexpectations and are subject to a number of uncertainties including, but notlimited to, the Company's ability to achieve its financial guidance, abilityto list its shares on a senior stock exchange, ability to manage expansion ofits operations effectively, competition in the marketing and sales of itsproducts, and other factors detailed in the Company's annual report on Form10-K and other filings with the Securities and Exchange Commission. TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. You are cautioned not to unduly rely on suchforward-looking statements when evaluating the information presented herein.Second Quarter Fiscal 2010 Highlights and Recent Events -- Net sales grew 39.0% year-over-year to $12.1 million. -- Gross profit increased 44.5% to $6.2 million from $4.3 million in 2009 while gross margin increased to 51.4% from 49.4% a year ago -- Net income rose 63.0% to $3.4 million or $0.09 per diluted share, as compared to $2.1 million or $0.06 per diluted share in 2009 -- New products, Banlangen Granules and Compound Honeysuckle Granules, accounted for nearly $3.7 million in sales in the quarter -- Appointed three new independent directors, strengthening corporate governance practices

SOURCE Renhuang Pharmaceuticals, Inc.
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