China Pharma second quarter revenue increases 18% to $19.6 million

China Pharma Holdings, Inc. (NYSE AMEX: CPHI) ("China Pharma" or the "Company"), a specialty pharmaceuticals company in China, today announced financial results for the quarter ended June 30, 2011.

Second Quarter 2011 Highlights

• Revenue increased 18% to $19.6 million from $16.6 million in the Second quarter of 2010.
• Cashflow from operations rose 10% to $3.6 million from $3.3 million in first six months of 2010.
• Net income, excluding the impact of change in fair value of derivative liability, fell 9% to $4.8 million, compared to $5.3 million in the second quarter of 2010 due to lower gross margins and higher tax rate in 2011.

"In the second quarter of 2011 we achieved solid sales growth primarily due to strong performances by our Anti-Viro Infection & Respiratory and our CNS Cerebral and Cardio Vascular product categories. We continue to face pricing pressures across several of our product categories during the quarter, but we expect gross margin and revenue to benefit from anticipated launches of Candesartan and Rosuvasatin in the months ahead," said Ms. Zhilin Li, China Pharma's Chairman and CEO. "In addition to the expected launch of these two higher margin products, we continue to advance our novel cephalosporin-based combination antibiotic through Phase II clinical trials. Commercializing exciting new drugs like this, along with first-to-market generic medicines, is an important part of our strategy to enhance China Pharma's growth and profitability."  

Second Quarter 2011 Results

Revenues for the quarter ended June 30, 2011 were $19.6 million, up 18% from revenues of $16.6 million for the quarter ended June 30, 2010. Sales growth in the second quarter was led by the Anti-Viro Infection & Respiratory and also the CNS Cerebral & Cardio Vascular categories.

Sales in the Anti-Viro Infection & Respiratory category rose by 28% to $8.1 million from $6.3 million in the year ago period. Our performance in this category was impacted by outstanding sales growth of Cefaclor Dispersible Tablets and also Clarithromicyn. Both of these products are front-line antibiotics in hospitals. Our Cefaclor Dispersible Tablets are a typical example of our differentiation strategy, which is especially popular in children and patients with swallowing issues.

Sales of CNS Cerebral & Cardio Vascular products also experienced continued growth, with revenues in this category increasing to $6 million from $4.9 million, or an increase of 24% on a year over year basis.

The "Digestive" category experienced more stable growth of 16% mainly from our Tiopronin, a drug prescribed for treatments of acute Hepatitis B and drug-induced liver damage.

Sales of our "Other" category were lower by 11% compared to the same period one year ago. A couple of products from our "Other" category, including Vitamin B6, saw sales declines compared to the same quarter one year ago when these products had a surge in sales partly due to the implementation of the EDL.

Gross profit for the three months ended June 30, 2011 was $7.28 million, which was approximately 3% higher compared to $7.04 million in the second quarter of 2010. Our gross margin for the second quarter of 2011 was 37.2%, compared to 42.4% in the corresponding quarter of 2010. We are seeing pricing pressure on many of our products, particularly antibiotics, although the pressure is not uniform across product lines. Pricing pressure has become more evident over the past few quarters as the effect of the Chinese government healthcare reform is being felt across all pharmaceutical products, especially in EDL related products. We expect the current challenging pricing environment to persist for some time.

In terms of our gross margins by major categories, CNS Cerebral & Cardio Vascular category margins decreased to 42.9% from the second quarter 2010 gross margin of 47.8%. Gross margin for our Anti-Viro/Infection & Respiratory category decreased to 26.4% from 32.1%. Gross margin for our Digestive Diseases category decreased to 45.7% from 52.3%, and gross margin for our Other category fell to 42.5% from 47.1%.

Selling, general and administrative expenses in the second quarter of 2011 were $1.8 million, or 9.1% of sales, compared to $1.5 million, or 9.1% of sales, in the same period of 2010. For the quarter ended June 30, 2011, the Company's bad debt benefit was $118,704, compared to bad debt expense of $37,615 in the same period of 2010.  

Operating income was $5.8 million in the second quarter of 2011, down 3% from $6.0 million in the second quarter of 2010. Operating income was lower mainly due to lower gross margins.

For the quarter ended June 30, 2011, the Company paid income tax at a rate of approximately 15%. Income tax expense for the second quarter of 2011 was $0.89 million, compared to $0.63 million for the same period last year. The Company obtained "National High-Tech Enterprise" status from the PRC government in the fourth quarter of 2010. With this designation, the Company is entitled to a preferential tax rate of 15% for the next three years (2011 to 2013), which is notably lower than the statutory income tax rate of 25%.

Net income for the second quarter of 2011 was $5.1 million, or $0.12 per basic and diluted share, compared to $6.1 million, or $0.14 per basic and diluted share, in the second quarter of 2010. Excluding the effect of change in fair value of derivative warrant liability, management estimates that adjusted non-GAAP net income in the second quarter of 2011 was $4.8 million, or $0.11 per diluted share, compared to $5.3 million, or $0.12 per diluted share, in the second quarter of 2010.

Six Months Results

Revenues for the six months ended June 30, 2011 were $37.7 million, up 19% from revenues of $31.7 million for the six months ended June 30, 2010. Gross profit for the six months ended June 30, 2011 was $14.2 million, up 7% from gross profit of $13.2 million for the corresponding period of 2010. Gross margin was 37.5%, compared to 41.5% for the first six months of 2010. Operating income was $11.1 million, up 2.9% from $10.8 million for the first six months of 2010. Net income was $10.2 million, or $0.23 per basic and diluted share, compared to $11.4 million, or $0.26 per basic and diluted share, for the same period a year ago.

Financial Condition

As of June 30, 2011, the Company had cash and cash equivalents of $4.7 million compared to $3.7 million as of December 31, 2010.

Working capital increased to $88.7 million at June 30, 2011 from $79 million at December 31, 2010. The current ratio rose to 8.2 times at June 30, 2011 from 7.2 times at December 31, 2010.

Accounts receivable balance rose to $66 million at the end of the second quarter of 2011 from $62 million at the end 2010. The Company's management team continues to be sharply focused on improving accounts receivable collection and expects to make further progress in the quarters to come.

For the six months ended June 20, 2011, cash flow from operating activities was $3.6 million, as compared to $3.3 million in the second quarter of 2010.  

"In the second half of 2011, we expect to add new higher-margin revenue streams with our upcoming new products, which should help offset some of the margin pressure coming from the more competitive pricing due to government reform policies. Overall we are still very optimistic that we have the right mix of products and pipeline opportunities to position China Pharma to benefit from China's healthcare reform program," said Ms. Li. "We believe our success in 2011 and beyond will be defined by our differentiated product portfolio, high-quality manufacturing facilities and promising pipeline, strong distribution network, and commercialization expertise."

Pipeline Update

As of June 30, 2011, China Pharma had nine pipeline drugs in different stages of active development. The development of three of such products is highlighted below:

• The Company completed clinical trials of Candesartan, a front-line drug therapy for the treatment of hypertension. The Company has completed all testing procedures and currently awaits final SFDA production approval.
• The Company completed clinical trials of Rosuvastatin, a generic form of Crestor, in December 2010 and has submitted an application for SFDA production approval.
• The Company completed Phase I clinical trials of its novel cephalosporin-based combination antibiotic in September 2010. Phase I of the clinical trials focused on the study of clinical pharmacology as well as the evaluation of safety on the human body, while observing tolerance and pharmacokinetics to provide support for dosage and drug delivery design. The Company has entered Phase II clinical trials for this drug.