Tianyin Pharmaceuticals Co (NYSE AMEX:TPI)

Third Quarter Fiscal Year 2013 Financial Results

• Revenue was $15.5 million compared with $14.4 million in 3Q12 an increase of 8.1% year over year,
• Operating income was $1.8 million, compared with $1.3 million in 3Q12, an increase of 38.8% year over year,
• Net Income was $1.3 million compared with $0.9 million in 3Q12, an increase of 40.9% year over year,
• Earnings per share of $0.04 per basic share, $0.04 per diluted share, compared with $0.03 per basic share, or $0.03 per diluted share in 3Q12,

Business Development & Outlook

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

Our flagship product Gingko Mihuan Oral Liquid (GMOL, SFDA certification number: H20013079; patent number: 20061007800225) contributes approximately 39% to our total revenue. Clinical application and information gathered from our 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.

Fiscal 2013 Guidance

The Company continues to face restrictive pricing pressures in our general marketplace as a result of the enactment of additional healthcare reform policies. We believe these policies could continue to put pressure on our ability to increase pricing both short-term and over the next several years, moderately affecting our revenue and margin guidance. However, we believe that the positive revenue growth we are realizing in our JCM and TMT distribution business, along with the growth we are experiencing in our core product portfolio, may help us offset to a certain degree of the general pricing pressures we have been witnessing. Given these conditions, we presently believe that we may be able to deliver revenue growth of approximately 5% to 10% in our fiscal year 2013 at a 10% net margin.

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

Second Quarter Fiscal Year 2013 Ended December 31, 2012 Financial Highlights:

• Revenue was $17.6 million compared with $18.2 million in 2Q12 a decrease of 3.3% year over year,
• Operating income was $2.6 million, compared with $2.1 million in 2Q12, an increase of 23.8% year over year,
• Net Income was $1.8 million compared with $1.7 million in 2Q12, an increase of 5.9% year over year,
• Earnings per share of $0.06 per basic share, and $0.06 per diluted share, compared with $0.06 per basic share, or $0.06 per diluted share in 2Q12,
• Cash and cash equivalents totaled $25.4 million on December 31, 2012; Operating cash flow for the six months ended December 31, 2012 was $(0.7) million, compared with operating cash flow of $7.9 million for the six months ended December 31, 2011.

Business Development & Outlook

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

Our flagship product GMOL (SFDA certification number: H20013079; patent number: 20061007800225) contributes approximately 37% to our total revenue. Clinical application and information gathered from our 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.

First Quarter Fiscal Year 2013:

• Revenue was $16.0 million compared with $17.5 million in 1Q12,
  
• Operating income was $2.2 million, compared with $2.1 million in 1Q12,
  
• Net Income was $1.5 million compared with $1.5 million in 1Q12, 
  
• Earnings per share of $0.05 per basic share, and $0.05 per diluted share, compared with $0.05 per basic share, or $0.05 per diluted share in 1Q12, 

Fiscal Year 2013 Guidance

We are assuming that continued pricing pressures in our marketplace will remain constant for the upcoming year as we expect further reforms to be undertaken in the healthcare marketplace in China. This will continue to put pressure on our revenue growth in 2013, but we believe that JCM and TMT distribution business may help us overcome these external pressures and allow us to deliver 2013 revenue growth of approximately 10% to 15%. Therefore, we reiterate our fiscal 2013 revenue projection of approximately $75 to $80 million along with a net margin of approximately 10%.

We believe the following factors will influence the future growth perspectives of our Company: 1) Market expansion and revenue growth of TPI's core product portfolio led by flagship product Gingko Mihuan Oral Liquid (GMOL) and other major products; 2) Ramp up of JCM revenue in the fiscal year 2013; 3) The gradual stabilization of generic sales following the progressive pricing restrictions caused by the ongoing healthcare reform; 4) Steady TMT distribution revenue contribution; and 5) QLF relocation and smooth transition of production capacity.

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

Third Quarter Fiscal Year 2012 Ended March 31, 2012 Financial Highlights:

• 3Q FY2012 revenue delivered $14.4 million compared with $24.9 million in 3Q FY2011,
• Operating income delivered $1.3 million, compared with $5.0 million in 3Q FY2011,
• Net Income was $0.9 million compared with $4.1 million in 3Q FY2011,
• Earnings per share of $0.03 per basic share, or $0.03 per diluted share, compared with $0.14 per basic share, or $0.14 per diluted share in 3Q FY2011,
• Cash and cash equivalents totaled $29.9 million on March 31, 2012,
• Operating cash flow for the nine months ended March 31, 2012 was $4.8 million, compared with $12.2 million for the nine months ended March 31, 2011.

Business Development & Outlook

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

Our flagship product Gingko Mihuan Oral Liquid (GMOL, SFDA certification number: H20013079; patent number: 20061007800225) contributes to more than 30% of our total revenue. Clinical application and information gathered from our physicians showed that in addition to our approved indication for the usage of 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 and mechanisms of these observations are being investigated in a number of hospitals.

Under the ongoing healthcare reform policy that favors the sale of EDL drugs in China, the national or provincial EDL listing could substantially support the market development of these products. Recently, GMOL has been selected as an EDL drug in both Henan and Shandong province (with a combined population of approximately 200 million) EDL provincial supplementary lists. The EDL status grants a full insurance coverage or 100% government reimbursement for patients.

Fiscal Year 2012 Financial Guidance

As a result of the current pricing restriction by the healthcare reform policies of the government along with the rippling effect of the highly competitive market environment for our generic portfolio, we revised our fiscal 2012 revenue guidance from $100 million to $66 million and our net income guidance from $10 million to $6.5 million. Our revised estimated projection is based upon several factors including but not limited to the following:

1. A delay in our JCM revenue ramp up estimated to occur in the second half of 2012;
2. Reduced generic sales as a result of pricing restrictions and healthcare reform policies recently undertaken by the government that was only partially offset from the steady revenue stream of our flagship product portfolio;
3. Flat but steady TMT distribution revenue.

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

Second Quarter 2012 Results

• 2Q FY2012 revenue delivered $18.2 million compared with $25.3 million in 2Q FY2011,
• 2Q FY2012 operating income delivered $2.1 million, compared with $5.3 million in 2Q FY2011,
• Net Income was $1.7 million compared with $5.9 million in 2Q FY2011,
• Earnings per share of $0.06 per basic share, or $0.06 per diluted share, compared with $0.21 per basic share, or $0.20 per diluted share in 2Q FY2011,
• Cash and cash equivalents totaled $36.9 million on December 31, 2011,
• Operating cash flow for the six months ended December 31, 2011 was $8.2 million, compared with $10.8 million for the six months ending December 31, 2010.

The sales decrease from the prior year was mainly due to 1) generic pricing pressure, 2) government policy to prioritize Essential Drug List (EDL) drug sales that led to the sales and margin compression of higher margined generic pharmaceuticals, and 3) in the quarter ended December 31, 2010, ahead of the current healthcare reform policies being enforced, downstream customers had significantly built up their inventory which led to a revenue gain of 69.6% for TPI from the prior year.

Based on the blend of the TMT lower margin revenue and the current pricing restriction, our overall gross margin in the near term, on a quarter to quarter comparison basis, may trend lower, but on a sequential basis should stabilize depending on the sales mix of TMT, JCM API revenue as compared to the proprietary portfolio revenue performance.

Business Development & Outlook

GMOL Capsule formulation

In November 2011, we announced the formulation expansion program for our flagship product GMOL (SFDA certification number: H20013079; patent number: 20061007800225). GMOL, the proprietary prescription medicine for TPI, is used nationwide in China to treat brain ischemia and infarction, coronary heart diseases, memory dysfunction and other neurological disorders. The new capsule formulation is more convenient to carry while traveling, adding to its ease of use for those long term treatment users. In addition, the cost of production and packaging material for the capsule formulation will reduce the overall cost of sales by 70% while extending the expiration period to 3 years from the current 2 years for oral liquid form. The new capsule formulation is expected to support the revenue growth of GMOL at approximately 30% year over year and improve the gross margin of GMOL products to 75% or higher. TPI will also apply for patent protection for the new capsule formulation. The R&D cost associated with the capsule formulation is estimated at $1-2 million.

Jiangchuan Macrolide Project (JCM)

In January 2012, following a series of the internal quality assessment and the environmental safety and impact assessment, JCM was approved for its GMP certification designated as "CHUAN M0799" valid through the period of December 31, 2011 until December 31, 2015.

Qionglai (QLF) Project

In preparation for the new Good Manufacturing Practice (GMP) standards stipulated by the PRC government in early 2011, TPI initiated the process of optimizing the manufacturing facilities and production lines in compliance with the new GMP standards by 2013. Concurrently, the city of Chengdu has re-designated various industrial parks of nearby counties to for particular industries such as automobile, biotechnologies, pharmaceuticals and chemical engineering for individual locations. As a consequence, TPI's manufacturing facility at the Longquan district, east of Chengdu, which is designated for automotive industry, is scheduled to be relocated to Qionglai city, south of Chengdu, which is designated for pharmaceutical industry. The QLF is approximately 18 miles from the Company's recently completed Jiangchuan macrolide (JCM) facility. The proposed relocation project also includes our TCM pre-extraction plant which is located near the center of city of Chengdu surrounded by rapidly expanding residential area.

On February 13, 2012, TPI announced the official start of its Qionglai Facility (QLF) project following the initial planning period. The Phase I of QLF project will be the construction of the pre-extraction plant which is targeted for completion by the end of 2012 calendar year.

The pre-extraction is the first step of the manufacturing process of modernized traditional Chinese medicine (mTCM). The pre-extraction facility will conduct initial processing of TCM raw material, separation using alcohol or water precipitation, filtration, centrifugation, concentration and purification of TCM pharmaceutical ingredients which will be further processed for the production of mTCM at the formulation facility.

The QLF occupies 80 mu or 53,000 m². Both pre-extraction plant and the formulation plant are to be relocated. The combined QLF plant, designed and constructed according to the latest GMP standards, is expected to relieve the current capacity saturation at TPI's facilities. The re-location and construction cost is estimated at $25 million for Phase I which will expand the current capacity by 30%. For Phase II QLF, an additional $10 million may be employed to double the current capacity by 2013.ally begun after the initial planning stage.

First Quartr 2012 Results

In preparation for the new Good Manufacturing Practice (GMP) standards stipulated by the PRC government in early 2011, which requires pharmaceutical companies to be in compliance by 2013, Tianyin Pharmaceutical Inc. (the “Company” or “TPI”) initiated the process of optimizing the manufacturing facilities and production lines according to the newly issued guidelines. Concurrently, the city of Chengdu has re-designated its industrial parks in nearby counties to be dedicated to particular industries such as automobile, pharmaceuticals, chemical engineering and etc. for individual locations. As a consequence, the TPI’s manufacturing facility at the Longquan district, east of Chengdu, which is designated for automotive industry, is scheduled to be relocated to Qionglai city, south of Chengdu that is dedicated to pharmaceutical industry. The Qionglai facility (QLF) is approximately 18 miles from the recently completed Jiangchuan macrolide facility (JCM) which is also located south of Chengdu. The proposed relocation project also includes our traditional Chinese medicine (TCM) pre-extraction plant which is located near the center of city of Chengdu surrounded by rapidly expanding residential area.

The manufacturing site is estimated to be 80 mu or 53,000 m2. Both pre-extraction plant and the formulation plant are scheduled to be relocated. The combined QLF plant, designed and constructed according to the newest GMP standards, is expected to relieve the current capacity saturation at TPI’s manufacturing facilities. The re-location and construction cost is estimated at $25 million for Phase I which, when completed in 2012, will expand the current capacity by 30%. For Phase II QLF, an additional $10 million may be invested to double the current capacity that is scheduled to complete in 2013.

Fiscal 2011 financial results

• Revenue delivered $95.2 million, exceeding the guided $90.0 million revenue forecast for fiscal year 2011, a gain of 48.9% year over year from $63.9 million in fiscal year 2010;
• Income from operation increased 23.1% year over year to $18.1 million from $14.7 million in fiscal year 2010;
• Net Income (excluding non-cash equity compensation of $1.9 million) increased to $17.5 million, up 35.4% year over year from $13.0 million in fiscal year 2010; Net income exceeded previously guided $16.0 million net income forecast excluding non-cash equity compensation.
• Earnings per share increased to $0.55 per basic share, or $0.53 per diluted share, up from $0.47 per basic share, or $0.40 per diluted share in fiscal year 2010, a gain of 17.0% and 32.5%, respectively;

Third Quarter Results:

• Revenue increased 56.3% year over year to $24.9 million from $15.9 million in third quarter fiscal year 2010;
• Operating income increased 39.9% year over year to $5.0 million from $3.6 million in third quarter fiscal year 2010;
• Net Income increased to $3.7 million, up 27.7% year over year from $2.9 million in third quarter fiscal year 2010;
• Earnings per share of $0.13 per basic share, or $0.12 per diluted share, up from $0.11 per basic share, or $0.09 per diluted share a year earlier, a gain of 19.3% and 35.5%,  respectively;
• Cash and cash equivalents totaled $31.1 million on March 31, 2011 or $1.10 per basic share in cash;
• Targeting 900 hospitals coverage by the end of fiscal year 2011 up from the current 880 hospitals network;
• Forecasting $30 million JCM macrolide API revenue for the first year of operation

Due to the recent healthcare reform and the resulting pricing pressure on  generic pharmaceutical sales nationwide, since January 2011, our generic division which makes up approximately 40% of our total revenue is expected to experience sales reduction for the next few quarters. In addition, the longer than expected equipment installation and GMP certification preparation process following the newly issued SFDA GMP standards by the PRC government at the beginning of March 2011, are expected to reduce the previously forecast revenue of JCM macrolide facility. We therefore revise our fiscal year 2011 revenue guidance to $90.0 million representing 40.8% year over year growth, from the previously guided $113.0 million in total revenue.

Based on the revised revenue forecast of $90.0 million along with the new 25% income tax rate starting in January 2011 from the previous 15% for Chengdu Tianyin, we revise our net income forecast to $16 million, representing 32.9% year over year growth from previous $18 million. The forecasted net income excludes any non-cash expenses associated with stock compensation plans or stock option expenses. 

Our analysis of the market condition suggests that although the pricing pressure on the generic division is likely to continue for the remainder of 2012 calendar year, the JCM along with TMT distribution business are expected to support the growth of TPI for the coming fiscal year.

• Revenue increased 69.6% year over year to $25.3 million from $14.9 million in 2Q FY2010
• Operating income increased 69.0% year over year to $5.3 million from $3.2 million in 2Q FY2010.
• Net Income was $4.4 million, up 69.2% year over year from $2.6 million in 2Q FY2010.
• Earnings per share of $0.16 per basic share, or $0.14 per diluted share, up from $0.10 per basic share, or $0.08 per diluted share a year earlier, a gain of 52.5% and 70.9% respectively.
• We reiterate our fiscal year 2011 revenue guidance of $113.0 million, representing 76.8% year over year growth and net income guidance of $18.0 million, representing 50.0% year over year growth

Fiscal Year 2011 Financial Guidance

We reiterate our fiscal year 2011

• revenue guidance of $113.0 million, representing 76.8% year over year growth

• net income guidance of $18.0 million, representing 50.0% year over year growth.

Our forecast is based on the following growth drivers:

1) steady revenue growth of the existing product portfolio including our flagship products such as Gingko Mihuan Oral Liquid (GMOL) for age-related cardiovascular and central nervous system disorders such as coronary heart diseases and stroke, Xuelian Chongcao Oral Liquid (XLCC) for immunity enhancement, Azithromycin Tablets (AZI) for bacterial infections and Apu Shuangxin (Benorylate) Granules (APU) for rheumatoid arthritis;

2) capacity ramp-up of Tianyin's newly completed production facility;

3) new product market entries from Tianyin's pipeline;

4) revenue contribution from Jiangchuan macrolide facility;

5) business development of Tianyin Medicine Trading (TMT), Tianyin’s distribution arm for specialty products by other pharmaceuticals that provide synergy to our existing product portfolio. In our forecast, we assume steady pricings for our products and revenue growth driven by increased sales. Forecasted net income does not include non-cash expenses associated with stock compensation plans, stock option expenses and/or future interest expense.

Our current facilities operate at approximately 80% of the total capacity on 24 hours per day schedule. We will be able to further utilize the remaining capacity and optimize the production with high-efficiency equipment base on increasing market demand

Business Development & Outlook

Jiangchuan Progress Update

Jiangchuan focuses on the production of one of the world's best-selling antibiotics, macrolide antibiotics, such as Azithromycin. Jiangchuan holds a license from China's SFDA to produce macrolide antibiotics and a related business license from the Industry and Commerce Bureau and Tax department. Tianyin owns 77% of Jiangchuan and will utilize Jianchuan as the foundation of a broader, longer term strategy to build a significant presence in the rapidly growing macrolide antibiotics market. Construction of the new production facility in Xinjin Industrial Development Area commenced on January 8, 2010 with Phase I capacity of 240 ton capacity, followed by Phase II (total of 480 ton capacity including phase I) with a total estimated capital expenditures of $20 million. Tianyin anticipates Jiangchuan's revenue contribution to begin in the 2^nd half of fiscal year 2011.

Development of Tianyin Medicine Trading Distribution Business

Since the inception of Tianyin Medicine Trading (TMT), we have been developing the distribution portfolio of TMT, Tianyin's distribution arm for specialty products manufactured by other pharmaceuticals that provide synergy to our existing organic product portfolio. Previously, TMT distributes mainly Tianyin's own products. In early November this year, we have successfully obtained one year distribution rights from state-owned Jiangsu Lianshui Pharmaceutical (Lianshui) to distribute approximately 15 Lianshui-branded generic injection products including cough suppressant, antiobiotics along with other healthcare indications. We forecast the annual distribution revenue from TMT to reach approximately $10 million.

• FY2010 revenue exceeds our revenue guidance of $63.0 million for FY2010, up 49.0% year over year (yoy) to $63.9 million from $42.9 million for FY2009.
  
• Gross profit delivered $33.3 million, up 55.6% yoy from $21.4 million for FY2009
  
• Gross margins increased to 52.2% from 49.8% for FY2009.
  
• Net income rose 51.9% yoy to $12.0 million at 19.0% net margin from $7.9 million at 18.0% net margin for FY2009; the net income also exceeds our net income guidance of $11.0 million for FY2010.
  
• Earnings per share equals to $0.47 per basic share, or $0.40 per diluted share, up 25.0% year over year from $0.32 per diluted share in FY2009.
  
• Cash and cash equivalents were $27.0 million on June 30, 2010 as compared to $12.4 million in cash and cash equivalents on June 30, 2009.
  
• FY2010 operating cash flow rose 85.5% year over year to $15.4 million from $8.3 million in FY2009

"For the fiscal year 2010, we have reached and exceeded our revenue and net income targets of $63.0 million and $11.0 million respectively. We thank our 1,365 employees whose diligence and persistence make possible Tianyin's successful operating performance not only for this year but for the past almost a decade of growth. In addition, we exceeded our revenue target of $22.0 million for Gingko Mihuan Oral Liquid through our continuous effort in sales expansion and market penetration," stated Dr. Jiang, Guoqing, Tianyin's Chief Executive Officer. "In addition to our 10 late-stage pipeline drugs pending approval that target various high-incidence medical indications in China, the future lays ahead with our initiative in the growing pharmaceutical raw material space. We expect our Jiangchuan macrolide facility to contribute to our revenue growth in the fiscal year 2011."

 Fiscal year 2011 Guidance:

The management reaffirms

• Revenue guidance of $113.0 million.
  
• Net income guidance of $18.0 million, representing 77.0% and 50.0% year over year growth respectively.