Bohai Pharmaceuticals (OTC BB:BOPH)

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

The Company is hereby publishing its preliminary gross revenue guidance for the third quarter of fiscal year 2012 ended March 31, 2012 in the range of $35 million to $39 million which, if achieved, would represent year-over-year quarterly growth of approximately 62.8-69.3%. The Company expects that this revenue growth were driven by a combination of its Yantai Tianzheng acquisition undertaken in mid-2011 and increasing of essential drug sales. In addition, the Company expects that the revenue growth will continue into the fourth quarter of fiscal 2012 (ending June 30, 2012) and the second half of the calendar 2012

First Quarter 2012 Results

• Revenue increased 78.3% to $29.9 million for the first quarter of fiscal 2012 from $16.8 million for the first quarter of fiscal 2011
• Gross profit increased 69.2% to $23.0 million versus $13.6 million for the first quarter of fiscal 2011
• Income from operations increased 35.9% to $6.7 million compared to $5.0 million for the same period of fiscal 2011
• Net income was $2.7 million, or $0.15 per diluted share for the first quarter of fiscal 2012, versus $3.0 million, or $0.15 per diluted share for the same period of fiscal 2011
• Non-GAAP net income increased 40.8% to $4.9 million, or $0.25 per diluted share, versus $3.5 million, or $0.17 per diluted share, for the first quarter of fiscal 2011

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "We are pleased to report another very strong quarter at Bohai. Our revenue growth is being driven by a number of factors, including increasing demand for our core products and brand, an expanding product line, aggressive marketing, China's expanding coverage of TCM under its national medical insurance program and, most recently, our acquisition of Yantai Tianzheng.

"We completed the acquisition of Yantai Tianzheng this past August and, by doing so, have expanded our existing product line while achieving economies of scale. The acquisition was immediately accretive to our business. We currently produce 19 varieties of approved traditional Chinese herbal medicines in seven delivery systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine. Of these 19 products, 12 are prescription drugs and 7 are over the counter (or OTC) products. Approximately 20% of the increase in our revenues during the third quarter was from Bohai and 58% was from Tianzheng.

"Our competitive advantage in the marketplace is the fact that all of our lead products are listed for coverage and reimbursement under China's national medical insurance program. The sale of our prescription drug products for the fiscal first quarter of 2012 represented 74.0% of total net revenue compared to 60.5% for the same period in last year. The increase in prescription sales was primary due to increases in sales volume from two of our core products, Tongbi Capsules and Tongbi Tablets, as well as prescription product sales from Yantai Tianzheng Pharmaceuticals. We are in a strong position in the Chinese market and seek to capture additional market share in the months ahead."

In concluding, Mr. Qu stated, "We anticipate our revenue and net profit will continue to increase as a result of the Chinese government's expansion of healthcare coverage and reimbursement for an increasing number of products produced by Bohai. By the end of 2011, China's healthcare system will provide individual health insurance for over 90% of the country's population. The health plan includes traditional Chinese medicines for coverage and reimbursement from hospitals and medical centers all over China."

Fiscal 2011 Financial Highlights:

• Revenue increased 37.2% to $81.3 million in fiscal 2011 from $59.3 million in fiscal 2010
   
• Gross profit increased 30.4% to $64.0 million versus $49.1 million for the fiscal 2010
   
• Income from operations increased 42.1% to $18.3 million compared to $12.8 million in fiscal 2010
   
• Net income was $14.0 million, or $0.75 per diluted share in fiscal 2011, versus $9.1 million, or $0.55 per diluted share in fiscal 2010
   
• Non-GAAP net income increased 37.4% to $11.8 million, or $0.66 per diluted share, versus $8.6 million, or $0.52 per diluted share, in fiscal 2010

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "A combination of company-driven initiatives, quality products and favorable healthcare coverage trends in China are the driving forces behind Bohai's impressive growth. We are pleased to report a 37.2% increase in sales for 2011 and 37.4% growth in adjusted, non-GAAP net income. Our four lead products continue to gain traction in the markets we serve and now comprise 76% of our total revenue. These products include Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets and Shantongning Tablets. We currently manufacture 19 varieties of approved traditional Chinese herbal medicines of which 12 are prescription drugs and seven are over-the-counter."

"We will continue to roll out new products already in our pipeline and we recently expanded our product lines through the acquisition of Yantai Tianzheng Pharmaceutical Co., Ltd., in August 2011. Yantai Tianzheng has a sales network that covers 14 major provinces in China and had revenue of $37.9 million in 2010, an increase of 60.5% over 2009. We plan to leverage our respective distribution channels and manufacturing capabilities, as well as streamline operations through the integration of our respective companies. The acquisition also expands Bohai's pipeline of SFDA approved, exclusive and/or protected TCM medicines. The government's plan to provide 90% of China's population with healthcare coverage by the end of 2011 will further enhance Bohai's penetration into its intended market."

In concluding, Mr. Qu stated, "With Bohai's strong and growing pipeline of both prescription and non-prescription products and the Chinese government's plan to provide reimbursement for an expanded universe of traditional Chinese medicines, we believe we are in an exceptionally strong position to increase sales as well as shareholder value."

Third Quarter Fiscal 2011 Financial Highlights:

• Revenue increased 44.6% to $22.2 million from $15.3 million for the third quarter of fiscal 2010
• Gross profit increased 35.7% to $16.9 million versus $12.5 million for the third quarter of fiscal 2010
• Income from operations increased 24.8% to $4.1 million compared to $3.3 million for the third quarter of fiscal 2010
• Net income was $2.7 million, or $0.14 per diluted share, versus $3.1 million, or $0.16 per diluted share for the third quarter of fiscal 2010
• Non-GAAP net income increased 26.2% to $2.6 million, or $0.14 per diluted share, versus $2.1 million, or $0.11 per diluted share, in the fiscal third quarter of 2010, excluding $997,626 of net gains for non-cash related activities

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "The continued growth and acceptance of our traditional Chinese medicines in China is very gratifying and we are pleased to report another quarter of strong revenue growth. We continued the execution of our operational plan by investing heavily in sales and marketing this quarter, and we believe our 44.6% increase in revenue demonstrates that this effort is paying off. In addition, we added 200 level 2 hospitals and 10 new drug store chains to our national network of retail locations selling our lead product--Lung Nourishing Syrup. We now sell this product in approximately 1,600 level 2 hospitals and 36 drug store chains in China. We believe that our strong distribution network, combined with an internal sales force of more 300 direct sales representatives, provides an important competitive advantage and bodes extremely well for the future. Moreover, we have significant capacity within our existing manufacturing facilities, which should enable us to gain significant operating leverage as we continue to grow."

From December 14, 2010:

Bohai Pharmaceuticals Group, Inc. has entered into a binding agreement with Shandong Daxin Microbiology Pharmaceutical Industry Co., Ltd. to acquire the rights to 14 approved TCM medicines that were previously issued to Daxin by the Shandong Branch of the State Food and Drug Administration of China ("SFDA").  The aggregate purchase price is approximately $7,200,000 (CNY 48 million), of which approximately $3,000,000 (CNY 20 million) will be paid within 15 days from the execution of the agreement.  The remaining balance will be paid on or before January 31, 2011. 
 
The product acquisitions expand Bohai's delivery platforms to include two new categories: powder and pellet formulations.  The Chinese government's Essential Drug List (EDL) for TCM, which was established in 2009 as part of China's healthcare reform, has the most product categories in these two areas.  Among the 14 medicines being acquired by Bohai, four are currently included on the EDL and an additional five medicines are included in the National Drug Reimbursement List (NRDL).  Additionally, 3 of the 14 are prescription medicines and 11 will be available for sale Over-the-Counter.  Inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese government. 
 
"Bohai is excited to significantly expand our potential product offerings with the acquisition of these 14 products, which we believe offer great value to our shareholders," said Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals Group. "The ongoing national health insurance reform promises to drive tremendous growth in the Chinese markets, particularly with respect to TCM and in rural areas, where over 900 million people reside.  Patient purchased drugs from the EDL will receive 100% government coverage, so ensuring Bohai expands patient options for medicines on this list will be a key component of our growth strategy.  Importantly, these new products will leverage our existing 300 person sales-force and help us gain additional TCM market-share in China."
 
Bohai's 14 newly acquired medicines are in addition to the 29 traditional Chinese medicine products that the Company is authorized to produce, of which 15 are currently in production. 
 
For additional information on this transaction, please see the Form 8-K that the Company plans to file with the U.S. Securities and Exchange Commission. 

“Improving upon our past financial achievements, Bohai is excited to announce its record results for the first quarter of fiscal 2011,” said Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals Group. “During the quarter, we recognized double digit top line growth by focusing our strong marketing efforts on our lead products while at the same time continuing the roll out of our five new TCM products. We were also able to cut administrative costs, allowing us to boost net income by 57% compared to the same period last year. We look forward to making further progress with our sales initiatives as we continue to take advantage of the Chinese government’s growing support of the TCM industry through the implementation of its new healthcare policies.”

As a key driver of Bohai’s growth, the company’s three lead TCM products (Tongbi Capsules and Tablets and Lung Nourishing Cream) are eligible for reimbursement under China’s national medical insurance program enacted in 2009. Bohai believes that this provides a distinct advantage to the company’s business strategy, which places a particular marketing focus on these lead products going forward. Among other features, this new government plan seeks to extend national medical insurance coverage to China’s rural areas, with a target population in excess of 900 million potential healthcare consumers. The plan also seeks to promote the use of TCM products. Bohai currently produces 15 TCM products in China and is authorized to produce an additional 14 products.

Sales in the first quarter were generated mainly from Bohai’s lead products, Lung Nourishing Cream, Tongbi Capsules and Tongbi Tablets, which together represented over 70% of Bohai’s total net revenues. However, progress has been made on the five products that Bohai introduced in April and May of 2010. Although the new product sales only represented less than 5% of total net revenues in the first quarter, the net revenues for the five new products in the quarter ended September 30, 2010 increased by 160% compared to the quarter ended June 30, 2010.

Mr. Qu added, “We anticipate our overall net revenues will continue to increase due to the national medical and health plan initiated by Chinese government in 2009, which is expected to eventually cover individual health insurance over 90% of China’s population by 2011. As these policies continue to be implemented, we believe endorsements for Traditional Chinese Medicine, along with its coverage and reimbursement from hospitals and medical

Summary of Fiscal Year Ended June 30, 2010 Financial Results:

• Net revenues for the twelve months ended June 30, 2010 increased by approximately $9,916,110, or 20.1%, to $59,264,724 as compared to $49,348,614 for the twelve months ended June 30, 2009.  This increase was primarily due to increase in revenue from three of our main products, Lung Nourishing Cream, Tongbi Capsules and Tongbi Tablets, which together had over 50% of our total net revenue and all of which are listed for coverage and reimbursement under national medical insurance starting in December 2009.  The increase was also due to the marketing strategy we implemented beginning in January 2010.

• Net income of $9,488,192 for the twelve months ended June 30, 2010, as compared to net income of $7,947,900 for the twelve months ended June 30, 2009, an increase in net income of $1,540,292, or 19.4%.
  
• Fully diluted EPS of $0.57 for fiscal 2010 vs. $0.60.
  
• Basic EPS of $0.64 for fiscal 2010, exceeding previously issued guidance of $0.61

GeoTeam® Note:

Net revenues for the fourth quarter ended June 30, 2010 decreased by approximately $173,000, or approximately 1%, compared to the fourth quarter ended June 30, 2009.  The decrease was due to the fact that some product orders were put on hold by hospitals as a result of changes in bidding processes for some state and local Chinese governments.  The national health insurance reform started in 2009 at national levels and, as a result, some state and local governments have tried to improve their overall new policies.  Changes in local bidding processes were temporary and should not have a material impact of our overall net revenues going forward.

"We anticipate our overall net revenue will continue to increase due to a national medical and health plan initiated by Chinese government in 2009, which plan will eventually cover individual health insurance over 90% of China’s population by 2011 and includes traditional Chinese medicines for coverage and reimbursement from hospitals and medical centers all over China."

The company’s projected guidance for its June 30, 2010 fiscal year results are as follows:

• FY 2010 projected net revenue of $58 million (vs. $49.3 million FY 2009), equating to an 18% year-over-year net revenue increase.
  
• FY 2010 projected net income of $9.0 million (vs. $7.9 million FY 2009), equating to an approximate 14% year-over-year net income increase.
  
• EPS of approximately $0.61 based on 14.7 million weighted average basic shares outstanding.

"We remain unequivocal in our commitment to driving revenue and earnings growth,” said Mr. Hongwei Qu, President and Chief Executive Officer of Bohai Pharmaceuticals. “We believe that our business model, which focuses on the government supported pharmaceutical and healthcare markets in China, is validated by our nine months ended March 31, 2010 top line results as well as current and forecasted top line and bottom line numbers for our June 30 fiscal year end. We believe our proactive sales initiatives and increased budget due to our capital raise in January will serve to drive our revenues, earnings and, ultimately, shareholder value.”