Renhuang Pharmaceuticals' net income for first-quarter of 2010 increases 17.8%

Renhuang Pharmaceuticals, Inc. (Pink Sheets: RHGP) ("Renhuang" or the "Company"), a developer, manufacturer and distributor of botanical products, bio-pharmaceuticals and traditional Chinese medicines ("TCM"), today announced its financial results for the first quarter ended January 31, 2010.

First Quarter 2010 Highlights and Recent Events -- Sales grew 24.4% year-over-year to $17.1 million. Gross profit margin increased to 55.3% in 2010 from 52.9% in 2009 -- Net income rose 17.8% to $7.4 million or $0.20 per diluted share, as compared to $6.3 million, or $0.18 per diluted share -- Introduced two new antibiotics, Banlangen Granules and Compound Honeysuckle Granules, for the flu season -- Appointed new Chief Financial Officer with US GAAP and SEC reporting experience

"Renhuang achieved record results in the first quarter, delivering robust revenue and net income growth while significantly increasing selling expenses and R&D investment," said Mr. Shaoming Li, the Chairman and CEO of Renhuang. "The strong financial performance was primarily driven by the timely launch of two new natural antibiotics at the end of last year. The two products, Banlangen Granules and Compound Honeysuckle Granules, were introduced in time for the peak flu season and were in great demand as a result of the global H1N1 pandemic. We successfully raised prices across our product portfolio, including a 30% price increase for our Siberian Ginseng (Acanthopanax) product series. We also expanded our sales and distribution platform and increased our promotional activities to drive market penetration and raise consumer brand awareness of our products."

First Quarter 2010 Results

For the first quarter ended January 31, 2010, net sales were $17.1 million, up 24.4% from $13.8 million in the same quarter last year. The sales increase was primarily due to a 14.0% growth in the sales volume, helped by the timely introduction of two new antibiotics, Banlangen Granules for the treatment of vial cold and sore throat and Compound Honeysuckle Granules for the treatment of the common cold, pharyngitis and tonsillitis, at the end of fiscal 2009 and an increase in the net average selling price (ASP) of existing products. The two new products together accounted for 20.2% of gross sales in the quarter, as compared to none in the first quarter of fiscal 2009. The Company realized a 9.1% increase in the net ASP in the first quarter, which reflected a 1.2% average price increase and a lower average sales rebate.

Renhuang increased the price of its Siberian Ginseng (Acanthopanax) products by an average of 30% over the past year. Based on detailed market research conducted prior to the price increase, the Company believes that the high quality of these products and strong consumer demand for them will support the higher price. As such, while volume for the Siberian Ginseng products were modestly lower year-over-year, the Company is confident that demand will rebound and volume will grow throughout fiscal year 2010. This is consistent with Renhuang's previous experience with price increases that led to a slight decline in the short-term and return to volume growth in the subsequent quarters.

Gross profit in the quarter increased 30% to $9.5 million, as compared to $7.3 million for the same period of 2009. Gross margin was 55.3% in the quarter, up from 52.9% in the same period last year. Gross profit and margin were positively influenced average selling price increases, lower rebate, new product introductions and a favorable product mix.

Operating expenses for the first quarter of 2010 were $2.1 million, as compared to $1.0 million in the same period last year. Selling and marketing expenses rose to $1.1 million from $0.3 million, primarily reflecting the Company's distribution network expansion efforts and increased direct-to-consumer promotion to gain market share and create greater consumer awareness of its premium quality products. General and administrative expenses increased 31.4% to $0.8 million from $0.6 million.

Operating income was $7.4 million, or 43.1% of net sales in the first quarter of 2010, up 17.8% from $6.3 million, or 45.5% of net sales in the prior year quarter. The Company did not incur income tax expenses as its subsidiary registered in the PRC has been granted a tax holiday for 2010. Net income rose 17.8% to $7.4 million, or $0.20 per diluted share, as compared to $6.3 million, or $0.18 per diluted share, in the first quarter of 2009.

Financial Condition

As of January 31, 2010, Renhuang had $17.7 million in cash and cash equivalents. Working capital was $40.9 million with a current ratio of 15.1. The Company had no debt on its balance sheet. At the end of the first quarter in 2010, shareholders' equity was $57.9 million, as compared to $50.5 million at the end of 2009.

Cash flow from operating activities was $9.6 million for the three months ended January 31, 2010, as compared to $1.2 million during the same period prior year. This was primarily due to higher net income and a $2.2 million decrease in trade receivables in the current quarter. Days sales outstanding (DSO) fell to 117 days in the 2010 quarter, from 154 days last year which included a period of special sales promotions offering more favorable credit terms for customers. The Company believes that the current DSO level is sustainable for fiscal 2010.

Recent Events

As part of its effort to improve internal controls, the Company appointed a new Chief Financial Officer, Yan Yi Chen, with significant experience in US GAAP accounting principles and SEC filings. Ms. Chen brings with her nine years of accounting and auditing experience, including audit management, with PricewaterhouseCoopers and is a member of the New Zealand Institute of Chartered Accountants. In her previous roles, Ms. Chen had successfully implemented accounting systems, established controls and instituted policies and procedures to assure compliance with applicable financial standards. In conjunction with the hiring of Ms. Chen, the Company also expanded its accounting and finance staff, as well as engaged external consultants to assist with the implementation of additional financial and management controls.

Outlook

"We expect to continue to deliver solid organic growth in fiscal year 2010 and beyond, driven by growing consumer acceptance of and demand for our natural products, potential listing of our products in the reimbursement catalog of essential medicine for health insurance, increased market penetration of our recently launched products, and overall volume gains as China's comprehensive healthcare reform is implemented," said Mr. Li. "We are confident in our growth outlook and look forward to another record year in fiscal 2010."

In fiscal 2010, Renhuang's quarterly earnings will be impacted by two key factors. First, as is the case in past years, a number of the Company's products experience seasonality in their sales. In particular, sales demand will be positively impacted by increased demand during the winter flu season. In contrast, demand is typically a bit softer in the warmer weather. Second, the Company will continue its promotional efforts to increase consumer brand awareness and market penetration of the products, as well as invest in the advancement of the R&D pipeline throughout the year. As such, the Company anticipates stronger sales and earnings in the first and fourth quarter of the year, as compared to those in the second and third quarters.

Based on the above factors, Renhuang is affirming its previously issued fiscal 2010 guidance for net sales in the range of $54.7-$55.6 million, which represents a 26% to 28% increase over reported revenues of $43.4 million in fiscal year 2009. The Company expects fiscal 2010 net income to be in the range of $18.6-$18.9 million, up 26% to 28% from net income of $14.8 million in fiscal year 2009.