Jiangbo fourth-quarter revenues decrease 5.9% to $29.3M

Sep 30 2010

Jiangbo Pharmaceuticals, Inc. (Nasdaq: JGBO) ("Jiangbo" or the "Company"), a pharmaceutical company with its principal operations in the People's Republic of China, today announced financial results for its fourth quarter and fiscal year ended June 30, 2010. The Company's annual report on Form 10-K has been filed with the U.S. Securities and Exchange Commission and is available on the Company's website.

Fiscal Year 2010 Corporate Event Highlights -- On June 8, 2010, Jiangbo's common stock began trading on The NASDAQ Global Market -- On June 10, 2010, Jiangbo announced that it had obtained SFDA approval to produce Felodipine sustained release tablets, which is a well recognized generic drug to treat hypertension -- Effective July 1, 2010, Mr. Linxian Jin took over the role of CEO from the Company's Chairman, Mr. Wubo Cao, who will continue his role as the Chairman of the Company's Board

Fourth Quarter FY 2010 Highlights: -- Revenues decreased 5.9% year-over-year to $29.3 million -- Gross profit was $21.1 million, a 8.2% decrease from the comparable period in 2009 -- Operating income decreased 17.1% year-over-year to $14.7 million -- Net income decreased 37.5% to $7.2 million, or $(0.39) per fully diluted share -- Non-GAAP adjusted net income was $9.8 million, or $0.65 per fully diluted share, for the three months ended June 30, 2010, down 19.1% from non-GAAP adjusted net income of $12.1 million, or $0.81 per fully diluted share, for the quarter ended June 30, 2009

Fiscal Year 2010 Highlights: -- Total revenue decreased 17.0% year-over-year to $97.4 million -- Gross profit decreased 20.3% to $71.3 million, as compared to the results in fiscal year 2009 -- Operating income decreased 3.1% year-over-year to $48.2 million -- Net income grew 3.4% to $29.9 million, as compared to the results in fiscal year 2009 -- Non-GAAP adjusted net income was $30.9 million, or $2.04 per fully diluted share in fiscal year of 2010, down 13.0% from non-GAAP adjusted net income of $35.6 million, or $2.46 per fully diluted share in fiscal year 2009

"Fiscal year 2010 was a transitional year for Jiangbo as we worked to upgrade our traditional Chinese medicine ("TCM") production facility and prepared for the introduction of new drugs. We are very pleased to have our shares begin trading on The NASDAQ Global Market, which is a significant milestone for our company," commented Mr. Jin, Jiangbo's Chief Executive Officer. "We are encouraged by the SFDA approval of our sustained release Felodipine tablets, which we believe will help counterbalance revenue declines of some of our more mature products such as Itopride and Baobaole Chewable tablets. While we have experienced delays in the renovation of our Hongrui facility for traditional Chinese medicine, we now expect to commence production of six of Hongrui's TCM products in October."

Fourth Quarter Results

Total revenue decreased 5.9% year-over-year to $29.3 million from $31.2 million. The Company carried five drugs during the quarter ended June 30, 2010, with Clarithromycin sustained release tablets accounting for 43.0% of total sales, Itopride Hydrochloride granules 24.4%, Baobaole chewable tablets 16.7%, and Radix Isatidis dispersible tablets 15.7% during the quarter. The year- over-year decrease in fiscal fourth quarter 2010 revenues reflects a 30.5% decline in sales of Baobaole chewable tablets, partly offset by sales increases of Clarithromycin sustained release tablets and Radix Isatidis dispersible tablets by 21.9% and 45.1%, respectively.

Gross profit decreased 8.2% to $21.1 million, from $23.0 million in the comparable period of fiscal year 2009. Gross margin decreased to 72.0% from 73.8% in the year ago quarter, mainly reflecting higher raw material costs for TCM herbs due to natural disasters in Southern China during the second half of fiscal year 2010. During the fourth quarter of fiscal year 2010, TCM accounted for about 20% of total cost of sales.

Selling, general and administrative expenses increased 26.8% to $5.3 million from $4.2 million in the same period of fiscal year 2009, primarily due to more marketing and promotional expenditures in the last quarter of fiscal year 2010 and more public company related expenses that were incurred in the same quarter.

Operating income decreased 17.1% to $14.7 million, as compared to $17.7 million in the same period of fiscal year 2009. Operating margin as a percentage of revenue decreased to 50.1% from 56.8% in the same period of fiscal year 2009.

Other expenses, comprised primarily of interest expenses, amortization expenses on convertible debentures, and change in fair value of derivative liabilities, were $3.2 million compared to $1.5 million for the three months ended June 30, 2009. Interest expense increased 140.5% to $4.2 million in the fourth quarter of fiscal year 2010, compared to $1.8 million in the year ago period, as a result of additional penalty interest incurred due to the Company's delinquency in paying interest to its convertible debenture holders and its convertible note holders, and significantly increased amortization expenses related to write off of unamortized debt discount as convertible notes were converted into the Company's common shares.

The provision for income taxes was $4.3 million in the fourth quarter of fiscal year 2010, compared to $4.7 million for the three months ended June 30, 2009.

Net income decreased 37.5% to $7.2 million from $11.5 million in the prior year's comparable period, representing basic earnings per share of $0.62. Diluted earnings per share for the fourth quarter of fiscal year 2010 were $(0.39).

Excluding the impact of a loss from discontinued operations of approximately $43,023, an unrealized loss on investments of $0.1 million, a gain in fair value of derivative liabilities of $1.1 million, and amortization of debt discount and issuance costs related to convertible debentures of $3.5 million, non-GAAP adjusted net income for the fourth quarter of fiscal year 2010 was $9.8 million, or $0.85 per basic share, as compared to $12.1 million, or $1.15 per basic share, in the fourth quarter of fiscal year 2009. Non GAAP adjusted fully diluted earnings per share were $0.65, as compared to $0.81 in the fourth quarter of fiscal year 2009. (For a reconciliation of adjusted non- GAAP net income and basic and diluted earnings per share with their nearest GAAP equivalents, please see the table at the end of this press release.)

Fiscal Year 2010 Results

Total revenue for fiscal year 2010 decreased 17.0% to $97.4 million from $117.4 million in fiscal year 2009. Gross profit decreased 20.3% to $71.3 million, as compared to $89.5 million in the prior year. Gross margin was 73.2%, compared to 76.2% last year, primarily due to reduced per unit sales prices as part of the Company's effort to restructure its distribution and sales system in January 2009 and, to a lesser extent, due to higher TCM herb raw material costs during second half of fiscal year 2010. Operating income decreased 3.1% to $48.2 million from $49.8 million in fiscal year 2009. Operating margin increased to 49.5% from 42.4% in the prior year, mainly reflecting significantly reduced commission to the Company's sales representatives after the distribution restructuring. Net income increased 3.4% to $29.9 million, as compared to $28.9 million in fiscal year 2009. Net margin as percentage of revenue expanded 6.0 percentage points to 30.6% from 24.6% in the comparable period. Fully diluted earnings per share were $1.36, compared to $0.09 in fiscal year 2009.

Excluding the impact of a loss from discontinued operations of $0.2 million, an unrealized gain on investments of $0.2 million, a gain in fair value of derivative liabilities of $14.6 million and amortization of debt discount and issuance costs related to convertible debentures of $15.6 million, non-GAAP adjusted net income for fiscal year 2010 was $30.9 million, or $2.79 per basic share, as compared to $35.6 million, or $3.54 per basic share, in fiscal year 2009. Non-GAAP adjusted diluted earnings per share were $2.04 in fiscal year 2010, as compared to $2.46 in fiscal year 2009.

Financial Condition

As of June 30, 2010, the Company had $108.6 million in cash, as compared to $104.4 million at the end of fiscal year 2009. Working capital was $88.5 million, down from $99.8 million as of June 30, 2009. Shareholders' equity was $134.5 million, as compared to $126.1 million at the end of fiscal year 2009.

The Company generated $20.3 million in cash flow from operating activities in fiscal year 2010. Net cash flow used in investing activities was $16.6 million in fiscal year 2010, which was primarily used to purchase land use rights of approximately $17.0 million, partially offset by proceeds of approximately $0.5 million from the sale of investments.

Due to restrictions on the Company's ability to transfer cash out of the PRC, the Company is delinquent in the payment of interest on its November 2007 Debentures and May 2008 Notes. Management has been in close discussions with holders of the November 2007 Debentures and May 2008 Notes in order to reach a resolution to this issue in the near-term.

Business Outlook and Guidance

Combined sales of the Company's top four products in fiscal year 2010 are expected to decline by 15% to 20% in fiscal year 2011, reflecting intensifying competition and the Chinese government's control over drug pricing under recent health care reform policies.

Incremental sales from the Company's recently approved Felodipine sustained release tablets and from the Company's TCM products to be manufactured at Hongrui are expected to largely offset this decline in 2011.

Management estimates that the portfolio of TCM drugs to be manufactured at Hongrui will generate revenues of $7 million to $15 million during the first year of production, beginning in the second quarter of fiscal year 2011. Felodipine is expected to generate revenues of $8 million to $12 million during the first twelve months after its launch, which took place in the first quarter of fiscal year 2011.

Based on current information, the Company expects that revenues for fiscal year 2011 will be in the range of $94 million and $96 million and net income, excluding the impact from change in fair value of derivative liabilities and expenses related to the Company's convertible debentures, will be in the range of $29 million and $31 million.

"We believe that our strong balance sheet and cash position provides Jiangbo with unique flexibility to acquire innovative new products and pursue strategic acquisitions. Presently we are evaluating select opportunities to enhance our growth prospects, strengthen our market position and vertically integrate our operations. With the transitional year of 2010 behind us, we believe that we are well positioned to create value for shareholders in 2011 and beyond," commented Mr. Jin.