China Pharma Holdings, Inc. (CPHI) is an NYSE American-listed specialty pharmaceutical company with a fully-integrated subsidiary based in China. The company has a rich history spanning two decades, during which it has navigated the dynamic Chinese pharmaceutical market and established itself as a key player in the industry.
Company Background and Structure
Established in 2005, China Pharma is a Nevada holding company that owns 100% of Onny Investment Limited (Onny), a British Virgin Islands corporation. Onny, in turn, owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd. (Helpson), a company organized under the laws of the People's Republic of China (PRC). The acquisition of Helpson was completed on May 25, 2005, when Onny entered into an Equity Transfer Agreement with Helpson's three former shareholders. This transaction received approval from the Commercial Bureau of Hainan Province on June 12, 2005, and Helpson was granted its business license confirming its Wholly Foreign Owned Enterprise (WFOE) status on June 21, 2005.
Operations and Product Portfolio
Helpson serves as the backbone of China Pharma's operations, functioning as the company's manufacturing and R&D hub. The subsidiary specializes in the development, production, and marketing of pharmaceutical products targeting high-incidence and high-mortality diseases prevalent in China. Helpson manufactures a diverse range of pharmaceutical products, including dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of these products are sold on a prescription basis, and all have received approval for at least one or more therapeutic indications by the National Medical Products Administration (NMPA), formerly known as the China Food and Drug Administration (CFDA), based on demonstrated safety and efficacy.
Market Challenges and Adaptation
Over the years, China Pharma has weathered various challenges, including the ongoing consistency evaluation of generic drugs in China and the implementation of centralized procurement (CP) policies. The company has demonstrated resilience and adaptability, often working to balance the market access opportunities presented by CP initiatives with the investment required to meet the associated regulatory qualifications.
In the face of these industry-wide changes, China Pharma has also been proactive in exploring new avenues for growth. The company has ventured into the comprehensive healthcare sector, launching products such as Noni enzyme, a natural antioxidant food supplement, and various personal protective equipment (PPE) like masks and sanitizers to address the evolving needs of the Chinese market. However, these new initiatives have not yet made a significant contribution to revenue.
Financials
China Pharma's financial performance has been impacted by the dynamic market conditions. For the nine months ended September 30, 2024, the company reported revenue of $3.39 million, a decrease from $4.86 million in the same period of the prior year. This decline was primarily attributed to an increasing number of drugs from other providers being included in national CP initiatives, while Helpson's peer products had not yet passed the required consistency evaluations to qualify for participation.
The company's gross loss for the nine-month period ended September 30, 2024, was $1.83 million, compared to a gross loss of $0.20 million in the same period of 2023. The increase in gross loss was largely driven by the decrease in revenue, as well as an increase in idle equipment costs due to reduced production and higher inventory impairments.
Despite the challenges, China Pharma has maintained a strong focus on research and development (R&D), allocating $0.28 million towards these efforts in the first nine months of 2024, up from $0.09 million in the same period of the prior year. These investments reflect the company's commitment to developing innovative products and navigating the evolving regulatory landscape.
For the most recent fiscal year (2023), China Pharma reported revenue of $7.01 million, with a net loss of $3.08 million. Operating cash flow was negative $700,000, and free cash flow was negative $711,000. The company's performance continued to decline in the most recent quarter (Q3 2024), with revenue of $1.10 million, representing a year-over-year decrease of 38.89%, and a net loss of $1.12 million.
Product Segments and Performance
China Pharma operates through its wholly-owned subsidiary, Helpson, which focuses on several key product categories:
Central Nervous System (CNS) and Cerebral Cardiovascular Products: This category, which includes drugs such as Candesartan for hypertension treatment, generated $1.02 million in sales revenue for the nine months ended September 30, 2024, a decrease of $100,000 or 9% compared to the same period in 2023. The decrease was mainly due to lower sales of Candesartan amid market fluctuations.
Anti-Viral, Infection, and Respiratory Products: This category, including drugs like Andro-grapholide and Roxithromycin, was Helpson's largest revenue contributor, generating $2.07 million in sales for the nine months ended September 30, 2024, a slight decrease of $40,000 or 2% from the prior year period.
Digestive Diseases Products: This category, which includes Omeprazole, experienced a significant decline in revenue, generating only $140,000 for the nine months ended September 30, 2024, compared to $1.02 million in the same period of 2023, a decrease of $880,000 or 86%. This decrease was primarily due to normalized market demand for Omeprazole after a spike in the prior year period.
Other Products: This category, which includes Vitamin B6 for Injection, generated $160,000 in revenue for the nine months ended September 30, 2024, down $460,000 or 74% from the same period in 2023. The decrease was mainly attributed to lower sales of Vitamin B6 for Injection due to the implementation of a stricter centralized procurement policy and market fluctuations.
Liquidity
As of September 30, 2024, China Pharma reported cash and cash equivalents of $720,000, with total assets of $13.47 million and total liabilities of $6.94 million. The company's current liabilities exceeded its current assets by $1.00 million, raising substantial doubt about its ability to continue as a going concern within the next year. To address this, China Pharma's Chairperson and Chief Executive Officer has advanced an aggregate of $1.17 million to provide working capital and enable the company to make required payments.
China Pharma's liquidity position has weakened, with cash and cash equivalents declining from $1.42 million at the end of 2023 to $720,000 as of September 30, 2024. The company's debt-to-equity ratio stood at 0.61, with a current ratio of 0.79 and a quick ratio of 0.26.
In addition, China Pharma has obtained various lines of credit to support its operations. The company renewed its lines of credit in 2024, including a current portion of $1.04 million and a non-current portion of $1.43 million. However, there is no assurance that it will be able to achieve its future strategic goals, including the launch of new products, or continue to have access to credit. The company is actively exploring strategic alternatives to accelerate the launch of its nutrition products and is also considering using its existing property, plant, and equipment as collateral to secure additional bank loans.
Conclusion and Outlook
The ongoing challenges faced by China Pharma, such as the consistency evaluation of generic drugs, the impact of centralized procurement, and the company's current liquidity position, highlight the need for prudent management and strategic decision-making. The company's gross loss margin increased from 4.2% to 53.8% over the nine-month period ended September 30, 2024, reflecting the significant drop in revenue and higher costs.
China's consistency evaluation of generic drugs has been an ongoing challenge for the company. Helpson has prioritized this effort, with one of its flagship products, Candesartan tablets, passing the consistency evaluation in 2023. However, progress has been slow due to changing policies and market conditions.
The company continues to face uncertainties around the implementation of centralized procurement policies in China, which have significantly reduced drug prices. China Pharma needs to balance the market access benefits of centralized procurement with the investment required to qualify and the decline in product margins.
Despite these challenges, the company's history of adaptability, its focus on R&D, and its exploration of new growth avenues in the comprehensive healthcare sector suggest that China Pharma is working to position itself to navigate the evolving Chinese pharmaceutical landscape. As China Pharma continues to navigate these complexities, investors will be closely monitoring the company's ability to execute its strategic initiatives, maintain its competitiveness, and ultimately, return to profitability.