What are Probiotics? - China-Biotics-Home

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Investor Presentation
Merrill Lynch Healthcare Day
June 22, 2010
1
Safe Harbor Statement
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements
set forth in this presentation that are not historical facts may be forward-looking statements that
involve risks and uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, but are not limited to, the Company’s ability to
market existing and new products, ability to access capital for expansion, and changes from
anticipated levels of sales, future national or regional economic and competitive conditions,
changes in relationships with customers, dependence on our flagship product’s profits and other
factors detailed from time to time in the Company's filings with the United States Securities and
Exchange Commission and other regulatory authorities. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. This presentation was developed by the Company, is intended solely for
informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to
buy the Company’s stock. This presentation is based upon information available to the public, as
well as other information from sources which management believes to be reliable, but is not
guaranteed by CHBT as being accurate nor does it purport to be complete. Opinions expressed
herein are those of management as of the date of publication and are subject to change without
notice.
2
Investment Highlights
The leading producer of probiotics in China

Strong R&D with sustainable, competitive advantages

Over 9 years probiotics product history & proven
record of profitability

Rising demand for China’s probiotic products driven by
increasing consumption of dairy products and rapid
growth in the animal feed market

Established large-scale production capacity and quality
control to penetrate bulk additives market

Strong revenue and profit growth with high margins

Revenue growth 39% CAGR FY06-FY10

FY10 revenue $81M and adjusted net income $28M

Guidance for 50% top line growth in FY2011

Proven high gross margin

Consistent positive free cash-flow in recent 3 years
3
What are Probiotics?
“Live microorganisms which when administered in adequate amounts confer a health benefit on the
host … can play an important role in immunological, digestive and respiratory functions and could have a
significant effect in alleviating infectious disease in children.” – WHO.
Nutritional
Products
 Historical Context
 Pasteur announced certain bacteria are necessary for human health
 Metchnikoff received 1908 Nobel Prize for work linking the immune
system and intestinal bacteria
 “Good” bacteria helps not only to stimulate digestive health, but may
stimulate a healthy immune system. - Gary Huffnagle, Ph.D.,
University of Michigan Health System.
 Benefits of Probiotics
Food
Additives
Shining
Probiotics
 Improves health of G.I. tract
Dairy
Products
 Stimulates immune system
 Helps break down nutrients properly
 Reduces creation of toxins
 Reduces symptoms of lactose intolerance
 Decreases prevalence of allergies in susceptible individuals
 Reduces some risks associated with certain cancers
Source: www.usprobiotics.org
Pharmaceuticals
Animal
Feed
Additives
* Sample: Bifido Bacteria, one
kind of probiotic
4
Global Probiotics Market

New markets are posting faster growth
Probiotic supplement sales in North America and
Eastern Europe are currently reporting a growth
rate of 25%

Significant increase in mainstream
research on probiotics in recent years

Digestive health is ‘mainstream’
In 2008, nearly 59.9 million Americans
complained of heartburn, and this figure is
expected to rise to almost 73 million by 2013,
amounting to nearly a quarter of the population
World Market by 2014 - $31 Billion
5.2
13.5
3.5
Europe
Asia
USA
Others
9
900
800
700

Global animal feed additives mkt is
expected to reach US$15.4 B by 2010
600
Probiotics have been demonstrated to have an
equivalent efficacy to synthetic antimicrobial
growth promoters (AGP), which were banned
completely in Europe since January 2006
300
500
400
History of Global Research
Publications on Probiotics
200
100
0
1950
1960
1970
1980
1990
2000
Source: Marketsandmarkets, nutraingredients-usa.com DataMonitor, FoodNavigator.com, ap-foodtechnology.com
Pubmed.org, and Mgmt estimate
2010
5
Chinese Market
Chinese affluence drives demand for health food

Demand for health food in China expected to reach $9.7 Billion by 2010
(Source: Pacific Bridge Medical)
Demand for Bulk Additive Probiotics increasing significantly

Chinese Bureau of Statistics forecasts tenfold increase in domestic
dairy consumption between 2007-2015, more demand for yogurt and baby formula product

Estimated $58 Billion animal feed market in China
Favorable Government Policies on both food safety and antibiotics safety

Requires Good Manufacturing Practice (GMP) and a step-by-step Hazard Analysis Critical
Control Point (HACCP) quality control system

Over-prescription of antibiotics in China

Gov’t is encouraging probiotics supplements to combat antibiotics abuse
China has limited probiotics production capacity

Current demand relies on imports from European manufacturers

3 dairy majors - Mengniu (HKSE: 2319), Yili (SHSE: 600887) and Bright (SHSE: 600597),
are actively and increasingly introducing probiotics in their value-add dairy products
6
Segment Analysis
Chinese Probiotic Usage and Growth (Metric Tons)
7000
6000
5000
4000
CY 2006
CY 2010
3000
2000
1000
0
Dairy
Products
Animal
Feed
Nutritional
Products
Other
Year
Dairy
Products
Animal
Feed
Nutritional
Products
Other
Totals (mt)
2006
2,000
1,000
100
300
3,400
2010 Est.
6,500
2,500
600
1,000
10,600
Source: Domestic Probiotics Market Analysis and Forecast Report
by Beijing Leadership Management Consulting Co. Limited
7
China-Biotics Overview

Founded in 1999 and headquartered in
Shanghai, with about 500 employees

The largest domestic probiotics supplier in
China

Shining is one of the most recognized
brands in Shanghai

Launched commercial production in the
new 150 ton manufacturing facility in Feb.
2010 to target bulk market in both diary
industry and animal feed industry

Proprietary technology powered by over
30 R&D staff with advanced academic
degrees

Retail outlets in 13 cities

Over 30 signed bulk additive customers
Strong Organic Revenue Growth
CAGR=39%
81.4
54.2
(Millions USD)
42.3
30.6
21.9
FY06
FY07
FY08
FY09
FY10
8
Strong R&D Capability
Probiotics R&D Center

Research Areas: Advanced bacteria culturing and protection, genetically engineered drugs, drug
delivery solutions

Over 30 members with Masters degrees or Ph.D.s

Close R&D partnerships with China’s top research programs in dairy science and technology at
the Northeast Agricultural University

Dr. Kai Ma, Director of R&D - Ph.D. in Microbiology from the Institute of Microbiology of the
Chinese Academy of Sciences and a member of the “863” and “973” national strategic projects for
developing technology
Intellectual Property

4 approved patents and 8 pending

The largest domestic Enterprise Bacteria Center with over 500 types of bacteria strains

China-Biotics currently carries all of the 21 probiotics strains in the list recently approved by the
Ministry of Health. These probiotics strains are widely used in the Company's bulk additive products.
9
Products in Retail Business
Total 41 products with 11 active products in market
Sample Products
Functions
Calms digestive system, enhances G.I. health and
Shining Essence
Shining Signal
Shining Golden Shield
Shining Energy
protects / strengthens liver function
Reduces high blood pressure, high blood sugar
levels and hyperlipidemia
Enhances the body’s immune system
Facilitates brain cell development
and increases alertness
10
Retail Expansion Strategy
 Continue to develop and introduce new products to the marketplace
 Leverage existing directly operated outlets in major cities
 Strengthen and broaden distribution network by partnering with large
wholesaler
 Expand capacity of retail product production capacity 30% in 2H 2010
 Continue to improve brand name and recognition
Jilin
Jiangsu
Shanghai
Zhejiang
Fujian
11
Products in Bulk Business
Additives for Dairy Product

Essential to yogurt-based drinks


CAGR of 31% for yogurt segment growth from ’05 to ’10 in China
(estimated by McKinsey Research)
Commonly added to infant formula milk powder

Improves digestion
Animal feeds

$58 Billion per year animal feed market in China*

Large global market
*Management estimate
Other Products

Pharmaceuticals

Nutritional products

Other food additives
12
Bulk Additive Strategy

Focus on dairy and animal feed industries, with
extension to nutritional and pharmaceutical products

Provide customized solutions and comprehensive
support, i.e. co-develop new yogurt formulas

Leverage our proprietary fermentation technology to
offer large volume, high-quality bulk powder

Extend business to international markets

Phase II capacity expansion: to increase total annual
capacity to 300 MT in Qingpu in 2011
13
Expanded Customer Base
(Bulk Additives)
14
New Industry-Leading Facility

The largest probiotics production plant in China

GMP certified highly automated production line with
maximum 60 workers even at full capacity utilization

Proprietary fermentation technology

Phase I = 150 MT annual production capacity
 Commenced commercial production in Feb. 2010
 Plan to ramp up to100MT run rate by March 2011

Phase II = 150 MT annual capacity
 Coming online in 2011

Large scalability to lower production cost per unit and
achieve high gross margin
MT = metric tons
15
Strong Financials
Strong Organic Revenue Growth
CAGR=39%
Proven Earning Growth
27.8
81.4
CAGR=35%
54.2
16.9
14.2
42.3
10.9
30.6
8.4
21.9
FY06
FY07
FY08
FY09
FY10
FY06
FY07
FY08
FY09
FY10
*Adjustment to exclude gain/loss related to
the change in fair value of convertible notes
Gross Profit (in millions)
70.0
71.2%
60.0
71.0%
50.0
70.8%
70.6%
40.0
70.4%
30.0
70.2%
20.0
70.0%
10.0
69.8%
0.0
69.6%
FY06
FY07
FY08
Gross Profit
FY09
FY10
Gross Margin
16
Income Statement & Cashflow
($ in Million)
FY2010
FY2009
FY2008
FY2007
FY2006
Net sales
81.4
54.2
42.3
30.6
21.9
Gross profit %
70%
70%
71%
71%
70%
Operating income
35.2
20.2
18.3
14.9
12.2
Adj. Net income
27.8*
16.9*
14.2*
10.9
8.35
Operating Cash-Flow
28.2
23.1
19.4
10.0
7.0
* gain or loss related to the change in fair value of convertible notes is not included
For Fiscal Years Ended March 31
17
Balance Sheet
($ in thousands)
2010
March 31
2009
2008
2007
Cash and cash equivalents
155,579
70,824
64,310
26,992
Current assets
181,953
87,370
79,979
41,897
Total assets
232,935
120,804
93,792
44,580
Current ratio
2.4
2.7
3.0
2.0
Current liabilities
76,756*
32,336
26,896
20,670
Total liabilities
76,756*
55,408
49,396
20,670
Stockholder’s equity
156,179
65,396
44,395
23,910
*Reclassification of convertible note, embedded derivatives, and interest payable from non-current liabilities to current liabilities
18
Key Management
Mr. Jinan Song, Founder, Chairman and CEO
 Founder and CEO since 1999
 Bachelor’s degree in Polymers; Masters degree in politics and economics
Mr. Travis Cai, Chief Financial Officer
 Over 10 years of financial management experience in financial institutions and US-listed companies
 MS from Stern School of Business at New York University and BS from Tsinghua University
Ms. Eva Yan, Chief Administration Officer
 Management team member since 1999 with participation in formulating corporate development plans
 Implementing internal control procedures and business negotiations
 Master’s degree in Economic Law from Capital University of Economics and Business
Dr. Tom Gu, Vice President
 Former director of the United States Federation for Culture Collections
 Standing member of the Expert Committee of the Shanghai Zhangjiang Bio-Pharmaceutical Base
 Ph.D. in molecular medicine from University of Arizona and BS in biochemistry from Jilin University
19
Investment Highlights
The leading producer of probiotics in China

Strong R&D with sustainable, competitive advantages

Over 9 years probiotics product history & proven
record of profitability

Rising demand for China’s probiotic products driven by
increasing consumption of dairy products and rapid
growth in the animal feed market

Established large-scale production capacity and quality
control to penetrate bulk additives market

Strong revenue and profit growth with high margins

Revenue growth 39% CAGR FY06-FY10

FY10 revenue $81M and adjusted net income $28M

Guidance for 50% top line growth in FY2011

Proven high gross margin

Consistent positive free cash-flow in recent 3 years
20
China-Biotics Inc.
Travis Cai, Chief Financial Officer
[email protected]
Grayling
Kevin Theiss (646) 284-9409
[email protected]
Thank You
June 2010
21
Appendix: Reconciliation of
Non-GAAP Financial Data
Three Months Ended March 31,
Adjusted Net income
2010
Net Income
2009
Net Income
Adjusted Amount
$8,773,196
$5,570,132
Non-cash gains (losses) from change in fair value
of convertible notes
(5,889,000)
1,019,000
Amount per consolidated statement of operations
2,884,196
6,589,132
Adjustments
Fiscal Year Ended March 31,
2010
2009
Adjusted Net income
Net Income
Net Income
Adjusted Amount
$27,784,961
$16,874,889
(12,137,000)
3,902,000
15,647,961
19,966,889
Adjustments
Non-cash gains (losses) from change in fair
value of convertible notes
Amount per consolidated statement of operations
22
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