Investor Presentation Merrill Lynch Healthcare Day June 22, 2010
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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
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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
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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
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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.
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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
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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
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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
$58 Billion per year animal feed market in China*
Large global market
*Management estimate
Other Products
Pharmaceuticals
Nutritional products
Other food additives
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Bulk Additive Strategy
Focus on dairy and animal feed industries, with extension to nutritional and pharmaceutical products
Provide customized solutions and comprehensive support, i.e. co-develop new yogurt formulas
Leverage our proprietary fermentation technology to offer large volume, high-quality bulk powder
Extend business to international markets
Phase II capacity expansion: to increase total annual capacity to 300 MT in Qingpu in 2011
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Expanded Customer Base (Bulk Additives)
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New Industry-Leading Facility
The largest probiotics production plant in China
GMP certified highly automated production line with maximum 60 workers even at full capacity utilization
Proprietary fermentation technology
Phase I = 150 MT annual production capacity Commenced commercial production in Feb. 2010 Plan to ramp up to100MT run rate by March 2011
Phase II = 150 MT annual capacity Coming online in 2011
Large scalability to lower production cost per unit and achieve high gross margin
MT = metric tons 15
Strong Financials Strong Organic Revenue Growth CAGR=39%
Proven Earning Growth 27.8
81.4
CAGR=35%
54.2
16.9 14.2
42.3 10.9
30.6
8.4
21.9
FY06
FY07
FY08
FY09
FY10
FY06
FY07
FY08
FY09
FY10
*Adjustment to exclude gain/loss related to the change in fair value of convertible notes Gross Profit (in millions)
70.0
71.2%
60.0
71.0%
50.0
70.8% 70.6%
40.0
70.4%
30.0
70.2%
20.0
70.0%
10.0
69.8%
0.0
69.6% FY06
FY07
FY08 Gross Profit
FY09
FY10
Gross Margin
16
Income Statement & Cashflow
($ 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
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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
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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
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