Sinovac Biotech Ltd (SVA) 2007 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Sinovac Biotech third-quarter 2007 earnings conference call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Miss Stephanie Carrington of The Ruth Group. Thank you, Miss Carrington, you may now begin.

Thank you operator. Good day everyone. Before we begin I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words and phrases such as well, expect, anticipate, future, intends, plans, believes, estimates and similar statements. Statements that are not historical facts including statements about Sinovac's beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Sinovac does not undertake any obligation to update any forward-looking statement except as required under applicable law. As many of you have seen, Sinovac issued its third-quarter 2000 financial results press release and it has filed its form 6-K with the Securities and Exchange Commission.

On the call today are Dr. Weidong Yin, Chairman, President and CEO; Helen Yang, International Business Manager; and Vanessa Wu, Senior Financial Manager. I will now turn over the call to Dr. Yin, Helen and Vanessa.

Thank you Stephanie. Good day everyone. Thank you for joining us on this conference call. Dr. Yin will commence today's conference call by discussing recent developments. I will provide a translation to his remarks. Vanessa will then provide a review of our financial results and discuss the business outlook.

(interpreted) Hello everyone, it is my pleasure to take this opportunity through this conference call to discuss with you about our Q3 developments. On December 11, 2007 we filed our third-quarter financial results with the SEC and issued our quarterly press release. These results have been revealed by our auditor, Ernst & Young. And this is the first time for us to release our quarterly report and we believe these announcement of quarterly financial results is actually help us maintaining our greater transparency and also continues our contact with our investors.

In all, we actually had a very strong third quarter, our sales increased 141% over the prior year to $10.8 million bringing our total sales for the nine months ended September 30, 2007 to $24.3 million. Gross margin for the third quarter was 84.7% up from 55.8% for the same period the year prior. Our gross margin was favorably impacted by the increase in (inaudible) scale achieved at our manufacturing operations that have resulted in a lower average unit cost for (inaudible) production in addition to greater product sales diversification.

These reported sales and higher gross margins have generated a net income of $2.2 million or $0.05 per diluted share for the third quarter and a total profit of $5.7 million for the nine months ended September 30, 2007. These represent our second sequential quarter of profitability and another important milestone for our Company.

And the (inaudible) achievement we have [bridged] (inaudible) actually brought by our activities in marketing and sales. Throughout this year our sales organization has continued to expand the market for our flagship product Healive. We're continuing to focus our revenue in more developed regions of China while also spending into new markets following the market's mandate to face (inaudible) liquid attenuated formulation of hepatitis A vaccine at the end of 2006 which is a dynamic that has certainly contributed to the growth we're experiencing.

During the three months ended September 30, 2007 we sold approximately 1.3 million doses of Healive a 100% increase from the 760,000 doses sold during the same period of 2006 bringing the total Healive doses for the first nine months of 2007 to 3.98 million doses.

As we outline our fiscal year end call in April 2007, we plan to initiate expansion of our vaccine production capacity early this year (inaudible) patient of growing Healive demand. We have now completed a project and have increased our annual production capacity for Healive to 10 million doses. We are currently evaluating additional opportunities to add production capacity in 2008 in anticipation of these continuing growth trends.

Yesterday we received confirmation from Beijing (inaudible) center that Sinovac's hepatitis A vaccine, Healive, was selected by the Beijing Centers for Disease Control and Prevention (inaudible) [profits]. As a result of the selection Healive is one of two inactivated hepatitis A vaccine that will be purchased by Beijing CDC for its hepatitis A vaccine program. The tender covers purchasing activities from 2007 to 2009. The selection is actually part of a governmental initiate to include hep A in China (inaudible). There is no (inaudible) program as we actually expected earlier this year.

Entering into the third quarter, we actually started to promote our seasonal flu vaccine Anflu and in August 2007 Sinovac entered into an exclusive promotion service agreement with GlaxoSmithKline China for our seasonally flue vaccine, Anflu. As part of the agreement, GSK China began to market Anflu to the adult population while Sinovac's salesforce focused its marketing efforts on pediatric population throughout our established sales distribution network.

Together over the past few months actually both GSK China and Sinovac are making a lot of effort together that we have conducted an extensive marketing campaign to raise awareness of these products. We are actually very pleased and encouraged with the results to date and our ability to establish a growing presence during this year's flu season. And we are currently have already sold 1.07 million doses of Anflu where we can see this growth rate is actually faster than our hepatitis A vaccine (inaudible) growth rates and we're very proud of our achievements.

As we enter into October 2007 we actually receive another good news which is Beijing CDC entering to an agreement with Sinovac to purchase our Anflu vaccine. And these actually give us opportunity to open the public market which is a big change from our previous activity which is always focused on the private market. We believe that these actually bring us under this tender process this (inaudible) our quantity of the vaccine. And based on the (inaudible) Sinovac has already shipped 150,000 doses at 34 R&B per dose to Beijing CDC.

And a good sales growth actually is brought by our good quality control in the product. And for the flu season 2007 we actually sent all of our flu vaccine to China's National Institute for the Control of Pharmaceutical and Biological Products for batch release and we are the supplier who receives the vaccine release from this organization the earliest in China market with an eligibility rate of 100%.

So in general all of our achievements are actually from two parts. One is from our product that we had marketed for several years our hepatitis A vaccine. The other part is the new product which we added into our portfolio is the seasonal flu vaccine and also Sinovac previously was only focused in the private market and from this year there was a new opportunity for the Company to expanded it and and access the public market to supply vaccines to Chinese government. And this is actually a good starting point for Sinovac to be successful in the future.

Turning to the research and development, our clinical trials for the pandemic influenza vaccine are progressing on schedule. As you may recall the SFDA granted Sinovac approval in April 2007 to conduct Phase Ib and II clinical trials of the whole viron H5N1 vaccine and Phase I and II clinical trial of the split H5N1 vaccine.

For the whole viral vaccine Phase II clinical trial we expanded the number of volunteers which are 402 volunteers age from 18 from 60 healthy adults. All of those volunteers have been vaccinated with a vaccine of either five milligrams, 10 milligrams or 15 milligrams vaccination. In the split vaccine clinical trials, total there are 160 volunteers from three to 70 years old were enrolled. And for those volunteers, we have completed all the fieldwork in the site to conducting the clinical trials and we're currently analyzing their blood serum.

And based on the information provided by the organization who conducted the clinical trial, it demonstrates the vaccine is safe on the volunteers. And we anticipate a result of the whole viral Phase Ib and II trials and split vaccine Phase I trial to be available in the first quarter 2008.

Actually, the pandemic flu vaccine is so-called the human use bird flu vaccine and everyone knows that currently the bird flu cases are infected with H5N1 vaccine. So our pandemic flu vaccine are developed with a string of H5N1. And the choice was to take these developments very seriously because in December 2007 there are another two cases of H5N1 infection were reported in China and one of which resulted in death.

So, we believe that the threat of a pandemic flu outbreak remains a public health risk in China and abroad. And it is our hope that once approved our pandemic vaccine will play a significant role in prevention of this disease in the future.

Next we would like to take a moment to discuss the previously announced postponement of our annual general meeting. The Company originally scheduled a 2007 annual shareholders meeting in August 2007. The meeting was postponed because the Company could not afford the (inaudible) which is 50% of the outstanding shares based on the Company's bylaws.

The Company is right now approaching to the end of the year and the Company does not believe that they will be able to [form the necessary] quorum to hold 2007 annual general meeting at year-end and we're actually continue to evaluate different options (inaudible) corporation and the requirements as a firm private issuer. In order to give us time to clarify these issues and to continue to seek sufficient process to form a quorum we have no desire to listing qualification department of [AMEX] that we will defer our annual general meeting to no later than April 30, 2008.

And we think that all this happens because our business conducting location is different from the other (inaudible) venue and also the broad geographic pace of our shareholders. That is all the business discussions for me, now I would like to invite Vanessa Wu to review the third-quarter financial results.

Thanks Dr. Yin and Helen, and hello everyone. I will touch on some of the key highlights from our quarter three release and our SEC filings. As of September 30, 2007 Sinovac will reported sales of $10.8 million representing 141% increase compared to $4.5 million from the same period of 2006. As mentioned, the sales growth in the third quarter was attributable to increased sales of Healive and Anflu.

Gross profit for the third quarter of 2007 was $9.2 million with a gross margin of 84.7% compared to gross profit for the same period of 2006 of $2.5 million with a gross margin of 55.8%. The gross profit increased in parallel with sales growth and it was attributable in part to the greater economics of scale from the increase of production, lower average unit costs and greater productivity locations.

Total operating expense for the third quarter 2007 was $5.1 million compared to $2.0 million in the same period of 2006. Selling, general and administrative expenses for the third quarter of 2007 were $4.8 million compared to $1.8 million for the same period of 2006. The year-over-year increase in selling, general and administrative expenses was attributable in part to the extensive promotion campaign for Anflu which we're expecting to launch this year.

Total research and development expenses for the third quarter of 2007 were $255,000 compared to $222,000 in the same period in 2006. Our net R&D expenses were $221,000 for the third quarter of 2007 compared to $69,000 in the same period in 2006. The net R&D expenses including the portion recognized as [reduction] of government grants of $34,000 in the third quarter of 2007 compared to $153,000 in the same period of 2006.

Operating income were $4 million for the third quarter of 2007 compared to the $111,000 in the same period of 2006. The year-over-year increase in operating income reflected the significant increase in vaccine sales and moderately higher operating expenses.

Net income for the first quarter of 2007 was $2.2 million or $0.05 per diluted share compared to $93,000 or $0.02 per diluted share. In the same period of 2006, net income for the third quarter of 2007 includes $160,000 interest and financing expenses, $758,000 of income taxes and $1 million in minority interests. Net income for the same period of 2006 included $111,000 of interest and financing expenses, $181,000 of income taxes and $256,000 of minority interests. As of September 30, 2007 Sinovac's cash and cash equivalents totaled $9.7 million compared to $9.2 million as of December 31, 2006. Thank you Dr. Yin and Helen.

Thank you Vanessa. We are happy to announce the progress that we have made today. This allows us to report a second sequential profitable quarter. The market awareness of Healive is continuing to rise across China and the market reception for Anflu following the marketing launch alongside GSK has been extremely positive. Our key R&D program is on track and we look forward to announcing the result from the Panflu Phase II trial in the first quarter of '08 once the results are [unblended]. We are happy to take any questions now.

(OPERATOR INSTRUCTIONS) [Doug Carey], China Upside Research.

Good quarter and I appreciate the quarterly reporting. And just curious about your intentions going forward for a quarterly reporting in conference calls and auditing and so forth.

Thank you for your question. Actually the management hopes that we could expand to file the quarterly report for going forward.

Okay, and another question regarding Anflu and do you have any comments about the market acceptance for Anflu? And also about the promotions that you have been doing and if you expect to continue this large promotion?

(interpreted) We think that the market acceptance is good for Anflu. And as you know that in China there are about 10 manufacturers who supply flu vaccine including several multinational companies like Sanofi and the price of flu vaccine in China is also quite competitive. And because Sinovac has a good image in Chinese vaccine market and through our research and development. So we seen the flu vaccine is launched into the market with a good brand image and also our strategy to promote these vaccines with GlaxoSmithKline China.

So we think this is a good combination for (inaudible) to experience in the flu market especially (inaudible) experience in Chinese flu market. And as we -- but we think the (inaudible) success for our achievement does not indicate future success.

(OPERATOR INSTRUCTIONS) [Daniel Jeff], Private Investor.

Hi; thank you and congratulations on a good quarter and the overall progress. I think most of the investors are really pleased. I have a few questions. One is, have you completed or if not when will you complete the expansion of the flu production facilities which I understand would enable 20 million doses of Panflu or 4 million doses of Anflu.

Actually we are start the expansion in August for these projects. Now we have reached the production capacity of Anflu with about 5 million doses.

Okay so that is complete?

Yes.

DO you have future plans for Anflu or Healive production expansion further?

We will see the market demand to determine the further expansion.

Okay, another question I have is do you have any update on the Japanese encephalitis vaccine, which is still in preclinical testing?

(interpreted) We still actually taking these Japanese encephalitis vaccine in the preclinical stage and we expect we could file the clinical trial application in next year.

Sometime in 2008?

Yes.

Changing gears a little do you have any projected date, even a rough one for release of fourth quarter results?

(interpreted) Actually we will have our year ended in December 31. So probably we will not do the quarter four, the first quarter release we just announced the whole year results in August.

Do you know when that might be?

Actually, by law we are required (inaudible) June 30 (inaudible) we will push forward as more as possible.

Okay and one final question and that is, the expenses for the third quarter compared to the second quarter rose significantly and you have explained some of those in terms of promotion costs and including bad debt and some other performance related bonuses. I'm just wondering if you have a sense of how the expenses will grow in the future quarters?

(interpreted) Actually, we haven't closed our accounts so at this moment we're not in a good position to predict the whole quarter's expense.

All right. Thank you very much. I appreciate that.

[Katrina Lau], Private Investor.

Good morning, I have two questions. The first one has to do with the press release that we have this morning in which you're talking about evaluating different options [and taking corporation] and a foreign private issuer. Can you elaborate on this? And my second question is that I would like to know if there any plans to list Sinovac shares in the future in any one of the Hong Kong exchange or the Shanghai stock exchange?

For answering your first question, actually we are in the preliminary stage to evaluate the different options. So it's really difficult to tell any detail at this moment. And then --

What are the options that are under consideration?

We cannot have any comment on that.

Okay.

I did not get your second question; I'm sorry.

Okay the second question is that are there any plans to list Sinovac shares in the Hong Kong exchange or in the Shanghai exchange?

We think we cannot comment on this issue right now.

[Scott Buhrer], Private Investor.

Yes, in your form -- I have a couple of questions. In your form 6-K filing there is a footnote No. 16 that talks about on October 23 the Company entered a nonbinding letter of intent with an unrelated corporation to contemplate the incorporation of a joint venture for the development, licensing and manufacturing of flu vaccine. Can you comment on that development?

Actually, unfortunately this is the term of the deal that are still in negotiation we cannot disclose anything further at this time.

Okay, my next question is can you help the shareholders understand the practical difficulty of getting a quorum together which requires a 50% response rate from your shareholders on your proxy? I understand the CEO owns 6 million shares and there's 18 institutions that collectively own 8 million shares so that's 14 million. You have 40 million shares outstanding. So it should only take an additional 5.8 million to get to a quorum level and it's just a little confusing to me as to why that would be so difficult to do.

(interpreted) Actually Mr. Yin himself is thinking the same logic as you're thinking about -- think that it might now be too difficult to have these quorums for these annual general meetings. But actually as a matter of fact, we can now form a quorum in time and currently we're still in the stage to make it happen and we will actually improve our process to make it in the future.

And one other question and I don't believe you covered this earlier. Typically the fourth quarter is the strongest revenue generating quarter of the year. Do you anticipate that that will be the case again this year?

(interpreted) Since we are quite close to the year-end and it's our company policy not to comment on this fourth quarter performance.

Okay, that's all my questions.

[Jim Small], Private Investor.

First congratulations for the great results of the third quarter. I have a question. Can you provide us -- what is the percentage of your promotion expenses related to your Anflu compared to the overall operating expenses?

(interpreted) Actually we didn't separate our sales and marketing expense for Anflu from the Healive. We just recorded everything together. So I can't give you a number right now.

Aright thank you.

There no further questions at this time. I would like to turn the floor back to management for closing comments.

We're actually very appreciated every participant on this conference call and the Company is very proud of the achievement up to now and we are expecting your support in the future and thank you everyone.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.