Sinovac Biotech Ltd (SVA) 2008 Q1 法說會逐字稿

Greetings and welcome to the Sinovac Biotech Limited first-quarter 2008 financial results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ms. Stephanie Carrington of The Ruth Group. Thank you, Ms. Carrington. You may 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 or phrases such as will, expects, anticipates, 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 statements except as required under applicable law.

As many of you have seen, Sinovac issued its first-quarter 2008 financial results press release and filed its Form 6-K with the Securities and Exchange Commission.

On the call today are Mr. 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 Mr. Yin, Ms. Yang, and Ms. Wu.

Thank you, Stephanie. Good day, everyone, and thank you for joining us on this conference call. These comments have been prepared in conjunction with Sinovac's Chairman Mr. Yin, Ms. Wang, Vice President in charge of Business Development and Clinical Research Department. Mr. Yin and Ms. Wang are on the line and will be available to respond to the questions. I will translate their comments accordingly. Vanessa will provide a review of our financial results. I will then discuss the business outlook.

(spoken in Chinese)

(interpreted) I'm very pleased to announce today the first quarter of our financial results. The announcement of the quarterly financial results is actually [the stressing] of internal controls and it furthers our goal of maintaining greater transparency and continuous contact with our investors. These results have been reviewed by our external auditor, Ernst & Young.

(spoken in Chinese)

(interpreted) Our first-quarter results are a testament to our vaccine commercialization strategy. Our sales increased 123% over the prior year to $8.86 million for the period ended March 31, 2008, up from $3.97 million same period last year.

Gross profit margins for the first quarter was 88.2%, up from 83.9% for the same period a year prior. Our gross margin was favorably influenced by the achievement of increased economies of scale at our manufacturing operations, resulting in lower average unit costs for Healive production in addition to greater product sales diversification.

(spoken in Chinese)

(interpreted) These record sales and higher gross margins have generated a net income of $1.6 million or $0.04 per diluted share for the first quarter. This represents our third sequential quarter of profitability and another important milestone for Sinovac.

(spoken in Chinese)

(interpreted) Despite a snowstorm in the South of China and the holiday in the first quarter of '08, our sales activity were not impacted. Moreover, our sales organizations have successfully continued to expand the market for our product, Healive.

(spoken in Chinese)

(interpreted) During the three months ended March 31, 2007, we sold approximately 1.5 million doses of Healive, a 113% increase from about about 07 million doses sold during the same period of 2007. In addition, we sold over 31,000 doses of Bilive in the most recent quarter.

(spoken in Chinese)

(interpreted) The growth is actually coming from the private market, which we are [yearly playing] in the past. We anticipate that the Healive sales growth in 2008 will come from the expanded opening of government tender market in the second half of this year, which may lead to lower gross margins based on a reduced average selling price. This is our expectation.

Our sales team initiated a proactive Healive promotion campaign targeting the private market at the beginning of the year, aiming at expanding our market share in the private market and creating a broader recognition for our hepatitis A vaccine across the industry. We believe the continuation of these proactive promotion initiatives is establishing a solid foundation for us to more effectively compete in the government tender market.

(spoken in Chinese)

(interpreted) Based on the historical seasonality patterns, sales of seasonal flu vaccine such as Anflu are typically very limited during the first quarter of each year as the quarter represents the final selling season in the North Hemisphere like China for the flu season. In line with the seasonality, we sold approximately 23,500 doses of Anflu during the first quarter of '08.

(spoken in Chinese)

(interpreted) So the above mentioned are about the current available products sales and marketing, which represents that the Sinovac team keeps executing its strategy, which actually revealed a successful performance.

(spoken in Chinese)

(interpreted) So now I would like to introduce about the R&D projects for the Company.

(spoken in Chinese)

(interpreted) In early April Sinovac was granted a production license for Panflu by the China State Food and Drug Administration, and this is actually proof of Sinovac to having the capability to supply a pandemic influenza vaccine for an emergency event, and this is the R&D project developed by Sinovac in the past, which probably will bring the commercial benefit for the Company.

(spoken in Chinese)

(interpreted) Concurrently Sinovac continues to advance the research of its fleet pandemic influenza vaccine, and Sinovac will deliver its research results to the public.

(spoken in Chinese)

(interpreted) These are about our achievement on the research and development. Separately, in the first quarter, we completed a [pipe] investment with Sansar Capital Management. We issued 2.5 million shares and raised $9.75 million. And we are utilizing the proceeds for funding our sales and marketing activities and increased the production scales and also investing in some international collaboration projects.

(spoken in Chinese)

(interpreted) On every one, even though the pipe investment we made in the first quarter is not a big amount, but we have seen that through the Company's executing its strategy, we have successfully got a license of Panflu, which will bring a great opportunity for the Company to increase its net income. And the management is very confident about to keep executing the strategy to using the current available cash in the bank to fund more projects, which may increase the net income for the Company in the future.

Next I would like to invite Vanessa Wu to review the first-quarter financial results.

Thanks and hello, everyone. I will touch on some of the key highlights from today's release.

For the three months ended March 31, 2008, Sinovac reported sales of $8.9 million, representing a 123% increase compared to $4 million from the same period in 2007. As mentioned, the sales growth in the first quarter was attributable to increased sales of Healive. Gross profit for the first quarter of 2008 was $7.8 million with a gross margin of 88.2% compared to gross profit for the first period of 2007 of $3.3 million with a gross margin of 83.9%.

The gross profit increased in parallel with sales growth was attributable in part to the greater economics of scale from increased production and the high sales of the lower average unit cost dosage form. As Helen mentioned, we sold 1.5 million Healive doses in the first quarter of 2008. Approximately 1.23 million doses or 80% of the total dosage sold in the first quarter of 2008 were in the lower-cost vial packaging with the higher cost for filled syringe making up the balance. This compares favorably to the first quarter of 2007 with 450,000 lower cost vial dosage was sold out of a total of 700,000 doses.

The first quarter of 2008 total operating expense was $4.7 million compared to $1.8 million in the same period of 2007. Selling, general and administrative expenses for the first quarter of 2008 were $3.6 million compared to $1.3 million for the same period in 2007. The year-over-year increase in the selling, general and administrative expenses was attributable in part to the continued extensive promotion for the Healive and the recruiting of additional employees for the production, quality control sales and the marketing segment to position the Company for market growth.

Total research and development expenses for the first quarter of 2008 were $933,000 compared to $477,000 in the same period of 2007. Our net R&D expenses were $929,000 for the first quarter of 2008 compared to $444,000 in the same period of 2007.

Net R&D expenses including adjustments for the government grants were $4000 in the first quarter of 2008 compared to $33,000 in the same period of 2007. Operating income was $2.9 million (sic -- see press release) for the first quarter of 2008 compared to $1.5 million in the same period of 2007. The year-over-year increase in operating income reflected the significant increase in vaccine sales and the moderately higher operating expense.

Net income for the first quarter of 2008 was $1.6 million or $0.04 per diluted share compared to $776,000 or $0.02 per diluted share in the same period of 2007. Net income for the first quarter of 2008 included $158,000 of interest and financing expenses, $268,000 of income taxes and $917,000 in minority interest. Net income for the same period of 2007 included $86,000 of interest and financing expenses, $342,000 of income taxes and $309,000 of minority interest.

As of March 31, 2008, Sinovac's cash and cash equivalents totaled $20.6 million compared to $17.1 million as of December 31, 2007.

(spoken in Chinese).

(interpreted) In addition, I would like to add recently there was a very serious earthquake happened in China, and the Company was very worried about the people living in the area. So the Company has donated RMB500,000 to the earthquake area through the Ministry of Public Health, and Sinovac employees totally also donated RMB110,000 to that area, and those money will be used for the disease control in that area. So this is --

(spoken in Chinese)

(interpreted) And, in addition, there are two employees of Sinovac whose home is based in that earthquake area. And, as we know, their house in that -- their house actually was destroyed during the earthquake. So the Company provides some money to those two employees for helping them rebuild their house, and they also expressed that they are going to be working more harder for Sinovac.

Thank you, Helen. Thank you, Vanessa, and Dr. Yin. We're very happy to announce that progress we have made to date has allowed us to report our third sequential profitable quarter. The market awareness of Healive continues to rise across China, and the market reception for Anflu has been extremely positive in the past. Our [GR&D] program is on track, and we look forward to announce the results from the split pandemic flu vaccine trials in the near future once the results are unblinded.

We're happy to take any questions now.

(OPERATOR INSTRUCTIONS). [Lewis Fanfan], Brean, Murray, Carret.

Congratulations on the good quarter. I just have three actually fairly simple questions. First of all, I noticed for this past quarter the gross profit was significantly higher than the previous couple of quarters. Could you give us a little more color on what was the reason for that?

(interpreted).

(spoken in Chinese)

(interpreted) First of all, (inaudible) slightly increased of the gross margin by 2% to 3% compared to the previous quarters is not a significant change. Even though our hepatitis A vaccine gross margin is very high, it is really higher than 80%. But because the production cycle of these products is quite long, so the product we sold in Q1 this year may be actually filled from the block, which is produced in last year. So Mr. Yin thinks this change is not significant.

Sure. The next question is what about operating margins? It seems like the operating margin is down ever so slightly.

(interpreted).

(spoken in Chinese)

(interpreted) So in the first quarter, the lower operating margins may come from the increase of the expenses, and the biggest factor is the selling expenses and the general and administrative expenses.

So, from the [leasing] company, we actually have additional $100,000 paid for the auditing for SOX 404 and some legal expenses. And also for the general expenses, we accrue a higher bad debt compared to the quarter the same time last year and also a generalized increase in R&D expenses to increase the R&D expense. So these are the several areas added up to increase the expenses for the first quarter.

Okay. That is fair. Thank you. My last question is regarding the Chinese basic medicines catalog. It is my understanding that the government is really working on pushing a new national basic medicine catalog that could come out as early as June. Basically it would include a few about like 400, 500 medicines that the government will basically take charge of the bidding and the pricing and organizing the production of those medicines.

So my question is, are any of the Sinovac products being considered for the catalog?

(spoken in Chinese) (multiple speakers) Okay. Actually Mr. Yin's answer is, as far as he understands, that catalog does not contain vaccine products, and he understands that it may focus on the pharmaceutical or drugs which is used in hospitals. But he will keep his eye on this issue and to get more understanding about it.

But at least from last year, we have seen that China has already initiated a basic healthcare insurance, and it will ensure RMB10 to one person living in rural area. And with these RMB10 insured, each person in a rural area can buy drugs for RMB100. Now in China there are 700 million people living in rural areas. So the market will be these 700 million times RMB100 will be RMB70 billion market value after this insurance policy is initiated in China.

And, in addition, last year the Chinese government announced that they are going to increase the spending with RMB2.8 billion to buy vaccines. So except the expansion of the catalog you just mentioned, we have seen that there are many channels for the government to increase its spending to enhance the healthcare industry in China. So, as a company in this vaccine industry, we believe we have a huge opportunity to grow with the country with the healthcare industry improvement process.

Okay. Thank you. Well, actually I do have a follow-on question. It is regarding Panflu. My understanding was it was approved in April by the SFDA for the treatment of the H5N1 influenza virus. I also saw that the order production is for the government for the next Chinese government's stockpiling program.

So my question is, are there any possibilities maybe down the road or anything a discussion of anything that the vaccine is produced for the private market?

(interpreted).

(spoken in Chinese)

(interpreted) We believe that at least in this year probably we do not have the conditions to support, develop the private market for pandemic flu vaccine. Because in China we have seen the H5N1 strain is not wildly pandemic in China, and the government has put a close control of the human cases expansion to the bigger area.

So even though there are -- if there is any use of human of these vaccines, probably it will be paid by the government. But we can see that in the future, if the pandemic situation is getting more and more -- affecting more and more areas and once the government is not having sufficient funds to covering everyone is probably the opportunity for Panflu to develop a private market.

(spoken in Chinese).

(interpreted) We can see that actually the H5N1 pandemic in poultry actually happened in many years, and this strength does not change very much. So, if this also happened for humans market, we believe there is a possibility to develop a private market for this product.

(OPERATOR INSTRUCTIONS). [David Rudolph], private investor.

It is David [Randolph]. First greetings to Helen and to Mr. Yin and others at the conference. I had a couple of questions.

The first was with regard to expansion of production facilities at Sinovac. Could you summarize the production expansion in the last year? What has been completed? And what is the plan for 2008?

I guess I was looking for a short summary and to see where you folks were in terms of vaccine production capacity expansion, particularly with Healive. So that was my first question.

And the other was a question with regard to Panflu production itself, which I understand that you -- it is unclear to me whether there is the capability for production or whether you actually are producing Panflu on your -- the influenza production line. So if you could speak to those, I would appreciate it.

(interpreted)

(spoken in Chinese).

(interpreted) So our improvement of the production process last year and the upgrading of the key facilities for hepatitis A vaccine, our production capacity for Healive was increased to 10 million doses per year, and this year we are going to further improving our key facilities to increase the capacity even higher than 10 million doses, maybe reach to [15] million doses.

This capacity is about the primary part of the production. And, as the production for vaccines, the secondary production capacity is also very important. By saying the secondary, it means the filling and packaging of the vaccine, and in the past the filling and packaging capacity for Sinovac is less than 10 million doses per year.

So our work in late last year and first-half this year we are going to set up a new filling and packaging line with a 20 million doses capacity per year. So it will increase our total production capacity of all vaccines up to 20 million doses.

In addition, the flu vaccine last year was produced about 1.8 million doses, and this year this amount will be increased, and we will make our judgment about the volume to be produced based on the market forecast. And this production capability is also linked to the filling and packaging capabilities.

And regarding to the pandemic flu, the Panflu, since producing the Panflu in the production line of seasonal flu vaccines, we will keep the production of Panflu in the off-season for seasonal flu vaccines, which May from July to the April next year, and it will increase the total production capacity with an additional 2 to 3 million doses.

Thank you very much. I did have one other question if I might, and that is could you clarify the current cash position of the Company, how much cash it has? And also is this -- has cash been dedicated for any purpose such as an acquisition?

As of March 31, 2008, Sinovac's cash and cash equivalents totaled $20.6 million.

(spoken in Chinese)

(interpreted) We actually are using the cash is dedicated to increasing the production capacity and expanding our market penetrations. And, as you are asking about whether we use the cash for acquisitions, actually Sinovac's management has actually kept these options for the development of the Company always in mind. We were looking at the opportunities to either buying back shares or buying the companies to increase our production capacity or market capabilities, and we are also looking for the opportunities to licensing any technologies or product lines.

But currently we do not have the information, which is ready for the public. So, as soon as we have any firm information, we will deliver to the public.

(spoken in Chinese)

(interpreted) As you have seen that we have about $20 million in the bank, and half of it will be used for operations because we will scale it up for the production, and actually the need for investment is quite big. And actually the money we can use for expanding the Company is only $10 million left, and we believe that this probably will not be enough to make a big acquisition for the Company to expand faster.

So while we also seek the understanding from our current shareholders, now the management of Sinovac is trying to balance the price for raising capital and total amount that we can raise in order to on the same hand to protect the shareholder benefit. On the other hand, we can have sufficient cash to develop the Company.

There are no further questions in the queue. I would like to hand it back over to management for closing comments.

Thank you, everyone, for your participation. We look forward to seeing some of you next week in New York City at the Brean, Murray Carret conference and also in Beijing at the Roth China Discovery Tour in 2008. Thank you, everyone.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.