Sinovac Biotech Ltd (SVA) 2009 Q4 法說會逐字稿

Greetings and welcome to the Sinovac Biotech Ltd. fourth quarter 2009 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, Stephanie Carrington of the Ruth Group. Thank you. Miss Carrington, you may begin

Thank you, operator. Good morning, 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, expect, anticipate, future, intends, plans, believes, estimates and similar statements. Statements that are not historical facts including statements about Sinovac's beliefs and expectation 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 accept as required under applicable laws.

On the call today we have Mr. Weidong Yin, CEO; Helen Yang, Investor Relations Manager; Vanessa Wu, Senior Financial Manager; and [Chris Lee], Investor Relations.

I will now turn over the call to Helen Yang and Vanessa. Go ahead, Helen.

Thank you, Stephanie. And hello, everyone. Thank you for joining us on this conference call. I would like to take this opportunity to update you on our full year results, recent strategic developments and Sinovac's [full year] outlook. Following my comments, I will then turn the call over to Vanessa Wu who will discuss the fourth quarter financials.

These comments have been prepared in cooperation with Sinovac's Chairman, Mr. Weidong Yin. Mr. Yin is with us today on the call and will be able to answer questions. I will translate his comments accordingly.

In 2009 it was a very productive year for Sinovac as we accelerated our growth strategy on all fronts. We generated record revenue from our existing vaccine products, expanded our production capacity and advanced our development pipeline of novel vaccines. We want to recognize and give thanks to the entire team for their tremendous efforts during the year.

Looking at the full year 2009 we generated record results with sales up 81% to $84.2m. These results were in line with the updated revenue guidance we provided in January 2010. The sales figure included in the recognition of 10.08m doses of Panflu.1, our H1N1 vaccine, purchased by Chinese Ministry of Industry and Information Technology for the national purchase plan.

As we previously disclosed, Sinovac has delivered 10.23m doses of Panflu.1 in 2009. Out of this amount we replace 0.15m doses with longer shelf life in 2010. Therefore in the 2009 we recognized the revenue of 10.08m doses of H1N1 vaccines.

Gross profit for 2009 rose by 75% to $64.1m given the higher revenue level. The gross margin was 76%, down from 79% in 2008 due to the greater percentage of sales to the public market which carries a lower margin compared to the private market. More than 50% of our total sales in 2009 were to the public market.

For the full year our operating income rose 162% to $40.8m as result of the higher revenue level and greater economies of scale. 2009 net income attributable to shareholders increased by 150% to $19.96m or $0.46 per diluted share.

Turning to the corporate developments we were pleased to close a public common share offering in February this year. A total of 11.5m shares of common stock were issued at $5.75 per share including 1.5m common shares according to the full exercise of the underwriters' over-allotment option. We received net proceeds of approximately $62m after deducting underwriting discounts, commissions and offering expense. We intend to use the proceeds to fund capacity expansion initiatives, to advance our development pipeline and other corporate activities.

We are pleased with the progress that we made over the past few months to increase our production and manufacturing capacity both at our headquarters and by securing additional capacity. We increased the annual production capacity at our headquarters in Beijing by approximately [60%] in 2009 by expanding production line that is used to manufacture the seasonal influenza, H1N1 or H5N1 vaccines.

In February 2010, our subsidiary Sinovac Beijing completed the acquisition of five existing buildings located about 30 minutes drive away from our corporate headquarter in Changping District, Beijing. We intend to set up two new production lines with a combined annual production capacity of about 40m doses and to manufacture our approved flu vaccines as well as the currently under development vaccines for enterovirus 71 which causes hand, foot and mouth disease.

The Changping site will enable us to expand our production capacity, as it will house two state-of-the-art production lines and other necessary supporting functions including a feeding and packaging line, a warehouse and an animal house. We anticipate that it will take approximately two to three years for the lines to be set up and production of our commercialized flu vaccines to begin. The total investment needed to bring Changping facility to this point is estimated to be approximately $50m. We expect to make this investment from 2010 to 2012.

In January 2010 we established Sinovac Dalian through a joint venture. The new entity will focus on the research, development and manufacturing of vaccines for human use in such indications as rabies, chicken pox, mumps and rubella. Live attenuated vaccines and the vero cell cultured vaccines will be manufactured at Dalian's facility. We expect our initial cash contribution of $8.8m according to the JV agreement to be completed by the end of the second quarter once the necessary government approvals are received.

Therefore, in total we expand our facilities from two sites, which is in Beijing and in Tangshan, to right now with four different production sites. And total production area is expanded from 167,000 square feet to [715,000] square feet, which can house as many as 14 production lines. And these facilities will house our existing products and the future launched pipeline products.

Turning to the R&D initiatives, we restructured our program in 2009 establishing a new R&D team in Beijing and better utilize our scientific and personnel resources. We currently have about 50 scientists and 8 major R&D projects are underway.

In December 2009, we filed the application with China's SFDA to commence a human clinical trial for our vaccines against human EV 71. The application was submitted ahead of our original timetable. This is the first clinical trial application made in China for hand, foot and mouth disease vaccine. We believe that this vaccine, subject to positive human clinical trial results and commercialization, has the potential to represent a flagship product for our Company based on our current market projections and demand coming out of Asia. We intend to commence these trials in 2010 upon receiving the approval of clinical trial application from SFDA.

Also in this year we anticipate a preclinical study for rabies vaccine, chicken pox vaccine, meningitis vaccine will be going on. This year we intend to complete preclinical trial and submit clinical trial application to SFDA for a pneumococcal conjugated vaccine, HIB vaccine, mumps vaccine and rubella vaccine.

Regarding to our international distribution strategy, we have already enter into distribution agreement to register and market our inactivated hepatitis A vaccine in Ukraine, India, Nepal, Mongolia, Korea and The Philippines. And we enter into distribution agreement to register and market our seasonal influenza vaccine in Mexico, Philippines, Korea, Mongolia and India.

We have also entered into distribution agreements for our H1N1 vaccine in Philippines, Korea, Mexico and India. In October 2009, we received the certificate of approval to distribute our H1N1 vaccine in Mexico. In September 2009, we obtained the regulatory approval on our H5N1 vaccine in Hong Kong. The registration process for other vaccine products in Philippines, Mexico, India, Hong Kong and Korea are going on.

We expect to secure additional marketing partners in some of these countries in the year of 2011 at the earliest and expect that sales will commence in that year. We want to point out that our aggregate 2009 sales to overseas market were about $145,000.

Turning to sales activities of our commercialized vaccines we have received orders adjusted by the government for a total of 20.97m doses for our Pnaflu.1, H1N1 vaccine, from China's government for a national purchase plan. Originally we have received a total of 21.06m doses. However, the total order was reduced by 90,000 doses based on the recent cancellation received by the company due to the decreased demand from two local CDCs.

In January 2010, Sinovac received a fifth purchase order for its H1N1 vaccine Panflu.1 from China's Ministry of Industry and Information Technology for the national purchase plan of total 8.57m doses. Under this purchase order, Sinovac is required to deliver an additional 2.33m doses of Panflu.1 to the Chinese Central Government. In this order, 0.18m doses have been delivered in 2009 required by the Government under emergencies.

The remaining 2.15m doses are required to deliver before March 15, 2010. However, the delivery was delayed due to the delayed completion of [fact] release process within the Chinese government. The delivery schedule shall be reconfirmed after the products are released by the Government in second quarter. The remaining 6.24m doses of this order will be stockpiled in the Company's warehouse as per the government's requirement.

In 2009 sales to the public market of hepatitis A vaccine represent 43.3% of total Healive sales. The significant portion of sales to public markets, particularly in our largest market segment of children of 18 months, resulted from the providing value added services to the local government. However, public market demand for the hepatitis A vaccine for the 18 months population has decreased, as this segment is not covered by the public market vaccination program.

It is projected the public market demand for hepatitis A vaccine will continue to gradually increase to in [2001], therefore, we are well positioned to further extend our market share in the public market for the 18 months population. And at the same time we will make effort to expand the private market sales to a wider scope of age group.

As we indicated previously the public market purchase of hepatitis A vaccine will be fully implemented in China as per Chinese government plans. And as we see in the first quarter of this year the public market is not open up enough as many CDCs are still in preparation for the tender offering process which we expect to take off from the second quarter of 2010.

In 2009, benefiting from our successful R&D on H1N1 vaccine, the Company's overall market recognition was greatly enhanced. Specifically Sinovac's market share for its flu vaccine in China grew from 5.8% in 2008 which is [credit] to number nine market position to 11.3% in 2009 which bought us to the number three market position. In 2010, we intend to continue to focus on marketing our seasonal flu vaccine to maintain and expand our market share in both private and public markets.

In China, the public perception of vaccines have been impacted by the recent media reports. Earlier this year, the media reported on improper storage of vaccines by a distributor in one province in China which has (inaudible) linked to a few cases of serious adverse events.

Although Sinovac was not involved with the both events, we believe that these problems may adversely impact the public perception of vaccine safety and that may reduce vaccine administration by the Chinese government. Therefore, we expect our organic business may be impacted in the short term but we still expect our business to grow gradually and at the same time the Company will increase investment on vaccine research and development, capacity build out for existing products and pipeline products in order to maintain the sustainable growth in the long term.

Furthermore, we believe that our core competencies inclusive of proven R&D capability, manufacturing and distribution capabilities, position us to capture capitalize on potential partners who are acquisition opportunities during this period.

Now let me elaborate on our full year 2010 guidance that we provided in today's press release. For the full year 2010 we expect sales of our non-H1N1 vaccine to increase by approximately 10% to 20% compared to $54.5m of non-H1N1 sales revenue in 2009. This translates into 2010 sales from our non-H1N1 vaccines in the range of about $59.9m to $65.4m. We expect the remaining 10 -- the remaining of 2.15m does of H1N1 vaccine will be delivered in 2010 and the revenue of this amount will be recognized in this year. And the stockpile amount of 8.74m doses will be produced and stored in the Company's warehouse and the revenue of this amount will be recognized in the year of 2011 unless the government requires us to deliver the product prior to that time.

And the revenue of H1N1 vaccine, which could be recognized in the year, are about $7.1m. Therefore, we expect total revenue for 2010 to be in the range of $67.1m to $72.5m. Our 2010 guidance does not include additional orders for H1N1 vaccine.

And based on our current projection we expect to invest a total capital expenditure of approximately $80m over the next three years to fund expansion initiatives that I outlined earlier. The breakdown of the $80m CapEx is expected as the following. $50m for Changping facility as described above. $22m for the two capital contribution in Sinovac Dalian joint venture. $3m for Tangshan facility, which is to industrialize animal vaccines and $5m for Beijing headquarter.

With that I will now turn the line over to Vanessa who will review the fourth quarter 2009 results.

Thank you, Helen, and hello, everyone. During the fourth quarter of 2009 sales were $36.4m, up 194% from $12.4m in the fourth quarter of 2008. Fourth quarter 2009 sales included the full recognition of purchase of 10.08m doses in December 2009 of Sinovac's Panflu.1 vaccine by China's Ministry of Industry and Information Technology, MIIT, as part of China's national purchase plan.

Gross profit for the fourth quarter of 2009 was $25.2m with a gross margin of 69% compared to $7.7m and a gross margin of 36% (sic - see press release) for the same period of 2008. The gross margin for the fourth margin of 2009 increased from that of the prior year due to increased production efficiency as flu and the Panflu.1 utilized the same production line and also light product returns in the fourth quarter of 2009.

Total operating expenses for the fourth quarter of 2009 were $8.2m compared to $4.6m in the comparative period in 2008. Selling, general and administrative expenses for the fourth quarter of 2009 were $6.3m compared to $4.1m in the same period of 2008. SG&A expenses as a percentage of fourth quarter 2009 sales decreased to 17%, down from 33% during the period year. The lower selling and administrative expenses as a percentage of the revenue resulted from increased economics of scale and H1N1 vaccine sales made to Chinese government, which incurred much light selling expenses.

Net research and development expenses for the fourth quarter 2009 were $1.6m compared to $359,000 in the same period of 2008. The higher R&D expenses were mainly related to continued development of EV 71 vaccine, pneumococcal conjugated vaccine and universal pandemic influenza vaccine.

Fourth quarter 2009 operating income was $17.1m compared to operating income of $3.1m in the prior year. The higher operating income in the current year quarter was attributable to the significant sales growth and the greater economies of scale.

Net income for the fourth quarter of 2009 included $1.06m in interest and other income, $37,000 in interest and financing expenses and $4.6m in income tax expenses. Net income for the same period of 2008 included $327,000 of income and other -- interest and other income, $46,000 of interest and financing expenses and $248,000 (sic - see press release) of income tax credit.

Net income attributable to shareholders for fourth quarter of 2009 was $8.9m or $0.21 per diluted share, up 275% compared to net income attributable to shareholders of $2.4m, or $0.06 per diluted share, in the same period of 2008.

As of December 31, 2009, Sinovac's cash and cash equivalents totaled $75m compared to $32.9m as of December 31, 2008. The increase in cash and cash equivalents primarily reflects the company's operating activity cash inflow of $48.4m.

With that we will now open the line for question.

(Operator Instructions). Our first question is from Hongbo Lu with Piper Jaffray. Please proceed with your question.

Weidong, Helen and Vanessa. How are you? I think I have quite a few questions, probably mainly 2010 guidance. By reading the press release I understand probably the major moving part for 2010 revenue expectation would be the seasonal flu market uncertainty in China. So, Weidong, can you actually walk us through what are the major contributing factors for this market uncertainty? And then what assumption did you make in order to give us the 10% to 20% of guidance for 2010, mainly on the seasonal flu part.

And I will ask for the hepatitis vaccine market after this. Thank you.

Let me translate your questions first.

(Interpreted) So actually the management make this projection based on the stable but with growth assumption. And, as you said, we believe in 2010 flu vaccine is one of the contributor to keep the sustainable growth of the Company.

As you may know that in 2009 China actually experiencing the great event of H1N1 vaccination program, which in that year 30m people vaccinated with seasonal flu vaccine and over 70m people were vaccinated with H1N1 vaccine. Actually in China, in Chinese history this is the first time that over 100m people were vaccinated with flu vaccine. And actually this is the first time for the government and the public to pay attention and understand the importance of getting flu vaccination. And the total vaccination coverage is greater than 5% of Chinese population.

And we believe this is a positive factor for flu vaccine and these positive impacts will be also transfer in year of 2010. Therefore, we expect the vaccine demand for seasonal influenza vaccine in this year will also increase. And we believe that Sinovac is well -- is right now well positioned as we are benefited from our previous research and development in H1N1 vaccine. And we will get -- we'll still strengthen our good comparative advantages in this industry. And we will try our best to make the flu vaccine sales revenue as one of the big contributions for this year's revenue.

Okay, thank you. And then, Weidong, if I may follow up on your answer. In 2009 it's a special year, more than 30m seasonal flu vaccine immunization in China, probably partially driven by people's fear towards H1N1, when they can't get H1N1 vaccine in time they rush to the clinic to get seasonal flu immunization. Would that happen still you continue -- would we continue to see that strong demand for the seasonal flu now H1N1 turned out to be a much milder pandemic?

The second question is also on the 70m H1N1 vaccine, those are mainly purchased by Chinese government. And then in 2010, would that demand in H1N1 vaccine translate into the seasonal flu? What I try to understand is for your overall non-H1N1 revenue growth 10% to 20% what kind of underlying assumption on the overall seasonal flu vaccine market growth in China did you build in?

(Interpreted). We actually believe that in 2010 definitely the H1N1 outbreak will not as serious as in last year. However, these cases in last year and also in this year was actually enhanced the understanding and awareness in government and public to know about flu vaccine's importance. And this is why we believe the demand of seasonal flu vaccines will continually increase.

And as we are making our projections for this year, our underlying assumption is that it's also undering that the flu vaccine market demand will keep increase. But as we said earlier that in this year there are also some uncertainties, like H1N1 impact on this year will not be as big as last year.

As you asked what are the assumptions under this 10% to 20% growth of non-H1N1 revenue. Firstly, actually for our seasonal influenza vaccine the production capacity is one of the limitations for us to further growing the market opportunities as the current production line is previously designed to have 2m doses capacity. And after we improve the production process and do the restructuring of the production line, we expand it to 5m doses. And recently with the internal adjusting of our facilities we expanded further to 8m doses. But this is the maximum amount. And there is no other room to make any breakthrough over this capacity. Therefore, this is one of the limitations for us.

And on the other hand, for hepatitis A vaccine, right now we are experiencing the transformation from private market to public market. Although we have received the -- although we have won the bid of entering into public market in Beijing, Tianjin and Shanghai, however, in total these markets represent less than 10% of the total public market of hepatitis A vaccine in China.

Even though for hep A we are well prepared for our capacity, but our challenge is to largely enter into private market in other provinces. And this control is at the provincial level CDC. That's why under these two considerations we're making the projection with a gradually growth projection for 2010.

Great. Thank you. And then a few more questions, if I may. One is, Weidong, do you -- last question on the flu franchise. Do you think the fact that H1N1 strain is now being included into the seasonal flu vaccine, is that good thing or bad thing for your seasonal flu vaccine sales, and then tell us why?

(Interpreted). Mr. Yin believes that this is a positive to our flu vaccine sales as we can tell the public that with vaccinating the seasonal influenza vaccine they can not only get protected from H1N1 vaccine but also to other prevailing strains. And recently Mr. Yin attended a meeting organized by the Ministry of Public Health. The officials and experts are sitting together to discuss similar issues as you ask. And finally, the MOH decide that the promoting vaccinating seasonal flu vaccine with H1N1 strain is the right thing to do. Therefore we believe this is positive news for us.

Okay. Great. I promise two more questions and I'm done. The next question probably just on the hepatitis A vaccine, I actually -- maybe I missed it. I don't have the breakdown of hepatitis A vaccine sales in private versus public market in the fourth quarter, if you can provide me that.

And also question to Weidong is if we look at the private hepatitis A vaccine market in 2008 and 2009, that market has probably declined quite substantially. And then -- so what is his view in 2010? And then are we going to see stabilization of the private market for hep A vaccine during this private to public transition? And then what's the earliest time that we can see the public -- the demand from public purchases start to pick up?

(Interpreted). So actually in the fourth quarter we do not sell any hepatitis A vaccine to public market. This is also due to the public market purchase nature. It's not very seasonal.

And to answer your last question is that we expect after the public market is opened up enough, the private market demand for hep A will be decreased. Therefore, our strategy are including three different parts. And the first one is that in some areas which previously do not have a substantial vaccination program for young children, maybe from two to three years old or even under the elementary school children or younger, we can focus that part and to provide vaccination to -- for that part of the population.

And secondly, we're also trying to -- lobbying the government to increase the financial budget to purchase higher quality products of hepatitis A vaccine, which is inactivated vaccine we provided, to have Healive included in more provinces for its EPI program.

And the third one is that we are also promoting Bilive heavily in private market as in some developed areas people welcome this idea that with one vaccination -- with only one vaccination but they can get protected from two different diseases. As you may see -- saw that in 2009, the sales growth in Bilive increased a lot and we expect to, through the sales marketing activity, to keep this trend in the next following years.

Okay. And is it realistic for us to expect a flat year-over-year for your hepatitis franchise with Bilive growth offsetting Healive decline for 2010 compared to 2009?

(Interpreted). That probably will be the assumption Mr. Yin would like to make. But as we said, if the government start to purchase the hepatitis A vaccine in a greater amount and that will have a significant growth in public market of hepatitis A vaccine. And therefore our revenue will be increased as well. However, this possibility was not included in our current projection for this year.

Okay. Great. One last question for Vanessa and I'll jump back to the queue is minority interest and tax rate going forward for 2010, how should we think about it?

Actually we purchased -- we set up a joint venture with Dalian. Now we have another subsidiary -- joint venture Sinovac Dalian. For 2010 Sinovac has increase of 30%. I think in 2010 we will consolidate Sinovac Dalian even though we have only 30% ownership because we have full control of that subsidiary. Therefore the minority interest will increase, not only including the current [Beijing] and they also have another 70% from Jin Gang Group. So you will see an increased minority share.

How about tax rate?

Tax rate? Yes, for Sinovac Beijing we still remain at 15% income tax rate. For other -- to other subsidiaries, because those subsidiaries is in the lower position -- in loss position so they won't pay any income tax. But I think overall, because the income -- the blended income tax rate could be increased because the loss from other subsidiary cannot offset the profit from the Sinovac Beijing.

Okay. Thank you. I'll get back to the queue. Thank you.

Thank you.

Thank you. Our next question is from Ingrid Yin with Brean Murray. Please proceed with your question.

Good evening, Weidong, Helen and Vanessa. Thank you for taking my questions. So my first question is regarding Healive. Can you tell us about the price difference you could get from public market and private market?

(Interpreted). So in public market in year 2009, for public market the unit price of Healive is CNY21 to CNY39 per dose. In private market it's CNY42 to CNY55 per dose.

Okay. So you talked about basically Healive plus Bilive adding together will be flat year over year. So as I understand, Bilive is a booster vaccine for hepatitis A and hepatitis B. So what are you thinking about the growth rate for that product?

(Interpreted). So actually the Chinese government initiated a program which is to vaccinating all child under 12 years old with hepatitis B vaccine within three years time. And in some developed areas most of the people will actually like to be vaccinated with Bilive which can prevent from both hepatitis A and hepatitis B. And therefore our effort is to develop the private market in those areas in order to achieve the higher growth for this product.

Right. So I'm trying to get a feel whether it's going to be 50% growth rate or 100% growth rate for this line.

(Interpreted). We expect that growth will be higher than 20%. But it will be difficult for us to give whether it's 40% or it' 50%. We will make all of our efforts to achieve maximum possibility.

Thank you. Our next question is from Michael Kass with Baron Capital. Please proceed with your question.

Yes. Thanks. I just wanted to ask regarding the stockpile doses, whether those, if they're not used and you are compensated in 2011, is that the same pricing mechanism and what is the current pricing mechanism? And how does pricing, I guess, across all the vaccines in the public market, is there an annual decline curve in pricing or does it stay relatively fixed?

Let me try to clarify. Are you talking about --?

Two or three different questions (multiple speakers).

Are you talking about H1N1 vaccines only or including H1N1?

Yes. I guess I'm asking first on H1N1, the 8.74m doses that are going to be stockpiled that won't be reflected as revenue under the current expected rate of ordering rate, do the stockpile doses, do those come in at full pricing next year if they're not used? Is it the same price as if it gets ordered and gets distributed to the CDCs?

And how does pricing for H1N1, or any other vaccine that's sold to public, what is -- on a like-for-like basis, is there an assumed decline curve that I should be using on pricing for those vaccines over time as the volumes grow?

(Interpreted). Actually for all the vaccine orders of H1N1 vaccine, we all enter into a specific agreement with government, including the specific terms of price and quantity. And right now we have completed production for these about 8m doses stockpiled. However, when we are making the projection -- revenue projection for this year, this amount is not included in this year as they will be expired in next year and we expect to recognize the revenue, based on the agreement we entered with the government, in next year. Of course there are also possibilities that government may require us to deliver these amounts or some of these amounts in this year. And when these products are delivered, we can -- we are capable to recognize revenue.

Thank you. Our next question is from Steve Brozak with WBB Securities. Please proceed with your question.

Great. Thanks for taking the call and in courtesy to others I'll be brief. I'll break it down into two parts. The first part, one of the important things in assessing for the American markets are when would you say that you would expect GAAP accounting or some kind of audited accounting? And are what we're looking at, you're satisfied that it's GAAP but it's not audited. What are your expectations in terms of when we might be able to see audited accounting so we can look at it on a more formalized basis? That's the first question. And I've got a follow-up on the science and the sales.

Actually the year audit has been substantially complete. The reason we did not put on audited financial statements because we haven't formally received the signed copy from our external auditor. Actually the numbers has been -- will be -- there's not going to have any change, I think. We will release -- we will file our 20-F with SEC very soon, within end of the week probably.

So you'll get -- the numbers will come out as early as the end of the week in terms of the actual audited numbers?

Right, yes. The numbers we put -- yes, the numbers we put out today actually is come out from the 20-F we are going to file with the SEC.

I see. So these are the -- we can use these numbers as numbers that you're going to file on official documents saying that these are the same numbers and that there's just going to be a difference in terms of timing as far as the release goes?

Yes. I think you can say that, yes.

Yes. We're just waiting for the auditor to sign off the report.

Okay. Okay. That's good to know. Okay. Let's talk about sales going forward now. You have an advantage in terms of given the fact that globally flu is identified pretty much around your region. So for the 2010, 2011, whatever the years are, they have a synthesis of identifying the different flu strains that take place. I would assume, given your proximity to and you're working in conjunction with CDC, that you would be kept informed of what the new flu strains are for the new season. How does that work? Can you give us any granularity on that front?

(Interpreted). Actually for manufacturing seasonal influenza vaccine we are strictly using the virus strains distributed by WHO. But it's good to know that in early this year, one of the Chinese CDC laboratories was qualified as the first laboratory under WHO for distributing flu virus strains. So in the future we probably can get strains directly from this Chinese lab. But in this year we're still getting -- using the strain from WHO.

Thank you. Our next question is a follow-up question from Ingrid Yin with Brean Murray. Please proceed with your question.

Hi. This question is for Vanessa regarding to the margins. You had very high margins for 2009 because of the government order. So how should we estimate the margins for 2010, considering sales and marketing cost and depreciation cost from recent acquired facilities, etc.?

To answer your question I think you have to understand that the new -- we recently acquired the facilities from Dalian because they were not going to have any sales. So the cost won't be affected by their amortization of all those things. So the margin still will be hepatitis A and Bilive and Anflu, so those traditional products from Sinovac Beijing.

Normally we have higher -- our margin is around 75% to 80%, even a little bit higher than 80%. So I think next year we'll be in the same range. Depends on what product we sell most. If we sell more flu-related products and the margin will be more close to like flu product margin, which will be -- that will be lower than the hepatitis A product margin.

Okay. Great. So also can you provide an estimate of the hand, foot and mouth disease vaccine clinical trial timeframe?

(Interpreted). As we disclosed previously that in December 2009 we have submitted clinical trial application of EV 71 vaccine. And last month we actually participated into an official technical communication meeting with Chinese government to exchange the technology of these vaccines to prepare for the future development.

And also Mr. Yin actually during the meeting organized by the Vice Minister of MOH in China to talk about the -- to understand about the outbreak situation of hand, foot and mouth disease in China. And as far as we understand internally from the government, the number of incidences and the severe cases numbers are far more compared to the numbers in 2009. And therefore right now we are expecting to receive the approval for commencing clinical trials. But it's difficult to tell when we can get it. But we have already making a lot of effort to have the government to approve, to enter a fast-track approval. And we have well prepared for commencing clinical trials once we receive the approval from the government.

So the protocol of clinical trials are actually having two aspects which will depend on which one is approved by the SFDA. One proposal is to conduct a six-month trial with Phase I and Phase II trials conducting together, or we can spend longer time to conduct the Phase I and then Phase II trial subsequently. So which one will be approved will definitely depend on the government decision.

Thank you. Ladies and gentlemen, we have come to the end of our allotted time for questions. I would like to turn the floor back over to management for any closing comments.

Thank you for all the participants. And we appreciate our shareholders' ongoing support. We continue to believe that Sinovac is well positioned to grow our business and expand our market share in a rapidly expanding Chinese vaccine market. And we expect to benefit from the healthcare reform plan and increasing expenditure in healthcare industry by the Chinese government.

We will also continuously execute our strategy to exploit the international market to further contribute to our sales revenue in the future. And we are looking forward to sharing our results with you next quarter.

Thank you.

Thank you.

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

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.