Sinovac Biotech Ltd (SVA) 2011 Q1 法說會逐字稿

Greetings and welcome to the Sinovac Biotech Ltd. first-quarter 2011 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, Ms. Stephanie Carrington of The Ruth Group. Thank you Ms. Carrington.

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, expect, anticipate, future, intends, plans, believes, estimates, and similar statements. These statements are not historical fact, including statements about Sinovac's beliefs and expectations, are forward-looking statements.

Forward-looking statements involve inherent risk and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Sinovac does not undertake any obligation to update any forward-looking statement except as required under applicable laws.

On the call today we have Dr. Weidong Yin, CEO; Mr. Jacob Ho, Chief Financial Officer; Ms. Helen Yang, Investor Relations Manager; and Vanessa Wu, Senior Financial Manager, and Ms. Chris Lee, Investor Relations. I will now turn over the line to Jacob Ho. Go ahead, Jacob.

Thank you, Stephanie, and hello, everyone. Thank you for joining us on this conference call. On the call today are Sinovac's chairman Dr. Weidong Yin. Dr. Yin and I will be available to answer questions.

As we discussed on our year-end call in late March, we reorganized our sales team and adjust our sales strategy in 2010 in response to the challenging domestic sales environment for our commercialized vaccines. We are pleased to see early signs during the first quarter of 2011 that the domestic market is beginning to stabilize and that our adjusted sales strategy is beginning to yield results in the private pay and public markets.

We refer to the public market as the EPI market which refers to the expanding program of immunization that is funded by the Chinese government.

I will begin by reviewing our first-quarter 2011 results and we will then discuss the R&D developments and capacity expansion initiatives.

Sales for the first quarter 2011 were $4.7 million, up 500% from $4.4 million for the first quarter of 2010. Excluding H1N1 vaccine, sales rose 50% compared to the prior-year period. In line with historical trends, first-quarter sales are comparatively lower than other quarters given the typical seasonality of the Company's vaccine sales in China.

First-quarter 2011 sales in EPI market were about $948,000, up 237% from about $281,000 for the first quarter of 2010. First-quarter 2011 sales in the private pay market were $3.7 million, up 32% from $2.8 million for the same period a year ago. These results are a positive indication following the sales strategy and team structure adjustments implemented in the fourth quarter of 2010.

Gross profit for the first quarter of 2011 was $3.1 million with a gross margin of 66.1%, compared to $3.6 million and a gross margin of 18.1% for the same period of 2010. After deducting depreciation of land use rights, amortization of licenses, permits, the gross margin was 63.5% and 77.8% for the first quarter of 2011 and 2010, respectively. The gross margin was adversely affected by lower prime utilization in the first quarter of 2011 as reduced demand caused the Company to scale back production.

Selling, general, and administrative expenses for the first quarter 2011 were $4.1 million compared to $3.1 million in the same period of 2010. SG&A expenses as a percentage of first quarter 2011 sales were 88.4% compared to a 69.9% during the first quarter of the prior year.

The SG&A expenses as a percentage of revenue was in line with the increased sales in private pay market in the first quarter of 2011. However, the overall increase was result from an increase in selling expenses due to the adding of new sales personnel in the first quarter of 2011.

Net research and development expenses for the first quarter 2011 were $2.1 million, compared to $1.1 million in the same period of 2010. The increased R&D expenses in the first quarter of 2011 were primarily due to the continued development of the [pipeline] vaccines, including the expenses on EV71 vaccine which has ended the Phase 1 clinical trial, the trial production of animal rabies vaccine, and mumps vaccine and other R&D projects.

We end the first quarter of 2011 with cash and cash equivalents of $91 million. We have a strong cash position and we will continuously support R&D projects and the capacity expansion construction initiative at Changping facility as we upgrade the facilities in line with the new GMP standards which bring us closer to the WHO standards.

Turning to our clinical trial activities, the Phase 1 trial for our proprietary EV71 vaccine is progressing on schedule. The inoculations in young children have been complete and are underway in the infant group which is expected to be complete. The preliminary results showed good safety and tolerance [profile] without [seeing] adverse reaction. We anticipate commencing the Phase 2 clinical trial in the next few months.

We submitted a clinical trial application for the rubella vaccine in April. Our long-term objective is to develop an MMR vaccine, a mixture of three live attenuated viruses administered via injection for immunization against measles, mumps and rubella. It is our plan to launch this combination vaccine in approximately 5 years.

Following the Ministry of Agriculture's GMP site inspection of our animal rabies vaccine production facilities at Tangshan Yian in late April, the outcome appears to be positive and is subject to the public notification process that ends on May 18 after which Tangshan Yian will apply up for the GMP certification, new drug certification, and production license in advance of commercializing the vaccine.

We are on track to launch our animal rabies vaccine within the year. The capacity expansion construction at Changping facilities is progressing on schedule. We remain encouraged by the early signs that the domestic vaccine market is beginning to rebound.

As we start on our fourth-quarter 2010 conference call in March we have suspended our practice of providing full-year sales guidance.

This is the end of my statement. Operator, we will now take questions. Thank you.

(Operator Instructions) Sean Wu, Morgan Stanley Smith Barney.

Good morning. Thank you very much for taking my call. Congratulations on a much better than expected first quarter [thanks to] sales excluding this vaccine and through the pandemic flu vaccine.

I have a quick question on your gross margin. Your gross margin appears to have recovered to a normal level after a negative one in the first quarter. I saw sales of 216,000 in this quarter for influenza vaccines, so did you incur any kind of write-off for this quarter of your Anflu?

Sean, this is Vanessa. In fact we did not write off any Anflu in this quarter, but we do provide some sales provisions for hepatitis A and hepatitis A and B in this quarter.

Okay, thanks. So I have another quick question just about your tax. You incur some tax loss payments. Your effect tax rate is still positive but you have [negative] income so I guess a lot of your expenses are now tax deductible. Why you have in -- why do you incur tax if you have negative income?

Yes, understand your question. Actually, the income tax expense is from deferred income tax expense. We do not pay the current income tax expense; it's from the deferred one.

Okay.

It is a confusing concept.

That is good to know. You will be focusing more on the private market and also so do you see this kind of level SG&A to continue? Like how far along are you into the process of building up your sales force and targeting EPI program for your hepatitis A vaccine sales?

Sean, by the end of last year we have about 135 sales personnel. By the end of the first quarter we have about 150 sales personnel.

So let me just ask the final questions before I go back to the queue. You said you are seeing tangible evidence of improvement as your sales excluding pandemic flu vaccine grew like 50% year-over-year.

So is this -- you think you like outperform the industry or are you seeing people now have more or less come back to recognize the importance of vaccination and no longer be scared by the (inaudible) incident? It's healthy again or I think I am just trying to see whether there is still (inaudible) to a normal level?

(interpreted) Generally speaking, from our view that we don't think there was a significant change in the industry wide. As you know that earlier this year we adjusted our sales strategy with more emphasis on private market.

As we saw in the first quarter sales of Bilive increase in private market sector. This is actually in line with our previous strategy as we expected before when hepatitis A sales decrease we will use Bilive as a complementary product to start generating higher sales in private sector. Therefore, we think this sales increase was resulting from our new strategy that we implemented in our sales teams in the first quarter of this year.

Is it fair to imply if the market reverts back to normal you may see actually even further upside because of your new strategy?

(interpreted) We think probably we need to wait until the second half of this year. The recovery of the market may have much more impact on our sales in flu vaccines, which is a seasonal product. That sales activity normally happens in the second half of the year.

And, as you know, that in the first half this year there was not a vaccination contained with measles for (inaudible). Therefore, the (inaudible) system are not taking too much attention on the other activities outside of distributing vaccines.

However, we also didn't see any significant positive news on any kind of vaccine sales in the first few months of this year. Therefore, that probably we need to wait until second half to using our sales (inaudible) to show whether the market is getting back to normal or not.

Thank you very much. Fair enough.

Chad Messer, Piper Jaffray.

Thanks for taking my question. I was interested in maybe getting a little bit more detail and color on your EV71 program. You said that the infant group is finishing up dosing shortly and that you expect to start a Phase 2 in the next few months.

When should we look for you to record final safety data out of that Phase 1 study? And what does the Phase 2 program -- how is that shaping up to like in terms of patient number and sort of time course to enroll? Any details on that would be great. Thanks.

(interpreted) Actually for -- to translate Mr. Yin's comments that for Phase 1 clinical trials we expect to complete vaccination by the end of this month. After that we are going to test the antibody titer.

Right now it's still -- we didn't break the -- we are still in a blind trial status. Right now we can see the preliminarily, the safety result is pretty good but we need to wait after breaking the blinding before we understand the antibody (inaudible). And we expect to have a report on Phase 1 trials results in June.

Regarding to the Phase 2 clinical trial, we expect to evaluate two different level of dosages for our vaccine candidates. Also, we expect to expense the volunteers in each subgroup and we expect the trial in Phase 2 will be more than 300 volunteers. We expect the trial would begin in the second half of this year.

The purpose of these Phase 2 trials is to fix the dosage level and to the fuller test the immunization schedule. We expect the Phase 2 trial could be completed within 2 to 3 months and we will report the results as to when we complete the trial.

Chad, did we answer your question?

Yes, thank you.

(Operator Instructions) Ingrid Yin, Oppenheimer & Co.

This is [Melodie] calling on behalf of Ingrid. (spoken in foreign language) Thanks for taking my question.

Sales of hepatitis vaccine really grew nicely this quarter. We understand [influenza] vaccine sales will depend on the market situation in the second half of the year, but do you think we should expect a similar trend for the rest of the year for hepatitis vaccine? Thanks.

You mean hepatitis A or --?

Both, please.

Both.

(interpreted) To translate Mr. Yin's comments that probably he is reluctant to using a number to show whether the growth rate in hepatitis A would be in line with the sales growth in the first quarter of this year. However that in generally speaking we believe that we regard hepatitis A vaccine sales to symbolize our market share in private market sector in China.

Once we stabilize the sales with hepatitis A vaccines we can use that business to support the growth in flu sector. So basically we regard hepatitis A as a stable product to keep generating revenue for the Company, and we regard flu vaccine as the driver for growth.

Got it, thank you. My next question is you mentioned that you have been expanding your sales force in the private market and also add sales personnel. So do you plan to further expand the sales force in the coming quarters? If yes, what kind of impact should we expect to have on your SG&A cost?

(interpreted) So to translate Mr. Yin's comments that even though last year we encountered a hard year, however, the Company does not want to [count] too much cost on sales. We are expanding our sales team -- we expect to take about six months to coaching our new salespersons, therefore, that they may need to have some time to get in more knowledge about the sales with our vaccine products.

Actually, this is part of our adjusted sales strategy and this is not only for this year. We also want to set up a good team for the sales team next year and also to be well prepared for the commercialization of our EV71 vaccine in two year's time.

Thank you. That is really helpful. So my next question is -- congratulations on the progress of the animal rabies vaccine. As you mentioned, you are expected to launch within this year so what kind of revenue scales should we model for this year and next year? Thanks.

(interpreted) We think that right now with being complete some preparation for commercializing our animal rabies vaccine, including the brand name and packaging styles, design. Right now in the Company we have about 5 to 6 in-house sales teams which is right now conducting the comprehensive market research and also the pricing models.

We think this is the first year for us to move into this market with these products. We don't expect to have a big volume of production and we also don't expect to have a big sales. Until now we didn't provide a guidance of sales revenue from animal rabies. We expect after -- we expect to have that number provided to the Street after we got the production license.

Got it. That is really helpful. So my last question is regarding your plans for the use of cash. So you have $91 million cash on balance, what is your plans for the cash and what is your cash (inaudible) as well? Thanks.

(interpreted) Actually the Company didn't change our strategy. We think the use of cash would be focusing on different aspects. The most important one is the research and development.

We will spend some cash on conducting clinical trials on EV71 vaccine and also we will conducting the pilot production or trial production on our pipeline products including EV71 and a (inaudible) vaccine. Also, we are going to have a series of products moving into clinical trials in the next following months or years and those are the other part the use of cash.

The capacity expansion in our Changping site in the north of Beijing; we will having some bank loan to support the investment in Changping site. We have complete the construction of a [cooled] warehouse and we also completed the design for our new [fitting and] packaging line according to WHO, GMP standards. We will spend about 6 months to order the equipment for fitting and packaging line, and we expect that we will install this equipment at the end of this year.

Also, we have to initiate the design for our EV71 production plant. Also, we think we also need to spend cash to invest into our Sinovac Dalian and Tangshan facility.

We think that we currently have plenty of cash to support the various business units in the Company. And if we think the results in the Phase 1 trial of EV71 is very successful we probably will speed up the process of conducting the Phase 2 and Phase 3 clinical trial. Also, we probably will speed up the process for constructing the production plant for EV71 vaccine.

Thank you so much. That is all of my questions.

Ladies and gentlemen, we have no further questions at this time so I would like to turn the floor back to management for any closing remarks.

Thank you, operator. Thank you, everyone, for participating on today's call. We look forward to seeing some of you next week in New York and Boston as we will be presenting at the Piper Jaffray Eighth Annual China Growth Conference and at the Oppenheimer Fifth Annual China Dragon Conference.

Thank you, everyone. Have a good day.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.