Sinovac Biotech Ltd (SVA) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech Limited third quarter 2012 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-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 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 statements. Sinovac does not undertake any obligation to update any forward-looking statements, except as required under applicable laws.

On the call today from management we have Dr. Weidong Yin, CEO; Mr. Danny Chung, Sinovac's Chief Financial Officer; Miss Helen Yang, Investor Relations Manager; and Miss Chris Lee, Investor Relations.

I will now turn the line over to Helen Yang. Go ahead, Helen.

Thank you, Stephanie, and hello, everyone. Thank you for joining us on this conference call. On behalf of our CEO, Mr. Yin, I will provide an update on the business, and Mr. Danny Chung, our CFO, will provide a financial review afterwards.

Let me start by providing with you an update on across the commercialized [vaccine] business.

We are pleased to see our continued solid growth in the third quarter of 2012 for our hepatitis vaccines in the private pay market, which increased 31.2% compared with the same period last year.

The withdrawal of the [key] competitive hepatitis vaccines, due to the new pharmacopeia adopted in China, has provided us more opportunities to expand our presence in the private pay market. And in the last quarter we [recharged] awareness of Healive with the celebration of the tenth anniversary of Healive, which benefitted the sales of Healive in the private pay market.

And as the only product in the Chinese market, our Bilive sales in the private market keep growing the third quarter with 6.6% year over year. However, our total sales in the third quarter went down from the prior year, mainly due to lower public market sales of Healive.

In the third quarter of 2011 we recorded sales revenue from the Jiangsu Province Governmental tender. Although we recently obtained several public tender awards, including the tenders from Gansu province, city of Beijing, Shanghai that we announced earlier, and Jiangsu, a newly awarded tender, revenues will be recorded upon future delivery of the vaccines.

We expect the sales of Healive in the public market to pick up in the coming quarters, as we continue to executing the plan to improve our capabilities and expand our presence in the public market.

And also in the third quarter of 2012, our Anflu sales decreased by 16%, compared to last year. The reason is the production of seasonal flu vaccines commenced later this year versus the recent historical trends in the previous year across the seasonal flu industry, given that flu manufacturers received a [reference] tender later than in previous years. These delayed Sinovac's manufacturing and sales of the flu vaccines in this season.

We also want to highlight that Sinovac was awarded a Government tender to supply seasonal flu vaccines to the People's Republic of Mongolia in September as well.

Turning to our development pipeline, we are committed to advancing our vaccine candidates, which are key milestones by which to measure the Company's future growth. As you know, our EV71 vaccine Phase III trial, is progressing on schedule. The hand, foot and mouth disease HFMD surveillance is ongoing and documentation collection, data input, data review and the quality control on the database are well measured, underway, and progressing on schedule.

Currently, we remain in close communication with the relevant authorities and experts on the expected schedule for trial conclusion and data unblinding, and we will share that information when appropriate.

In parallel, the construction of the dedicated EV71 vaccine production plant has been completed, and internal validation of production process is underway, which are moving forward simultaneously to the EV71 clinical trial.

The GMP certification applications for the production plant will be submitted in line with our progress made with the Phase III trial. Our ultimate goal is to launch the vaccine shortly after obtaining the product license in China without any delay.

We're also pleased that we had received GMP certification from China State Food and Drug Administration for the Company's dedicated mumps vaccine production plant at Sinovac Dalian facility. We recently commenced the commercial production for our mumps vaccine and aim to launch the product to Chinese market in the coming months.

On the corporate side, we want to highlight that our 2012 annual general meeting of shareholders was held on August 22, 2012. During the meeting, four proposals, including the 2012 share incentive plan were approved. The fifth proposal to amend the by-laws did not receive the requisite vote.

Now I would like to turn over the call to Danny to review our financial results. Danny.

Thank you, Helen. Good morning, everyone. It's a good opportunity to try to review the financial statement and highlights with you.

Our Hepatitis vaccine sales in private pay market rose 31.2% in the quarter; total sales decreased 7% to $14.3 million, compared to $15.4 million in the same quarter of 2011. The decrease in total third quarter 2012 sales were primarily due to decreased Healive sales to the public market, and reduced the Anflu sales that started later this year. This was partially offset by the increase of both Healive and Bilive sales in the private pay market.

Overall, the Company ended the quarter with a net total sales decrease of $1.1 million, or 7% decrease compared to the same quarter of last year.

Core vaccine sales for the nine months period ended September 30, 2012, increased 6% to $29.6 million, compared to $28 million in the same period of 2011. Despite a 29% increase in Bilive sales, total sales decreased 17% to $29.6 million, compared to $35.7 million in the same period of last year.

The decrease was mainly affected by non-core government stockpiling of the pandemic flue H5N1 vaccine sales of $7.7 million in the 2011 period, as there were no government stockpiling sales in the current fiscal year to date, to the end of September. Please refer to the note 1 in our release for the sales analysis for the nine months period ended September 30, 2012.

Gross margin in third quarter of 2012 was 52.6%, compared to 56.8% in the same period of last year. The lower quarterly gross margin was mainly due to the increased provision for expired H1N1 inventory costs, and overhead allocated to cost of goods sold arising from seasonal excess capacity. After depreciation of land use rights, amortization of licenses and permits, the gross margin was 52.4% and 56.5% for the third quarter of 2012 and 2011, respectively.

Selling, general and administrative expenses, as a percentage of third quarter 2012 sales, were 54.9%, compared to 49.8% for the same quarter of the prior year. The increase in the year-over-year quarterly SG&A expenses was mainly due to the ongoing preparation costs for the GMP upgrade, and the Changping site validation.

Research and development expenses for the third quarter were $3.8 million, a $1.4 million increase over the same period in 2011, mainly due to the ongoing EV71 clinical trial development.

The increase in depreciation of property, plant and equipment, and amortization of licenses and permits for the third quarter of 2012 was mainly due to the assets at Changping site that were in use in the quarter.

As of September 30, 2012, cash and cash equivalents totaled $82 million, compared to $104.3 million as of December last year. The Company utilized $1.1 million and $6.5 million of its cash resources in the third quarter and nine months period, respectively, to contribute to its ongoing clinical trial for its proprietary EV71 vaccine.

The Company intends to provide the trial with approximately an additional $3.4 million during the remaining quarter of the year, and $1.5 million in 2013. During the quarter and the first nine months period, $3.7 million and $8.7 million, respectively, were spent for the ongoing capital needs of the Changping site development, which were in part covered by the credit line arrangement already in place.

Capital expenditure payments to complete the Changping site, which are in part covered by the credit line arrangements, are estimated up to $7 million in the remaining quarter of 2012, and $8.7 million in 2013. The cash position and credit line facility with local commercial banks provide the Company with the resources to commercialize the EV71 vaccine being developed for HFMD diseases. The Company is in a position to drive the future growth of the businesses with a combination of commercialized vaccines and vaccine candidates.

The above concludes management prepared remarks. Operator, we will now take questions. Thank you.

Thank you, we will now be conducting a question and answer session. (Operator Instructions). Chris Lui, Morgan Stanley.

This is Chris on behalf of Bin. Can you tell us about your selling cost as a percentage of sales; we see that's lower compared to previous quarters. Can you give us an idea if that will happen the same for fourth quarter and onwards? Thank you.

Well, I think the selling cost we have a small reduction in quarter 3, but as we're going to pick up the sales in the quarter 4 we're going to see the expenses will go back to a normalized level.

What would the normalized level be?

That would be in the same line in the last year I would say, last year quarter 4.

Okay, thank you.

(Operator Instructions). John Gregory, SJ Strategic Investments.

Assuming that the EV71 vaccine is approved next year, does the Company have any estimates on how much they think it will add to the overall revenues for the Company? Could it actually be more than -- increase the revenues by more than double?

(interpreted) We would expect the commercialization of EV71 will help the Company to drive up the growth of our top line. But whether it will be doubled -- well, the scale of the increase actually is not -- we currently didn't make it to the public at the moment. But we still see that the market potential of EV71, if we're only talking about in China, we're targeting about 80 million children between six months to five years old. So we would expect that these will help the Company to drive up our growth.

Okay.

Yi Chen, Aegis Capital.

First of all, when do you expect to report the Phase III data from EV71 trial?

(interpreted) Because based on the protocol of the Phase III trial, we would expect to end the trial in January next year, 2013. And after that, we need to work on the data and analyze it about the data collected from the trial. So we would expect to announce the result in the first half next year.

Thank you. My second question is, do you provide any guidance in terms of revenue for fiscal year 2012, and total net income for fiscal year 2012?

Currently, we do not provide any guidance on the sales figures for the total fiscal year.

All right, thank you. Last question, for a cost of revenue, do you expect the total fiscal year 2012 cost of sales to be roughly at the same level, in terms of percentage of sales, compared to 2011?

First of all, last year we do have some government stockpile sales in last year, 2011. So in that case, that will not going to happen just like last year. So in that case, there will be some deviation rising from these factors.

Right, but I'm talking about cost of revenue. Will that be at the same level?

Well, there will be the -- because of the order not going to be like last year. So in that case, the cost of sales level will be different compared to last year.

Okay, thank you.

(Operator Instructions). John Gregory, SJ Strategic Investments.

One last question. The EV71 vaccine, is it the Company's plan, after approval, to market the product throughout Asia? HFMD obviously is a serious situation throughout Asia, so is it targeting just China? Or is it also going to be marketed in places like Cambodia, Vietnam, and places like that?

(interpreted) Actually, it is a very good question. We have also been aware about the reported cases in a country like Vietnam and Cambodia. And in order to be able to participate into the global sales, the design of our clinical studies is in line with the international standards. And also, our Company has contacted with different regulatory organizations in different countries. But the regulatory approval for other countries can only be started after the vaccine has been approved in China.

So we were aiming to commercialize the vaccine in China first. And we may consider about other opportunities outside of China.

Okay, thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

We would like to take this opportunity to thank you for our shareholders and our potential investors who are caring about Sinovac. And we thank you for your support always, that ends our call today. Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. 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.