Sinovac Biotech Ltd (SVA) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech fourth quarter full year 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, we 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 facts -- 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 can 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 Mr. Rui Chung, Investor Relations Specialist.

In addition, we would like to apologize for the delay of the start of the conference call. As you may have seen the quarterly release has now crossed the wires. As such, 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. I will provide an update on the business on behalf of our CEO, Mr. Yin. Our CFO, Mr. Danny Chung, will then provide a financial review.

And let me firstly highlight that 2012 was a transformative year for Sinovac as we made significant advances across our entire business, both on the clinical development pipelines and also for the commercialize of vaccine. We believe that we are well positioned for medium and long-term growth on multiple fronts. As such, we will start by providing you with an update on the vaccine development pipeline and our most advanced candidate, our phase III clinical studies for our proprietary inactivated vaccine against human enterovirus 71 or EV71.

As many of you know, in March, we announced the preliminary top-line data for our phase III clinical trial on our EV71 vaccine against hand, foot and mouth disease caused by EV71 virus. The main -- primary objective of the study was to evaluate the efficacy of the vaccine candidate. And the trial was conducted among infants from six to 35 months old. And we are very pleased to report that the preliminary data showed that Sinovac's EV71 vaccine was 95% efficacious against hand, foot and mouth disease caused by EV71.

In addition, yesterday, Dr. Zhu Fengcai, Deputy Director of the Jiangsu Provincial Center for Disease Control, and who is the co-principal investigator of our phase III trial presented additional efficacy and safety data from the trial that we conducted in Jiangsu province on the 13th Annual World Vaccine Congress and Expo held in Washington, DC of the United States. And this data showed that EV71 vaccine had 95% efficacy when compared to the placebo group, and safety was comparable between the vaccine group and placebo group. And injection site and general adverse reactions were similar across both group.

We are working with the PR team to draft an article about this vaccine for a (foreign) journal and we will make an announcement on the publish of this article, once it's completed.

Our clinical research and regulatory team are right now working on the summary report of the clinical studies and also to protect the new drug application dossier and we expect to submit the application for the new drug license to China's FDA by the end of May.

And regarding to EV71 vaccine production facility at our Changping site, we have completed the construction and installation of the equipment and a validation was carried on in the last year and right now the facilities are ready for GMP inspection. Therefore, once the new drug license is granted, we can make an application for our production license and the GMP certification before we can commercialize our vaccine to the market, and we would expect that a vaccine could be commercialized in the year of 2014.

And with respect to our vaccine develop pipeline, we also have several other candidates in various stages of development. And early this year, we filed an IND for the varicella vaccine developed by our Dalian site. And also we previously filed a clinical application pneumococcal polysaccharide vaccine. And we would expect to start the trial once we obtain the license granted by the government in China.

And also you may have seen that recently the news about a new Avian flu strain H7N9 that is beginning to be found in China. With our flu vaccine platform, we believe we are capable of developing and manufacturing vaccines which are flu-related, and we are experienced in developing Avian flu vaccines for humans including vaccine against newly-emerged flu viruses, such as the H5N1 and H1N1 flu strain. And we intend to begin preliminary research on H7N9 strain after we obtain the viruses.

In December of 2012, the China FDA conducted on onsite inspection on our Changping site and Shangdi site at Beijing to evaluate the compliance on the China under GMP standards, which is according to the 2010 version, which is the latest one. And 10 days public comment period was conducted from March 19 to April 3, and we are currently awaiting the GMP certification for these two sites.

And now, I would like to turn over to our commercialized vaccine business. We have saw a 38.6% increase in our regular vaccine sales in 2012, including our core products like Healive, Bilive, Anflu and also our recently launched mumps vaccine and RabEnd, which is the animal rabies vaccine. And we have actually achieved a growth across all our core products and in every market segment, including private pay market, public market and overseas market. And especially for the private market that we supply our Bilive and Healive that actually contribute the growth in both the growth rate and magnitude of the sales.

Our financial results was benefited from a successful price increase for both of these products, as well as higher sales volume and as we believe that our current sales team [is] very successfully to execute their sales strategy to drive up the growth. And we also believe that this capability of our sales team can be utilized when we are commercializing our EV71 vaccine in China.

And in addition to that, in order to have a successful commercialization, we are actually supplying the vaccine to the targeted population in China, under five years old with our EV71 vaccine, which actually is about approximately 80m population. And as it was reported in last year, a total about 2.16m cases of hand, foot and mouth disease was reported, and among which 560 are fatal cases.

However, that unfortunately right now, no matter in China or around in the rest of world, there is no any EV71 specific treatment method. Therefore, that providing the vaccine as the most effective solution to help our population to prevent the disease and to control the disease epidemic. That's why we believe with our sales team's experience and also our good vaccines, we are helping the -- our population to prevent the outbreak also of hand, foot and mouth disease caused by EV71.

And also yesterday, we received very good news from our overseas market, as actually Sinovac had spent over two years for -- in order to get our license to commercialize our vaccine in Mexico. And yesterday we were informed that the license of commercializing flu vaccines in Mexico was granted to us. And if you remember that in year of 2011, Sinovac flu vaccines plant and Hepatitis A plant have the onsite inspection by Mexican authority, so now we are in a good position to be planning of our commercializing plan of our flu vaccines in Mexican market.

And we also want to take this opportunity to mention that we were -- besides the human vaccines, we were also making efforts to develop our animal vaccine market. However, that we believe this market is completely new for Sinovac and that will make sometime for the market and sales to pick up. And therefore that management take a conservative approach for the year-end 2012 to provide accounting treatment to do an impairment of Tangshan Yian assets, which are related to the production of animal vaccines, on our P&L. And for now, I think I complete the statement for the business.

I would now like to turn over the call to Danny to review the financial results for the fourth quarter and full year 2012. Danny?

Thank you, Helen. Good day, everyone. I'm going to walk you through on the financial highlights for the fourth quarter and the total year.

Total revenue for the fourth quarter of 2012 was $19m, a decrease of 10.4% from $21.1m in the same period of 2011. Fourth quarter 2012 sales of our regular products Healive, Bilive, Anflu, mumps vaccine and RabEnd animal vaccine increased by 166.9% to $19m from $7.1m in the same period of 2011.

The significant increase in sales of core products in the fourth quarter was driven by one, expansion of Healive to a new territory, Jiangsu Province in the fourth quarter. Second, successful implementation of a new sales strategy that could achieve high volume and also average selling prices increased for Healive vaccine. Third, high Anflu sales in the fourth quarter compared to other regular years due to a later start of Anflu sales season in 2012.

2011 sales include recognition of approximately $14m revenue from Panflu and Panflu.1 vaccine stockpiled by the Chinese government in 2010. These two products are not for regular sales, since they were produced upon government order and subject to the government decision of using the vaccine within its shelf life, if there was any flu pandemic caused by H1N1 and/or H5N1. The Company's revenue recognition requirements were not met until the fourth quarter of 2011. And in 2012, there was no revenue recognized for either Panflu or Panflu.1 vaccine.

Compared with the fourth quarter of 2011, the gross profit margin for the fourth quarter of 2012 decreased from 62.0% to 54.1%. The higher gross margin in the fourth quarter of 2011 was due to the recognition of $14m revenue from H1N1 vaccine stockpiling, which has a higher gross margin than the other vaccines.

Selling, G&A expenses for the fourth quarter of 2012 were $12.8m, compared to $5.9m in the same period of 2011. The increase in SG&A was largely due to an increase in G&A, although both selling expenses and G&A also increased. The increase of G&A expenses was a result from the increase of expenses incurred for validation, commissioning, and trial production for the dedicated production facility for our EV71 vaccine at the Changping site, and the preparation for GMP inspection by the government authorities of our existing manufacturing facilities in both the Changping and Shangdi sites in Beijing in order to comply with the China 2010 GMP guidelines.

The R&D expenses for the fourth quarter of 2012 was $1.3m, a $1m, decrease from $2.3m for the same period in 2011, due to lower EV71 clinical trial expenses as the trial is approaching its end.

Depreciation of property, plant and equipment and amortization of licenses and permits for the fourth quarter of 2012 was $0.5m, compared to $400,000 for the same period in 2011.

For the fourth quarter of 2012, an impairment charge of $1.5m on the long-lived assets, including plant and building, machinery and equipments related to the animal vaccine production was made.

Net loss attributable to stockholders for the fourth quarter of 2012 was $5.4m, or $0.10 per basic and diluted share, compared to a net income of $2.8m, or $0.05 per basic and diluted share, for the same period in 2011.

For the fourth quarter of 2012, an impairment charge of $1.5m on the long-lived assets including plants, building, machinery and equipments related to the animal vaccine production was made.

Overall, net loss attributable to stockholders for the fourth quarter of 2012 was $5.4m, or $0.10 per basic and diluted share, compared to a net income of $2.8m or $0.05 per basic and diluted share, for the same period in 2011.

So, now we turn to the full year results. Total revenue for the fiscal year ended December 31, 2012 was $48.6m, a decrease of 14.5% from $56.8m reported in 2011.

Excluding the revenue recognized on the government stockpiling of Panflu and Panflu.1 in 2010, sales of our regular products, Healive, Bilive and Anflu, mumps vaccine and RabEnd, increased by 38.6% to $48.6m in 2012 from $35.1m in 2011.

Gross profit margin for the year was 60.7% in 2012, a decline from 62.8% in 2011. When excluding the impact to the sales and cost of sales in both years by the Panflu and Panflu.1 government stockpiling products, gross margin of regular vaccine products actually increased to 63.7% in 2012 from 57.7% in 2011.

SG&A expenses in 2012 were $31.7m, compared to $22.4m in 2011. The increase in SG&A was largely due to an increase in G&A, both in selling expenses and general and administration expenses. The increase of G&A expense was due to the increased cost incurred on the validation of the facility in Changping and the preparation costs for the new GMP compliance for the existing facility in both Changping and Shangdi sites.

Research and development expenses for the 2012 increased to $17m from $9m in 2011. The increase was mainly due to expenses incurred in 2012 in connection with the EV71 phase III clinical trial.

Depreciation and amortization expenses in 2012 was $1.6m, compared to $1.4m in 2011. The higher depreciation in 2012 was mainly due to the additional depreciation on the property, plant, equipment at the Changping site.

The Company recorded loss on disposal impairment of $2.2m for the year in the operating expenses, in which $1.5m was for the animal vaccine production-related assets, and $0.5m was for human vaccine production-related assets.

For the total year, net loss attributable to stockholders in 2012 was $15.7m, or $0.29 per basic and diluted share, compared to a net loss of $800,000 or $0.02 per basic and diluted share in 2011.

Now, we come to the cash position. As of December end 2012, our cash balances totaled $90.9m, compared to $104.3m as of last year December 31, 2011. Net cash used in operating activities was $16.6m in 2012, primarily resulted from payment made for our EV71 clinical trial and validation cost for the manufacturing site and GMP preparation costs. Net cash used in investing activities was $16.2m, primarily because we made payment for the purchase of the property, plant and equipment to be installed at the Changping site. Net cash provided by financing activities was $17.3m in 2012.

At the end of the day, the Company maintained a strong cash balances, $90.9m by the end of December 31, 2012 despite the significant expenditure on the phase III clinical trial, EV71, and the investment in our production facilities. In order to commercialize other pipeline products, the Company may continue to explore new sources of financing when appropriate.

In closing, we want to point out that we include a second set of unaudited financial tables in today's press release to correct prior unaudited quarterly resulting in Q2, Q3 in 2012. The corrections are related to government grants, related to the purchase of equipment that should have been remained as deferred government grants.

The above concludes management highlights on the financials. So, operator, we will now take questions. Thank you.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Bin Li, Morgan Stanley.

Hi. Good evening. This is -- it's [Bella] calling behalf of Bin Li from Morgan Stanley. I have two questions. The first question is can management give us a little bit color for the 2013 outlook in term of the revenue growth and the net income. And what kind of -- the growth rate we will be seeing? And also what kind of growth driver we we'll be seeing in term of the product sale?

And the second question is regarding for the EV71. We are very pleased to see the positive progress of Sinovac EV71 clinical trial but could management give us a little overview of the competitive landscape and what other companies have developed the same vaccines and what kind of competitive advantages Sinovac has in terms of launching EV71 in terms of the timeline? Thank you.

So I will translate your question first and I will invite Mr. Yin to answer your question.

(Interpreted). So to answer your first question, because we don't expect any new products to be commercialized in 2013 therefore our sales team will keep to execute a similar strategy as they executed in last year in terms of selling our existing vaccines in the market. And therefore for the management we would expect to maintain the sales and to try to achieve the growth from the existing vaccines in 2013. And also after we complete clinical studies on EV71 we would expect R&D expenses in 2013 should be lower than the level that we reported for last year and therefore that we think from the loss position should be improved compared to last year.

And regarding the EV71 results, we believe that with a 95% efficacy rate which shows the vaccine has a very good efficacy profile and also we indirectly understood that the other two companies who are also developing EV71 vaccines also obtained a similar level of efficacy from their results. However, that none of us published the results yet but we think generally speaking all these three companies are at a similar stage of the development and we would expect everyone could be aligned in order to speed up the progress in terms of regulatory approval for this vaccine and then we could expect the vaccine can be commercialized as soon as we can.

Okay, thank you. If I can, can I have the other question? The question is regarding for the commercialization of the anti-flu in Mexico and what kind of sales contribution you expect and at what time?

(Interpreted). Actually for Mexico market we have spent quite a long time to pursue the regulator approval for commercializing the vaccine and recently we just obtained a license. And regarding the Mexico market, actually the tender for 2013 has been completed and granted in 2012 and that's actually the majority of Mexican market. But there are still some (inaudible) market opportunities therefore we don't expect a significant contribution to our total revenue from Mexican market this year.

Okay, thank you. That's all my questions. (Spoken in Chinese).

Our next question comes from the line of Yi Chen with Aegis Capital. Please proceed with your question.

Hi, thank you for taking my questions. My first question is what is Chinese government's current opinion on whether it is necessary to develop a vaccine for H7N9?

To translate Mr. Yin's answer to that question, actually Sinovac was engaged in developing vaccines against the potential pandemic of flu kind of viruses starting from 2004. At the time we were developing H5N1 vaccine but after many years we actually think we didn't obtain too much profit or revenues from these products but we think we actually get the platform and people were trained to do that. By the year of 2009 and 2010 H1N1 caused a very serious pandemic and Sinovac also lead the research to develop a vaccine and that actually gave the Company a good opportunity in terms of selling the vaccine and also to provide a vaccine stockpile for the government. And now there are new viruses within the flu family, the H7N9 epidemic, that actually provide the possibility for Sinovac to do the research on another kind of avian flu vaccines for humans.

(Interpreted). And as you remember, actually in last year we have completed the GMP certification for our brand new filling and packaging line on our new site and also our flu plant certification, GMP certification, was completed as well and we believe that Sinovac has the capability technically to develop a new type of avian flu vaccine for humans. However, there are big uncertainties of the epidemic situation and whether these viruses will come up to human-to-human transmission.

And maybe some of you have seen that the Company has claimed to the media that once we obtain the [verify] from either WHO or other flu laboratories we will immediately start to do the development of the vaccine and this partly is that we want to be a responsible company for the social society and also we think that even though there are some uncertainties that we would like to be ready once there is any good opportunities for us and we would expect that our shareholders and our friends could be closely watching -- monitoring the situation with us on how this epidemic would be developed in the next few months.

Okay. My second question is what is your expectation for SG&A expenses, R&D expenses in 2013?

Mr. Yin just roughly answered your question that because this relates to the information that we actually previously didn't disclose to the public we would expect that the R&D expenses comparing to last year should be lower because we don't have to spend that big amount of money on EV71 kind of clinical studies. But there are some other uncertainties like if we start to (inaudible) to develop the H7N9 vaccine, that part would not been included in our consideration when we are doing a budget for the Company yet. So generally speaking if no H7N9 the number should be lower, significantly lower.

So do you also expect the -- so you expect the SG&A expenses to be much lower in 2013 compared to 2012? Is that correct?

SG&A was that?

Yes, G&A.

(Interpreted). We didn't see any indicators to show that the SG&A could be significantly lower than last year so we expect SG&A should be similar to last year.

Okay, thank you for the answers.

You're welcome.

(Operator Instructions). Our next question comes from the line of [James Song], a private investor. Please proceed with your question.

Hi, Dr. Yin, congratulations to the progress in Mexico. My first question would be are there any potential for Mexico government to announce any public procurement for 2014 for Anflu sale to Mexico?

(Interpreted). This actually is the objective that we want to pursue because we spent quite a long time on obtaining the license. And as we explained earlier, normally the tender for next year would be granted in the prior year so we are currently working with our partner to make (inaudible) in order to participate. And if we can successfully win the tender and the sales could potentially be reported on 2014.

And actually Mr. Yin added to his answer that for overseas market, especially for flu vaccine, this is a kind of medium to long-term strategy because right now we are primarily selling flu vaccines in China and we are starting to have -- we are starting to expand -- to utilize our facilities to manufacture other types of flu vaccines like H5 or H1N1. And so adding other potential from overseas markets actually provides another opportunity for us to fully utilize our facilities to manufacture flu vaccines.

Got you. My second question would be what's the quality control improvement for EV71 vaccine? We have done lots of large-scale projects for Healive, for H5N9 -- sorry H5N1 and H1N1 so this time will we do better in quality control for EV71?

Sorry, are you asking better quality improvement?

For safety and for quality control for the vaccine thus we can sell in better marketing position.

Well, actually even though we believe that as a vaccine manufacturer Sinovac always puts the quality assurance and quality control as the most important task we need to follow -- but are you asking how we get the QC and QA improved for different products?

To change the question in another way, compared to competitors what would be the quality control for Sinovac?

Understood, understood.

Actually Mr. Yin provided an example with our EV71 vaccine and when we're doing the clinical studies the standards from different aspects of these clinical studies are in line with the international norm. And we actually spent quite a lot of effort on different [aspects] to evaluating the vaccine. And also Sinovac invests a lot in the pilot production phase to do a big amount of validation to prove the stability of the process. And also I add on that is that one part of the quality control is from the QC test but the other hand and also in order to maintain a good quality the GMP capability also would be very important. And once we start to design the new facilities, we are looking at a [highest] standard currently available in the international society. And we will -- and we think that this also provides another assurance for manufacturing a vaccine with good quality.

Good. Can I ask a couple more questions?

Sure, please?

For EV71 vaccine in Vietnam, Cambodia and other countries like Egypt, the announcement each year for children deaths, I believe all those countries are praying for help from companies like us. Do we have any plan to push to a neighborhood country first in 2014 after the Chinese commercialization?

(Interpreted). We were also aware of the epidemic situation in other neighboring countries. However for vaccine sales in every other country we need to go through a very complicated regulatory approval process. Sometimes they may also require to do the local clinical studies and this can only be done after our vaccine has been commercialized in China. And also our primary market in China and we think the potential is very big at the moment and actually if we compare the potential market in terms of population, maybe any one province population will be even bigger than some other countries very close to us. Therefore we think our most important task is to commercialize EV71 in China which we are supplying the vaccine to this whole market, potentially it could be 80m population in China for the children under five years old.

I see. My last question would be finance related. Currently the depreciation and amortization is only CNY0.5m per quarter. Do you have any estimation for 2013 after the Changping facility getting to production for packaging facility, etc.?

Well, I think that's a good question as what you said, when we came up with the production and installing more equipment in the future we expect this number will be more than the number this year because the way the Company is developing and enlarging the size of the Changping facilities.

I see. Thanks and have a good day. Bye.

Thank you.

Thank you.

(Operator Instructions). It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Great, thank you Operator. We all really appreciate that every one of you to joining us today and we actually expect to share Sinovac's excitement of our new development in the near future with all of you and thank you very much.

Thank you.

Thank you.

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

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.