Sinovac Biotech Ltd (SVA) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech first-quarter 2013 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. 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 that are not historical facts, including statements about Sinovac's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Sinovac does not undertake any obligation to update any forward-looking statements, except as required under applicable laws.

On the call today we have Dr. Weidong Yin, CEO, Mr. Danny Chung, Sinovac's CFO and Ms. Helen Yang, Investor Relations Director. I will now turn over the line 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 and Danny Chung, our CFO will then provide the financial review.

So firstly, let me start with the sales performance of this quarter. We believe that we were doing well on the sales activity in the first quarter 2013. We reported a total of $10m revenue just now, which is about 68% growth year over year. The sales growth was primarily driven by the sales of Healive, our inactivated Hepatitis A vaccine which increased over 280% year over year. In the first quarter, the demand of our Hepatitis A vaccine was very strong and the competition landscape for the inactivated Hepatitis A vaccine was developed to our favor. We are pleased with the high recognition of our inactivated Hepatitis A vaccine for its good quality by the user when deciding to replace the free, live, attenuated Hep A vaccine with ours.

In addition to the growth from Healive, our mumps vaccine, manufactured by the Dalian site, was commercially launched to the market in this quarter which also contributed to the sales growth in this quarter. The growth was partly offset by the decrease of Bilive sales comparing to the same period last year which was impacted by the measles vaccination campaign implemented by the government in the first quarter, which is conflicting to the sales of Bilive because of that activity taking majority of the time and the manpower of the vaccine distribution channel which is the Center for Disease Control.

As our sales increased, our gross profit margin was improved and funding our R&D was largely reduced which resulted in a lower loss position in this quarter comparing to the same period of last year. Our CFO will discuss the financials in detail. I just want to highlight that in the first quarter 2013 net loss attributable to stockholders in the first quarter of 2013 was $2m or $0.04 per basic and diluted share compared to a net loss of $5.6m or $0.1 per basic and diluted share for the same quarter of last year.

After discussing the existing vaccine business, I would like to turn over to the near-term opportunities. As you may know, we have completed a Phase III clinical trial on our proprietary EV71 vaccine candidate which concluded with an approximately 95% efficacy rate against hand, foot and mouth disease caused by EV71. The trial was conducted among 10,000 healthy volunteers aged from six to 35 months old. The safety result showed no significant differences between the vaccine group and the control group and there is no rare, severe, adverse reaction reported in the trial. And both GMT level and seroconversion rate showed the vaccine group can effectively -- showed the vaccine can effectively induce immune response after immunization on the vaccine group.

Our next step is to file the new drug application with the China Food and Drug Administration to file for the new drug certificate and the production license for this vaccine.

The Endovirus71 or EV71 vaccine remains to be a significant unmet medical need across China and Asia based on the widespread outbreak of hand, foot and mouth disease caused by EV71. And it's also a significant pediatric mortality rate. In 2012 over 2m cases were reported in China and over 500 fatal cases published by the China National Health and Family Planning Commission which is previously named China Ministry of Health. Most of the severe cases were caused by EV71 infection and usually spring is a peak outbreak season in China for hand, foot and mouth disease caused by EV71. In the first four months in China there were total over 350,000 reported cases of hand, foot and mouth diseases with 57 fatal -- fatalities.

We also recently learned from the public information that through our outbreak of hand, foot and mouth disease had a secondary [pool] in Hong Kong affecting students aged between 13 and 16 which showed an outbreak trend which is expanded in the population age. And in China one cohort represent about 15m to 17m population. And it was studied previously on the epidemic situation that majority of the cases reported are among the group under five years old and most of the severe cases were reported under three years old.

As we indicated previously, the EV71 vaccine production facility at our Changping site is ready for GMP inspection. Once the new drug certificate and production license are granted, we can apply for the GMP certification in order to commercialize the product which we expect to complete all these regulatory approvals in the year of 2014.

Sinovac is also committed to advance our other vaccine pipeline development program. In January, we filed an IND which is a clinical trial application for our varicella vaccine. And, as a reminder, we previously filed an IND for our pneumococcal vaccine as well as a rubella vaccine. We recently received the notice from CFDA to submit supplementary documents for the pneumococcal vaccine and we are now in the progress of preparing and submitting required information to the Central government.

On the manufacturing aspect, based on China's new GMP regulation, in order to be able to carry on vaccine production, every vaccine manufacturer has to pass the GMP certification under the new guideline. And here we are very happy to announce that after a whole year preparation and validation by our quality and production team on the commercial production front, we successfully passed the on-site inspection on all commercial production facilities in Beijing at one time and officially received the GMP certificate covering all of our commercial production plant on April 18, 2013.

And finally, I would like to turning over to the newly emerged H7N9 influenza in China. Influenza A, or H7N9 is one of a subgroup of influenza viruses that normally circulate among birds. This virus had not been seen in people until recently. However human infection has now been detected in China since April this year. According to the publicly available data, as of May 24, 2013 there are total 131 reported H7N9 infectious cases which included 36 deaths. Currently, Sinovac is paying close attention to the epidemic situation of H7N9 influenza and meanwhile preparing for the development of a H7N9 vaccine candidate. Currently we are expecting the H7N9 [varices] provided for the potential manufacturing of the vaccine.

And now I would like to turn over the call to Danny to review the financial results for the first quarter 2013. Danny, please.

Hi. Thanks, Helen. It is a great opportunity for me to introduce the financial highlights and summary for the first quarter of 2013. The sales is analyzed in the attached table. You can refer to the figures inside the table.

The total sales for the first quarter 2013 increased by 68% to $10.1m from $6m in the first quarter of prior year. The total sales growth was primarily driven by sales increase in Healive which was due to the favorable competition landscape. The mumps vaccine manufactured by our Dalian site was firstly commercialized in the current first quarter. That also contributed to the total sales growth. The total sales growth was partly offset by the decrease of Bilive sales.

For gross profit, gross profit for the first quarter 2013 increased by 90% to $7.1m from $3.7m in the same period of 2012. Gross profit margin percentage increased to 70% from 62% in 2012 with Healive sales representing 61% of the current quarter sales compared to 27% in the same period of last year. The main reasons for the increase of gross profit margin in the first quarter 2013 were the lower unit cost of Healive resulted from higher production volume in response to increased sales and also the higher sales mix of Healive vaccine in syringe sold at premium price.

Selling and G&A expenses for the first quarter of this year were $6.4m compared to $4.3m in the same period of last year. SG&A expenses as a percentage of the sales in first quarter were 63%, compared to 72% for the same quarter of last year. The increase in SG&A expenses was mainly due to increased selling activities and costs that resulted in sales increases in Hepatitis A and new mumps vaccines. And also we have material and labor costs mainly for the ongoing validation activities to prepare ourselves for GMP certification for the EV71 manufacturing facilities in the Changping site. And also we have higher operating, amortization and utility cost generally in current quarter for the Changping site because the site was under renovation in same period of prior year.

R&D expenses in the first quarter of this year were $1.8m, a significant decrease from $7.3m in the same period of last year because the EV71 vaccine Phase III trial was approaching to the end stage in current quarter, but it was just started in the same period of last year. Also, since mumps vaccine was commercialized, we do not have any research and development expenses in current quarter, but the vaccine was under development in the same quarter of last year.

Depreciation of plant, property and equipment and amortization of licenses and permits for this quarter was $0.8m compared to $0.3m for the same period of last year. Depreciation expenses increased because more assets were put into service at the Changping facility since the last quarter of last year.

Net loss attributable to stockholders in the first quarter of 2013 was $2m, or $0.04 per basic and diluted share, compared to a net loss of $5.6m, or $0.1 per basic and diluted share, for the same quarter of last year.

Then I turn to the cash position. As of the quarter end by March, our total cash and cash equivalents totaled $91.6m compared to $91.2m as of December last year. Net cash used in operating activities was $5.6m in the first quarter.

Net cash of $2.1m was used in investment activities, mainly used for payment and prepayment for acquiring the property, plant and equipment in Changping site.

Net cash provided by financing activities was $8m in the first quarter, including the loan proceeds of $7.5m drawn under credit facilities already in place supporting our EV71 vaccine commercialization and daily operations. When appropriate, the Company will seek new sources of financing to commercialize other pipeline products.

So that ends the financial highlight and summary. So I turn back to the -- to Helen and the operator.

Yes, that actually concludes management's prepared remarks. Operator we are now taking questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Isabella Zhao with Morgan Stanley. Please proceed with your question.

Hi, good evening. This is Isabella on behalf of Bin Li from Morgan Stanley. First question is regarding the process of EV71 vaccine application. Can management give us more color when do you expect to file the new drug application and when we should look at the sales begin to contribute. And also how much is the sales we should look at in [2004] if it's successful launched.

And my other question is regarding for the mumps vaccine sales expectation for this year. Do we have a similar sales figure for the next quarters compared to the 1Q? That's my first question. Thank you.

Thank you Ms. Zhao. I will firstly translate your question and then I will invite Mr. Yin to answer your question.

(Spoken in Chinese).

To answer your first question, management is actively working on the new drug application. And also, as we mentioned several times, that we're also preparing in parallel for our commercial plan for the EV71 vaccine. And Mr. Yin described that there are two uncertainties that may impact the entire reviewing timing for the EV71 regulatory approval process. The first one is that actually under the control by the CFDA, that how much time they are going to spend on reviewing the entire file. And on the other hand, we believe that the outbreak situation, the epidemic situation if it is quite serious, we think that may be helpful to speed up the process for getting the approval. And management will do whatever we can to submit the new drug application as soon as we can.

(Spoken in Chinese).

(Interpreted) So regarding to the commercial sales of the vaccine, our sales and marketing team has already made a field version of pricing and the targeted territory for commercializing this vaccine. And we think that -- generally speaking, all these terms are not fixed yet but we think that because we're starting from the private-pay market, so we think the sales volume may start from a low level and it will go up step by step. And also from the pricing point of view, we think we will start at a relatively high price and we will start with the private-pay market first. And then after a few years we may consider to provide it to the public-pay market. So we think maybe at first we will focus on those territories that have high epidemic situation with this disease.

So, actually we have seen a very good result from the sales of -- sales growth for the Hepatitis A vaccine when the sales team is executing the sales strategy focusing on the private-pay market. And management, of course, expect to maintain the similar level of growth next quarter. But the management provided guidance for the forward-looking -- for the following quarters to the public. So we are just hoping that we are expecting to provide resources and trying to maintain the similar level of growth.

Okay, thank you. My next question is regarding for the gross margin. I know in this quarter gross margin was helped with higher Hepatitis A sales. What we're going to look at the gross margin for next quarter or for the whole year.

Well, I think that depends on how we're going to execute the sales strategy. But at this point of time, if the sales demand is keeping like this level, obviously we expect a continued strong in the gross margin.

Okay.

In reference to that, I think what Danny described for the next quarter is absolutely correct. But I think you are aware that normally the flu vaccine gross margin is relatively lower comparing to the Hepatitis vaccine. And the flu vaccine sales normally will be recorded in the second half of the year. So generally speaking we expect the gross margin of the Company in the second half will be lower compared to the first half.

Okay. Yes. That's all my questions. Thank you.

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

Hi. Thank you for taking my question. My first question is can you express some comments as to why the sales of Healive has been sequentially decreasing for the past few quarters?

(Interpreted). So normally when we are considering about the growth -- still growth, we are looking at the Bilive and Healive, a group of products because they are sharing the same Hepatitis A vaccine. And we think that combining the two, we think the total sales of Healive and Bilive still have the strong growth comparing the same periods last year. And we believe that the success of Healive is a very good execution on the replacement strategy that we implemented in this first quarter which, to take our Healive vaccine in the private=pay market to replace the live attenuated vaccine in the EPI market.

Okay. Thanks. My second question is do you expect the SG&A expense to -- as a percentage of sales to remain at roughly the same level going forward for the rest of the year?

Well, basically, in terms of the amount, we definitely will have increased SG&A in terms of the depreciation expense increases and also the facility cost in Changping, we've also added to the ongoing increase in the SG&A. So in terms of the amount, I can see that that is happening.

Okay. Thank you.

(Operator Instructions). Our next question comes from the line of John Gregory with SJ Strategic. Please proceed with your question.

Thank you. I wonder if you could answer this question. Here in the US, several financial writers have tried to say that they think EV71 vaccine will not be that big of a revenue-generating product. But obviously you all think otherwise. And it might have something to do with the fact that there isn't really any hand, foot or mouth disease in the US. But how does hand, foot and mouth disease affect China, the country of China? Obviously this must be of great concern. So how does it affect the daily life when this disease is becoming a problem?

Sure. Thanks, John. I will translate the question to Mr. Yin.

So firstly, Mr. Yin thinks this is a very good question because when we are looking at the epidemiology of this hand, foot and mouth disease in US and China, we found these significantly different. In China, there are a great number of young children aged 1 or 2 years old who will develop hand, foot and mouth disease. And most of the severe cases or symptoms develop symptoms like meningitis. And when normally during -- when the children are getting -- a lot of children get infected and the parents trying to take the kids to be treated in hospital, but right now in China, normally the case is that they -- the children may not be able to have the opportunity to see a doctor and get good treatment due to the lack of resources to provide -- to cover the whole group getting infected in China. That's why we still have a high level of reported cases and also the fatalities.

And also right now in China the parents have a very great concern about their children who are doing a lot of socializing in the kindergartens or in school-age that get infected. So this is a description on the real situation in China.

And in addition to that, based on the clinical study and epidemiology study done in China on these hand, foot and mouth disease outbreaks, over 80% to 90% of the severe cases were actually caused by EV71 infection. And many of these kids were infected and develop serious symptoms, like high fever and meningitis. And also there is a number which is calculated by the experts showing that the median of the number of days from the kids get infected until the kid dies is only 3.5 days. That's how it causes a lot of concern among parents.

And also in recent years, it's very -- it's always the case that if the hand, foot and mouth cases were found in preschool or kindergarten, and some of the time that these schools just being closed down for a period of time through this kind of passive way of stop the transmission. And this kind of situation happening regularly in every city and every year. And also you know that in China there is a one child policy. That's why the parents, government and school are trying to provide good healthcare and living conditions to the kid. That's why -- to control the disease outbreak of hand, foot and mouth disease is becoming a very big issue among the -- in society.

And before we commence our Phase 1 clinical studies on EV71 vaccine, we had a conference call with the expert from US FDA particularly about the trial and the epidemic situation of hand, foot and mouth disease in China. And also we had held a similar type of discussion with big pharma based in US and Europe. However, there are also comments similar to what you said, that in US there is -- the symptoms only develop mild symptoms, not very serious. And there is no find-out of a group of children being developed with severe symptoms.

However, we think there is no evidence showing that this virus will not be transmitted from different countries or among different type of population. And we believe that the China demand is the primary focus for now. But potentially we think there will be opportunities for using this vaccine abroad, outside of China.

Well, it would just seem like to me, when you would have several schools closed down because somebody got infected or somebody died, that the demand just in the private sector would be overwhelming. I know if that happened in the US it would be overwhelming, the doctors that would want the vaccines. And one of the things that I don't fully understand is with this type of infection going on and with children being killed, why wouldn't the Chinese FDA fast-track this thing, especially after the fantastic Phase 3 results you've got.

Sure.

(Interpreted). So just as what you expected, actually Sinovac, as a vaccine developer, we of course want to move -- want to advance the development as much as we can to control the disease epidemic. And at the same time the previous MOH, the Ministry of Public Health, are also very supportive on the vaccine development, as well as the FDA. And also the Ministry of Science and Technology even provides the funding to support the vaccine development. That's why we can complete the three phases of clinical studies within a relatively short period of time.

So this, as what you said on the -- no matter from us or from the regulators, everyone putting a lot of support in trying to have a vaccine to be available as soon as we can.

Okay. Just one more question, and that's in regards to the new bird flu epidemic. Is there some magic number of cases, like 200 or some magic number of deaths, like 50, that's going to trigger you working on this, whether the government gives you an order or not for the private pay sector? What will be the decision that is the turn-on process to make this bird flu vaccine?

(Interpreted). Regarding to the bird flu, actually the Company, it's already initiated a planning for a possible development of H7N9 vaccine. And we also have close communication with the government organizations in the science and technology and health industry. And we think that the research and development of the vaccine could be similar to the technology that we used for H5N1, the avian flu vaccine for humans. We could possibly try split viral technology or whole virus technology, either to add the adjuvant or without adjuvant.

And right now we have seen that the total number of infections with H7N9 is over 100 cases within a few months, which is already more than the H5N1 infection within years in the past time. So we think the concern on H7N9 seems to be more serious or bigger than the H5N1. But right now, as a matter of fact, there is no order being placed by government yet.

And we didn't make a final decision whether we are going to commercial manufacture this vaccine. But we think the Company can make this effort firstly on the development of this vaccine, but we think this development won't cost too much investment because the Company itself has the technology platform and our teams train to develop a similar type of vaccine.

So we actually analyzed a different type of scenario for the possible epidemic situation of H7N9. It could develop as serious as the H1N1 back to 2009. And it's also possible to be disappeared suddenly like SARS 10 years ago or like H5N1 with a few number of infections among people but no human-to-human transmission being confirmed. However, no matter which type of scenario really happens, we believe that right now Sinovac is more mature comparing to how we were when we were facing the previous type of development on H1, SARS and H5. And we believe that we have more experience of getting benefit from these type of opportunities.

Okay. Just last question, the mumps vaccine, where you did 0.5m in the quarter, is that what you were expecting to do in the first quarter or were you surprised by that good number?

Sure.

(Interpreted). So actually for mumps vaccine, the scale of a potential level of sales is relatively small comparing to our other vaccine types. And in China these vaccines were used to immunize the people living in the areas where having the outbreaks. And because this is the first year for us to do the commercial launch of this vaccine, we think we are more focused to stabilize the commercial production in a large scale and also trying to test the water of expanding the sales. Therefore we don't have a very aggressive expectation of the revenue generating from mumps for this year. That's why we didn't have a projection as well.

Okay. Thank you.

You're welcome.

Thank you. 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.

Thank you. Once again we thank you for everyone's participation. And we will actually report good development progress made by the Company in the next [four] weeks. 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.