Sinovac Biotech Ltd (SVA) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech Limited, second quarter, 2013, earnings conference call. At this time, all participants are in 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, planned, 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, Ms. Nan Wang, Sinovac's Chief Financial Officer, and Ms. Helen Yang, Investor Relations Director.

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. And also as you may know, due to our prior announcement, that our Vice President, Ms. Nan Wang, was appointed to be the Company's Chief Financial Officer, after the resignation of Danny Chung.

I will provide the overview of the financial [part], on her behalf, as well, and then we'll invite both Mr. Yin and Ms. Wang to answer your questions as needed.

Let me start with the sales performance first. We're very pleased with the sales performance in the second quarter, which increased, year over year, by 86.4%, driven by the robust hepatitis vaccine sales.

In the second quarter, both Hepatitis A vaccines and Hepatitis A and B vaccines contributed approximately 95% of the total revenues. And Healive, the Hep A vaccine, sales grew 97% and Bilive, the combined A and B vaccine grew 58%.

The growth of [both] products mainly occurred in the private-pay market, for this quarter. The demand for both Hepatitis A vaccine and combined A and B vaccine, continues to be strong, under the favorable competitive environment in China.

And also we could see the sales across the public market, private market and distributors market, are increasing in the first half of this year, which demonstrated the successful implementation of our diversified market strategy, as we deploy the customized sales strategy, targeting each segment. We expect the success of the new sales strategy to benefit future sales of EV71 vaccine, which is expected to be launched in 2014.

And today we've got good news as well, from the markets, that Sinovac was selected as one of the four suppliers by the Beijing Health Bureau, to supply the seasonal influenza vaccine to the citizens of Beijing, again. This year, the Beijing Health Bureau plans to order up to a total of 1.8 million doses of seasonal flu vaccine, for the vaccination campaign for the senior citizens and schoolchildren.

The public notification of the bidding result is published online today, and will last for seven working days, after which the official agreement will be signed to supply the vaccines upon demand.

After discussing the existing vaccine sales, I would now turn to the near-term opportunity, which is our proprietary EV71 vaccine candidate. We filed new drug application to Beijing Drug Administration this past May. And Beijing Drug Administration completed the site inspections on all of the clinical sites, in both Jiangsu province and Guangxi province, where we conduct the Phase I, II and III clinical studies on these vaccines.

The inspection opinion has been issued and on July 30, 2013, the registration documentations were submitted to and officially accepted by the Center for Drug Evaluation, for the technical review of this vaccine.

The Enterovirus 71 vaccine remains to be a significant unmet medical needs across China, based on the widespread outbreak of Hand, Foot and Mouth Disease, caused by EV71. In the first six months of 2013, totaled over 900,000 cases of Hand, Foot and Mouth Disease, were reported, with 156 fatalities.

Currently, our dedicated EV71 production plant in Changping site, is ready for the inspection. And we're on track to launch the EV71 vaccine, after we receive the required approvals anticipated in 2014, to provide a solution to address these unmet medical needs, as no treatment and prevention options exist for this highly contagious disease, impacting children in China and the surrounding countries.

The phase II clinical result for Sinovac's proprietary EV71 vaccine was first published online on August 6, 2013 in the Journal of Infectious Diseases. This publication is considered to be the premier global journal for original research on infectious diseases. The paper is entitled Immunogenicity, Safety and Immune Persistence of a Novel Inactivated Human Enterovirus 71, A Phase II Randomized, Double-Blind Placebo Controlled Trial.

As we are continuing to advance the development of our adult pipeline candidates, the Company recently initiated research and development program for a proprietary H7N9 vaccine. And according to WHO as of August 12, this year total of 135 H7N9 human infectious cases were reported, with 44 fatalities.

Although the epidemic situation of H7N9 in China in the past few months it's still limited, one suspected human-to-human transmission case was reported in Shanxu province of China, and this demonstrates the risk of potential risk of human-to-human transmission still exists. Therefore, our development project is being carried out as planned.

And then let's turn to the financial review for the second quarter. As outlined in our quarterly release, total sales increases by 86.4% to $17.5 million in the second quarter of 2013, from $9.4 million in the second quarter of 2012.

Gross profit increased by 70.1% to $13.6 million for the second quarter of 2013, from $8 million in the same period 2012. Gross margin was 77.9% in the second quarter of this year compared to 85.3% same period of last year. Excluding impact of H5N1 inventory provision of $0.2, the gross margin was 79% in second quarter of this year. The decline in gross margin was affected by the sales of different product mix with different level of gross margin.

And selling, general and administrative expenses for the second quarter of 2013 were $8.3 million compared to $6.7 million in the same period of last year. Selling expenses as a percentage of second quarter 2013 sales was 32%, compared to 38.9% during the second quarter of the prior year. The decrease in selling expense as a percentage of revenue was mainly due to the increase of sales team's productivity.

The general and administrative expenses for the second quarter of 2013 decreased to $2.7 million from $3.1 million in the second quarter of 2012. The decrease was mainly due to the effect that the bonuses paid out or to be paid out were recorded against a previously-accrued liability account, rather than charged to expenses. And this had effect of partially offsetting increased G&A resulting from the higher operating cost, because the Company's Changping site is now operational comparing to the situation in first half of last year.

A part of the operating cost increase was related also to the ongoing validation activities on the manufacturing facilities in support of the EV71 vaccine, for which the NDA, the New Drug Application is currently under review.

The research and development expenses in the second quarter of 2013 were $2 million, a decrease of $4.7 million in the same period of 2012. The lower R&D expenses in the current quarter were attributable to the completion of the Phase III studies of the EV71's vaccine candidates in the first quarter of 2013. The R&D activity in the second quarter focused on the other vaccine candidates in the Company's pipeline.

And depreciation of property, plant and equipment and amortization of licenses and permits for the second quarter of 2013 were $0.5 million comparing to $0.3 million for the same period of last year. Depreciation increased because more assets were in service at the Changping site as compared to the second quarter of last year.

Net income attributable to common stockholders was $1.3 million, or $0.02 per basic and diluted share for the second quarter of this year, compared to a net loss attributable to common stockholders of $1.6 million or $0.03 per basic and diluted share for the second quarter 2012.

And excluding the impact of the bonuses revision of $1.6 million in this quarter, which was paid out or to be paid out from a previously-accrued liability account, rather than charged to expenses, the net loss of the second quarter of 2013 would approximately be $0.3 million or $0.01 per basic and diluted share.

And this concludes the management statement. And, operator, we can now take questions. Thank you.

(Operator Instructions). [Isabella Zhao], Morgan Stanley

First of all, I want to congratulations for very good quarter. (Spoken in foreign language).

I will translate the question into English. My first question is I want to ask Mr. Yin to comment the competitive landscape for the Hepatitis A and Hepatitis B vaccine. And what have you done differently in the past two quarters to grow the sales?

Number two is the sales outlook for the second half for the flu vaccine? Thank you.

(Spoken in foreign language).

So to answer your question, Mr. Yin, firstly, thank you for asking the question in Chinese.

Mr. Yin, firstly, answer your first question regarding to what kind of Sinovac in order to achieve the high sales growth in the first half. Mr. Yin says, actually, the Hepatitis vaccine market does not have any material change in terms of the structure of the player.

However, previously our key competitor, GlaxoSmithKline, they mainly supply their Hepatitis vaccine to the premium market. And their product sales is limited in this year, because their inventory loss is about to be expired. And when Sinovac -- executing our own sales marketing strategy, we are also entering into part of their market as well.

And, actually, the current market strategy for marketing the Hepatitis vaccine was made one year ago, and we are having a customized strategy targeting different market, as well as providing different diversified presentation of those vaccines in vial and pre-sales arranged to target different market segments.

And we believe that the combination of Hepatitis A vaccine and Hepatitis A and B vaccine in the portfolio are complementary to each other, which helps us to strengthen our market position in Chinese Hepatitis vaccine market. And we could, clearly, see that we are not only executing the sales strategy in a private-pay market in past -- as what we did in the past. But, at same time, we are also executing the marketing strategy through a sales -- through the third party, we call distributors.

And also, we have seen that the sales expansion in the public market as well in the first half. For example, the province of Jiangsu actually having a pretty big population size, and we enter into this market to supply the inactivated Hepatitis A vaccine to the EPI market and we're having about half of the market share.

And you combine all these above mentioned factors to, actually, achieve the increased order sales growth of both Hepatitis A and Hepatitis A and B vaccine.

And I will invite Mr. Yin to answer your second question.

(Spoken in foreign language).

And regarding to the influenza vaccine market, actually, the competitive landscape was [not] automatically changed to the previous years. The only one change might happen is that the timing of launching the first batch of flu vaccines to the market is expected to be earlier than the previous flu seasons, because it is earlier to obtain the virus strain and to submit for the first spot release application to the FDA, therefore. that we expecting an early launch of this vaccine in this year.

And also, we have some market information that some of the key competitors within the flu market may adjusting their supply strategies, because, in the past, some of the strong players want to supply more in order to get a market share. But, at this moment, this is not for sure, we are expecting to see the batch release data in the coming month.

And for Sinovac we are still maintain a consistent strategy of selling our flu vaccine. And we believe that a good result of Hepatitis A vaccine and Hep, A and B vaccine, in the first half, will allow us to spend more effort on flu vaccines in the second half.

And, right now, our sales team is actively preparing all the commercialization of flu vaccines in this season. And, for us, this year we don't expect to increase the number of vaccines delivered to be dramatically increased compared to last year.

However, our purpose is to decrease the level of product return in this year comparing to the prior year, as you may know that flu vaccine can only be used for one year due to the change of virus strains. Therefore, all the vaccines is not being used on human or not immunized to human, they will be either returned and the product life on the inventory can only be destroyed. That also incurs additional costs for the Company and, therefore, this is how we want to improve the management and improve the profitability of flu vaccines franchise.

And also the good news we obtain is that Sinovac won the tender of Beijing flu market. However, that right now in China there are only one city, Beijing, to provide a public market opportunities for flu. And we are expecting more cities or provinces may adopt these similar strategies and, at the time, we would expect the market for flu will expand.

And this is Mr. Yin's answer to your question.

Thank you. If I can ask another question, if I may. Can you comment -- either Helen or Miss Wang, comment on the margin trend in the second half of the year, especially giving the fact the gross margin has been trending up over the past two quarters? (Spoken in foreign language).

Thank you for your question; let me just answer it directly. Because in the first half the vaccine we sold are only Hepatitis A and Hepatitis A and B vaccine, and I believe most of you are aware that the gross margin of these two vaccines are pretty high, which is around 70% and 80%.

However, that -- in the second half of this year we would start selling flu related vaccines. And we expect a lower gross margin attached to flu vaccines may occur. And if the flu vaccine sales contribute more shares in the total revenue, we would expect the overall gross margin might be decreased comparing to the first half.

And also, for your information, we obtain an order H5N1 vaccine two years ago, and that is under a government stockpiling program. And we would expect to recognize about RMB20 million revenue in the third quarter, and this, due to the expiry -- after the vaccines are expired. And we also expect a lower gross margin, which is about around 50% of this amount of revenue. And if these will be included in the sales in Q3, we would expect the gross margin of the third quarter will be lower compared to the first half.

Okay, thank you. That's all my questions. Congratulations for a good quarter again. Thank you.

Thank you.

Yi Chen, Aegis Capital.

My first question is, first, sales this quarter; how much sales comes from the public market percentage-wise and how much is from the private market?

You mean in this quarter?

Yes.

We have seen about -- you mean the sales growth or the contribution of the revenue from each market segment?

The contribution of revenue.

Contribution. Sure, in the second quarter, it's about 90% of the revenue coming from the private-pay market, but the rates are -- overseas market is only 1%. And rest of them are the public market.

Okay. My second question is how many people do you have currently in your sales force? And do you -- will you recruit more sales force once you get the EV71 vaccine approval?

I would like to invite Mr. Yin to answer the question. (Spoken in foreign language)

(interpreted) Right now, there are about 140 members in our sales team and, as we are expecting the commercialization of EV71 vaccine next year, we plan to start organize the preparations for commercializing these vaccines in the fourth quarter. And we would expect the increase of number of sales rep in the team will be in line with the sales activities for the market demand of EV71 vaccine after it's commercialized. So, the Company internally has a plan and we will execute it when we seeing the dynamic situation on the market.

Thanks. My next question is do you expect your 2013 hepatitis vaccine sales to be comparably the same or maybe a little bit gross compared to the 2012 revenue?

(interpreted) We would expect a -- overall, the total revenue of Hepatitis vaccine will be higher compared to last year. And particularly for the first half, that all of the growth are contributed by the Hepatitis A vaccine.

Thank you. My next question is looking -- for the Hand, Foot and Mouth Disease, looking at the number of infection cases and also the number of deaths cases for the first half of 2013 compared to the first half of 2012 both numbers are lower. So I want to hear your comments on whether you see any trend in this or if there is any trend in your opinion.

I will invite Mr. Yin to answer question. (Spoken in foreign language).

(Spoken in foreign language).

Mr. Yin said he does not believe that the increase of the number of reported cases has any meaningful for the epidemic situation of the entire disease in China, because what we have seen in China that every month there were reported cases from January to May. And also we have seen the reported cases from elsewhere. Therefore, that we still think that the disease outbreak still surrounds us, and that's why we think the providing a vaccine to resolve the (inaudible) treatment is a very needed solution.

Thank you. My final question is do you expect the EV71 vaccine to be approved by the end of 2013? Thank you.

(Spoken in foreign language).

Mr. Yin explained a few factors may affecting the timeline of getting this vaccine approved. Firstly, we think from technically speaking, we have successfully completed Phase III clinical studies and the submission of registration documents were completed as well. Therefore, that we don't believe there is any technical hurdle of getting this vaccine approved or we could say that it is highly possible for the vaccine to be finally approved to be commercialized.

And, on the other hand, we believe that the disease epidemic situation will provide an incentive to the government to approve the vaccine. And, given the current either the reported cases or the epidemic situation we have learned from the industry, we still believe the government should be very incentivized to approve this vaccine.

But the third factor may affect the timing is the organizational structure change within the CFDA and this is [hotly] to be managed. But we believe that this vaccine is quite important relate to the public health issues in China and we would expect the SFDA should take an active and a positive view of approving this vaccine.

And, of course, the management would expect, would hope, the vaccine can be approved by the end of the year, but there are uncertainties. And we will do whatever we can in order to get the approval done as soon as we can. However, that we can't have any control on that.

Thank you very much for your answers.

Sure.

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

First, congratulations to the management on developing a unique vaccine company, that really seems to be getting sales growth and traction with its business model. I've got a couple of questions.

Most of us have read recently about the Chinese Government cracking down on big pharmaceutical companies in China about some of their marketing practices to doctors, which the government seems to suggest borders on bribery. I note that two of the companies are GSK and Sanofi, which, I think, both of these companies sell vaccines in China. Does management think that the pressure being put on these big pharma companies in China will, actually, benefit Sinovac's revenues in the future, since these companies are your competitors?

(Spoken in foreign language).

So Mr. Yin answers your question that because these issues are happening for the other companies, he's not willing to comment on those cases and he's not willing to comment on whether Sinovac getting benefit, because of that.

But the comment Mr. Yin wants to make is that the entire Chinese vaccine market is high -- is growing fast. And within this, for the high grow, there must be some uncertainties.

What the management within Sinovac can do is that we will lead the Company to get it benefited for the business, to be benefited on every kind of opportunities we can leverage. But, at the same time, we need to make sure that we are having a good compliance system, in order to eliminate the other risks that might happen during conducting the business.

Okay. I realize that there are some other companies that are going after the Hand, Foot and Mouth Disease vaccine, other Chinese companies, but it seems like Sinovac is on a faster track, from my research, at getting approval first before any other Chinese vaccine company. Does management have any insight on that as far as where they stand in the queue compared to the other people trying to get approval of this vaccine?

Thank you for your question. I will translate to Mr. Yin and I will ask him to answer.

(Spoken in foreign language).

Actually, there are three companies who will complete their Phase III clinical studies and the NDA were submitted for all three. So these three companies are at a similar stage.

We don't see we have a very clear advantage compared to other two peers to get EV71 vaccine approved before them. But we believe that, as a goal of the management team and also to provide a good return to our dear investors, we will do whatever we can to get the approval as soon as we can.

Another point Mr. Weidong made to this question is that this vaccine will never been studied by any other entities outside of China in the past. We believe that having three companies, who are conducting the research on this vaccine, can actually demonstrate the results of everyone to provide a confidence to the public and also for the authorities, in order to approve this vaccine more smoothly.

And, on the other hand, this vaccine has never been used on humans ever in the past. And our purpose is not to commercialize it as the first Company; instead, we want to collaborate with the other two peers to enlarge the entire market size of the vaccine, in order to control the disease outbreak in China and also in other countries.

Okay. Just my final question is I did not think the mumps vaccine was supposed to be that big of a revenue product. Is management surprised by how well they are selling that product?

So your question is that you think the mumps vaccine sales is higher than you expected?

Yes, I thought it was -- I didn't think you all thought it was going to be that big of a product. It looks like you sold almost $1 million in the quarter. Is that what you were expecting?

(Spoken in foreign language).

And for the mumps vaccine, we actually -- this vaccine normally compared with our other vaccine, may bring relatively lower level of revenue. And internally, we have a budget and we think the sales we have made in first half demonstrate that the Chinese market has a big potential that these vaccine sales address some regional outbreak of mumps in China, but we still think, compared to the other vaccines, they are relatively small.

However, that we think having these vaccine sales on the market, they can actually give us a good foundation for developing a good combination of vaccines to combine mumps with other life attenuated vaccines, which are manufactured by our Dalian site. And these actually moved the Dalian company from an R&D space to an entire company with the commercial production which we think is more meaningful than increase the limited sales of mumps.

Okay. Thank you.

You're welcome.

Thank you. Ms. Yang, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you. We are very glad to share these quarterly results with all of you.

And I would like to take this opportunity to remind that we are going to host the 2013 Annual General Meeting of shareholders on August 21, 2013. And all shareholders of record of our common shares as of the close of business day on July 3, 2013, are entitled to vote. And here, we want to urge all investors to vote your shares at your earliest convenience.

We also look forward to seeing you at our AGM, which will be hosted on our headquarters in Beijing of China.

And should you have any questions on AGM voting, please send contact to us by sending an email to ir@sinovac.com.

And thank you for your time. Have a good day.

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