Sinovac Biotech Ltd (SVA) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech Limited third quarter 2013 earnings conference call. (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 now 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 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, intend, plans, beliefs, estimates, and similar statements. These statements that are not historical facts, including statements about Sinvoac'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 law.

On the call today, we have Dr. Weidong Yin, CEO; Miss Nan Wang, Sinovac's Chief Financial Officer; Miss Helen Yang, Investor Relations Director; and [Mr.] 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. I will provide an update on the business, and a financial review on behalf of our CEO, Dr. Weidong Yin, and Ms. Nan Wang, our CFO.

Now, let me start with the quarterly performance. We are very pleased to see another strong quarter with the sales growth of 54.5% year over year; and a profitable bottom line, with net income attributable to stockholders of $0.04 per diluted share, marking another profitable quarter following Q2. The growth in the third quarter was mainly driven by the robust sales of Anflu, our seasonal flu vaccine.

With continued execution of the tailored sales strategy, Anflu sales was increased by 121% in this quarter, compared to the same period of last year, resulting from a solid support from operations.

We are leveraging the improved efficiency and expanded capacity of our fully operational Changping site, which is conducting filling and packaging activities ; and we can complete the production in a timely manner comparing to the previous years. Therefore, we were able to deliver the majority of flu vaccines produced at the beginning of the flu season in China.

The aim of our sales strategy during 2013 to 2014 flu season is to increase the administration levels, which will reduce the product return level and improve the profitability of our flu business. The promotion activities will be continued into the fourth quarter.

As a reminder, flu virus strains are changed every year. Those vaccines not being administered will be returned to the Company, and will be billed as a cost to the operation.

Turning to the sales to the public market in China, we successfully won a tender in Beijing to supply Anflu, and the Jiangsu province to supply Healive for its 2014 EPI program.

As our sales increased; our gross profit was improved by 111.7% compared to the same period of last year; and the R&D expenses have been decreased dramatically. Therefore, we conclude another profitable quarter.

Leveraging the strong sales performance, we expect to generate [$70 million] in revenue for 12 months 2013; and we're on track to record a positive net income for the full-year 2013, following three consecutive years of losses.

After discussing the existing vaccine business, I would like to turn to the near-term opportunities within our development pipeline, and the latest on the new drug applications filed in May 2013.

As highlighted in our quarterly release, the CFDA issued new guidance in late October 2013, enabling applicants to apply for GMP certification for its production facilities concurrently with the production site inspection during the New Drug Application, or NDA, process, instead of waiting until after the new drug certificate is granted. The new guidance will accelerate the entire registration process for the vaccine products, including Sinovac's EV71 vaccine candidate.

Currently, our EV71 vaccine is under the technical review by the centers of drug evaluation, CFDA. The review on pharmaceutical data was completed, and supplementary documentation has been submitted, as requested. The review on clinical data is underway, after which an expert conference will held for further discussion and review, after which we are ready to apply for the said inspection, as well as the GMP certification, according the CFDA's new guidance.

The other pipeline products are moving forward on schedule. We will keep the public updated on any milestone progress for the pipeline.

And now, let's talk about the financial review on the third quarter. As introduced, the total sales increased by 54.5% to $22.1 million in the third quarter 2013, from $14.3 million in the third quarter of last year.

Excluding $3.6 million of H5N1 vaccine revenue, recognized in the third quarter of 2013, regular sales increased by 29.5% to $18.5 million, from $14.3 million in the same quarter last year. The growth was mainly driven by the sales of Anflu, as I explained earlier.

The gross profit increased by 111.7% to $15.9 million in the third quarter of 2013, from $7.5 million dollars in the same period of last year.

Gross margin was 72.1% in the third quarter of 2013, compared to 52.6% in the same period of last year. The higher gross margin was mainly due to the increased Anflu gross margin. Because of a lower sales return provision, as well as inventory provision recorded, less excess capacity was charged to the cost of goods sold in this quarter, comparing to the same period of last year.

Selling, general and administration expenses in the third quarter of 2013 were $9.9 million, compared to $7.8 million in the same period of 2012.

Selling expenses as a percentage of the third quarter 2013 regular sales were 32%, compared to 28.7% in the same period of last year. The increase in selling expenses as a percentage of revenue was mainly due to the increased marketing effort to generate Anflu sales this quarter.

G&A expenses in the third quarter of 2013 increased to $4 million, from $3.7 million in the same period of 2012. The increase was mainly due to a higher operating cost at the Company's Changping site, as it is now fully operational.

These increases were partially offset by the decrease of bonuses, due to the Board of Directors approving certain employee bonuses to be settled from the Company's Staff Bonus and Welfare Fund, an accrued liability account, rather than charged to expense.

R&D expenses in the third quarter of 2013 decreased to $2 million, from $3.8 million in the same period of last year. The lower R&D expenses in the current quarter were attributable to the completion of the Phase III study of EV71 vaccine candidate in the first quarter of 2013.

Depreciation of property, plant, and equipment, and amortization of licenses, permits, and renovation costs for the third quarter of 2013 was $0.8 million, compared to $0.4 million in the same period of last year. Depreciation increased primarily due to more assets at the Changping facility start to be depreciated in the first quarter of last year, compared to the comparative period.

Net income attributable to stockholders in the third quarter of 2013 was $2.3 million, or $0.04 per basic and diluted share, compared to a net loss of $3 million, or $0.05 per basic and diluted share in the same period of last year.

If the bonus of $0.3 million, settled from the accrued liability account, was charged to operation in this quarter, the net income of third quarter this year was approximately $2 million, or $0.04 per basic and diluted share.

And now let me turn to the nine-months financials. The total sales of the first nine months of 2013 were $49.6 million, a 67.4% increase, from $29.6 million in the same period of 2012; and exceed full-year 2012 sales by $363,000.

Excluding the $3.6 million H5N1 vaccines revenue recognized, the regular sales increased by 55.3% to $46 million. The increased revenue was driven by the Anflu sales growth in the third quarter, as well as the Healive growth in the first half of the year.

Gross profit for the first nine months of 2013 increased by 90.2% to $36.6 million, from $19.2 million in the same period of last year.

Gross margin was 73.7%, compared to 46.9% (sic - see page 4 of press release "64.9%") in the same period of last year. The higher gross margin was primarily due to the increase of gross margin of Anflu and Healive, with lower sales return provision recorded, and less excess capacity charged to the cost of goods sold in the third quarter of 2013, compared to the same period of last year.

Selling, general, and administrative expenses for the first nine months of 2013 were $24.6 million, compared to $18.9 million in the same period of 2012.

Selling expenses as a percentage of 2013 nine months' regular product sales was 31.6%, compared to 33.5% of the same period of last year. The decrease in selling expenses as a percentage of regular product sales was primarily due to the higher sales achieved without significantly increasing the sales team headcount and salaries.

G&A expenses in the first nine months of 2013 increased to $10 million, from $8.9 million in the same period of last year. The factors affecting general and administrative expenses in the nine months of this year were the same as for the third quarter of 2013, as described above.

Research and development expenses for the first nine months of 2013 decreased to $5.9 million, from $15.8 million in the same period of last year, as the clinical studies of EV71 vaccine candidate was completed in early this year.

Depreciation of property, plant, and equipment, and amortization of licenses, permits, and renovation costs in the first nine months of this year was $2.1 million, compared to $1.1 million in the same period of last year. Depreciation increased because more assets at the Changping facility start to be depreciated in the last quarter of 2012.

Net income attributable to stockholders in the first nine months of 2013 was $1.6 million, or $0.03 per basic and diluted share, compared to a net loss of $10.2 million, or $0.19 per basic and diluted share in the same period of last year.

If the $1.7 million bonus, settled from an accrued liability account, was charged to operations for the nine-months period, the net loss of the first nine months of 2013 was $0.1 million, or $0.02 (sic - see page 5 of press release "$0.002") per basic and diluted share.

As of September 30, 2013, cash and cash equivalents totaled $89 million, compared to $91.2 million as of December 31, 2012.

In the first nine months of 2013, net cash used in operating activities was $14.7 million.

Net cash used in investing activities was $3.4 million in the first nine months of 2013, which was mainly to acquire property, plant, and equipment for the Changping facility.

Net cash provided by financing activities was $15 million in the first nine months of 2013, including loan proceeds of $13.9 million.

As we introduced earlier, we would expect, for the whole year 2013, to generate about [$70 million] in revenue, and we expect to make a profit for this year.

That concludes management's prepared remarks, and, operator, we will now take questions, thank you.

(Operator Instructions). Isabella Zhao, Morgan Stanley.

My first question is the revenue outlook for the winning of these two tenders; one is for the Anflu for Beijing, and the other one is the hepatitis A vaccine for Jiangsu province. How much revenue will you expect, and when will it be recognized?

The next question is about the gross margin. Given the fact that the gross margin was another high in the third Q, and I want to know what kind of gross we will expect in the fourth Q? Thank you.

To answer your question, Mr. Yin said this is a very good question. Also, this is a strategy that when the company promoting our vaccines in the private pay market will also have another team to focus on expanding our market share in the public pay market.

As you mentioned, we won the tender of flu vaccines for the city of Beijing. We are about to ship about 400,000 doses of Anflu in this season. About 300,000 doses has already been shipped out in the third quarter, so the revenue should already have been booked in the third quarter; and another 100,000 doses will be shipped -- was shipped in fourth quarter. It sold at about RMB25 per dose.

We think that this is a very good model, that the government pays for the immunization for the citizens. And if this model can be utilized in other provinces or cities, we will think the flu market will have a better opportunity to grow.

Turning to the tender in Jiangsu, actually, Jiangsu province is another territory that we're expanding, the public market for Healive, the hepatitis A vaccine, after we supply Healive to the public market in Beijing and Shanghai.

In Jiangsu, since the size of population is relatively bigger than the other cities, so if we won a tender, normally, the volume supplied would be relatively higher compared to the other cities. In this tender, we are about to ship 900,000 doses.

And we think that this is a very good sign to see that more and more provinces, or cities, recognize the value of inactivated hepatitis A vaccine, and the government would like to pay for the better quality. And if this trial is expanding, we think hepatitis A vaccine market will grow, or at least for the sales of our hep A vaccines will grow, even though we can't say particularly about how would be the percentage of growth. But we think the trend showing that the revenue for hep A should grow.

And the other question about the gross margin for the fourth quarter, I can answer you, that since in the fourth quarter we expect to recognize about 2 million doses of H5N1 vaccine into the revenue, due to those vaccines reaching expiration date; and we aim to complete the government audit activities before the end of this year.

Normally, those vaccines have a relatively lower gross margin, which is about around 50%. So we would expect, in the fourth quarter, our gross margin should be slightly lower comparing to the third quarter, which we expect it could be around 65%.

Does that answer your question?

Yes, thank you. (spoken in Mandarin).

Mr. Yin, firstly, explained the new policy issued by the China Food and Drug Administration. Mr. Yin personally is very happy to see the new policy because normally, when we apply for approval of a new production the product the product, the [dossier], the registration documentation needs to be technically reviewed by the CFDA. If it passed, it would move to another department within CFDA to issue a certificate we call the new drug certificate. This is the valuation of the technology itself.

And there, another line for approving the production. So, for the production approval, based on the guidance issued by CFDA, the company needs to apply for the onsite inspection for applying the GMP certification. In the past, the company needs to apply for the new drug certificate first; and after the new drug certificate, basically, if the product itself from technically is approved and then the company can start up making the application for the production, i.e., the GMP certification.

So moving from new drug certificate to GMP certification, or onsite inspection, could either spend three to four months, or even it could go as long as two years.

Right now, the new policy is that while the product is being reviewed, technically, for the new drug certificates, the company is able to make an application for the onsite inspection for the production at a GMP level. Therefore, this new policy will shorten the time spending from moving from new drug certificate to GMP certification. We think this will help, generally speaking, to speed up the process of a product review and approval in China.

Turning to EV71, as we explained, EV71 [file] is right now under technical review within the CFDA. Also, for our production line, we have already built the facilities, and we keep conducting the validation of our facilities in Changping. Actually, once -- at any time, if the CFDA is ready to do the onsite inspection, we're able to receiving them, and to cooperate for the onsite inspection.

So, from the management, of course, we will do whatever we can to moving into the GMP certification as soon as we can. However, at this stage still is not under our control, so it's very hard to give you a specific time when we can finish entire approval.

But at least from the change in policy, we think that the government is showing a jester of speed up the entire process of approving products, and, therefore, that we are more and more confident about getting the approval in a relatively short period of time. Once we reach any material milestones, we will notify the public.

Thank you for taking my question.

Yi Chen, Aegis Capital.

First question, Helen, did you just mention that you will recognize more revenue from H5N1 vaccine sales in this fourth quarter?

Yes, I did.

How much is that?

It's -- actually, the revenue is about RMB44 million, $7 million.

Okay. Second question is could you comment the current status of H7N9 in China, and whether Sinovac currently has any activity on that subject?

Sure, I will translate and ask invite Mr. Yin to answer this question.

Mr. Yin's answer is that we -- after -- in China, we have moved into late autumn and early winter, and we still keep seeing more cases arise. In the past there are some cases from [Guizhou] province; and recently, one case is identified in Guangdong province. Right now in China there are more than 140 cases reported.

Right now, we think the trend of epidemic of H5N1 it seems not been well controlled, but it's still within a limited connection, and no one actually can predict whether this virus will cause human-to-human transmission. Right now, centers for disease control is also keeping -- watching about the trend of this disease development.

In Sinovac, we have obtained the various strains in [Guiyang] this year, and we, starting from that, conducting the pre-clinical studies, and now we have almost complete the pre-clinical research.

However, for the approval, or application of getting the vaccine commercialized, whether it could go down through the case, like pandemic flu, like H5N1 stockpiled by the government, or it could it be submitted as a regular vaccine and being approved and then commercialized regularly in the market, it's still different to tell at this stage.

We believe that CFDA may take different strategies, based on different level of severity of the epidemic situation of H7N9. We, of course, as a company, will closely watch the change of the epidemic situation as well. At the same time, we keep conducting the research, and if there is any risks to human kind in China at least we have a product to be used to protect people.

Thank you. Third question is could you please comment whether the current government's investigation on GSK China's practice has any impact on Sinovac's marketing activities?

I will translate question, first. Mr. Yin's answer is that he don't believe there is any direct impact on our business, and we even don't know whether there is any result from these investigations. However, that he wants to take this opportunity to discuss how we should make the strategy of developing a business in China.

He thinks that, firstly, we need to understand the real need from China. We believe that China actually needs to have good products. Chinese people should be able to use good products, good vaccine, and we think that we are following this strategy in order to supply good services, good products to the Chinese population.

We were guided with this goal to conduct our research development, production, and sales and marketing, and we believe that [in] this way we are able to make a product with good quality, and we will finally have our clients and the users of our product to be fully benefited.

Actually, in China, the entire competitive landscape is quite complicated; we are facing the competition with multi-national companies, local companies, state-owned enterprises. But we believe that the strategy we're taking is helping us to lead the Company to develop ourselves on a right direction.

Once we keep conducting the business of supplying good vaccines to our population, we believe that the Company will have a good potential, and the competitive advantage of the Company will be more and more obvious as we keep insisting of doing the right things in China. Thank you.

Okay, thank you. Final question. Could you comment on what the R&D expenses will look like going forward, considering you have other pipeline products currently in development?

Also, to confirm with Helen that you mentioned previously that the revenue for 2013 would be around [$70 million], correct?

Yes.

Could you talk about the R&D expenses?

Sure. Let me translate the question, first. Mr. Yin's answer is that, actually, the planning for our research and development activities is to managing the long-term growth opportunities.

If you remember, that actually in 2012 the total amount of R&D sponsored for the EV71 clinical studies was really high, actually the highest in our history. But we think this is worthwhile because after EV71 is commercialized we will expect the revenue and profit level will be increased significantly. At that time, the Company will be more capable of making a bigger investment into the R&D.

However, right now, our total revenue is still relatively small. We think that even though we still need to make investment into the research and development, and we should do so, but we will not -- at this moment, we are difficult to say what will be the percentage because we will go with the different status of the development projects.

But Mr. Yin just wants to give you a general idea about how we are looking at the research and development, and how important it is for our future growth opportunities.

Okay. Thank you.

John Gregory, SJ Strategic Investments.

Just a couple of questions. Helen, regarding the HFMD disease, which EV71 will help to prevent, isn't there a certain time during the year when this disease is more prevalent in effecting children? And if that is the case, what part of the year is that?

Sure, I can answer your question. Actually, the first peak comes normally in April; and then it will go higher and higher, starting from late March, April, May; and may lower a little bit; but when it getting a little bit cold in September and there is a lower peak again. Actually, the [severance] of this disease is throughout this year; the peak is about in April and September.

Well, it would seem like to me then, I guess, if it really starts in April through September, doesn't it make logical sense, since you're so far along in the process with the Chinese Government, that they would try to approve the vaccine before the peak season starts?

I will translate that part for Mr. Yin. From management point of view, of course, we would expect to see the vaccine been approved before the first peak comes. Also, we conduct a survey among our clients within the centers for disease control, and doctors always to use -- have the vaccine available before the peak comes next year. However, that, as we explained, is still not under our control, so we can't do that prediction, whether it could be approved at the time.

Actually, Mr. Yin wants to explain that even if the vaccine is approved before the first peak comes, actually, we need to manufacture the vaccine batch by batch, and the use of the vaccine needs to go from one area to the other areas. Mr. Yin does not believe the timing of the approval will have a significant impact on the disease epidemic situation in the first year.

Okay. Another question; when will you know if you're distributor in Mexico for a 'flu vaccine has won any government business in Mexico for this year?

Actually, they are managing to conduct that. We think, probably, we may know the results in late January, or early February, because there are a few rounds of tendering process. So we need to wait for a few months.

And then just a final question, I know the Company has approved to sell its vaccine in the Philippines, and with this recent disaster in the Philippines, do you think the government of the Philippines might be needing any additional products, like hepatitis vaccine?

Well, actually, the vaccine approval in Philippines is influenza vaccine. We were supplying flu vaccines for a few years. I think even the current disaster, maybe -- as you know, that hepatitis might be a more suitable product, but not for the flu vaccine, and our hepatitis vaccine was not registered in the Philippines yet.

Okay, all right. Okay, thank you very much.

(Operator Instructions). [Bob Oliver], private investor.

Thank you for sharing the information on Mexico, and the potential for the Philippines, but could you spend a little more time on the specific countries that you're approaching worldwide, and whether, or not, you expect that to be a significant part of the 2014 revenue stream?

Thank you for the question. As we explained in the past, we are currently selling our vaccines to Mongolia, Nepal, and the Philippines. Next year, as we just answered the previous question, that we are -- we received approval of our flu vaccines in Mexico, and hopefully we can sell to Mexico in 2014.

And for the other countries, like India, and some part of South American countries, we are registering the vaccines at the moment. We don't expect any countries that we can receive any approval in next year for those countries, so in 2014 we think the sales from overseas market is still focused on those four territories I just mentioned.

Thank you very much.

It appears there are no further questions at this time. I would like to turn the floor back over to management for any concluding comments.

Thank you, operator. Thank you for everyone to participating into this call, and we are looking forward to speaking to you in the next call. Thank you.

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