Sinovac Biotech Ltd (SVA) 2015 Q2 法說會逐字稿

Greetings and welcome to the Sinovac Biotech Ltd. second-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Katherine Knight of ICR. Thank you. Please go ahead.

Thank you, operator, and good day, everyone.

Before we begin I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words or phrases such as will, expect, anticipate, future, intends, plans, believes, estimates and similar statements. These statements that are not historical facts including statements about Sinovac's beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking 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 Mr. Weidong Yin, CEO; Ms. Nan Wang, CFO; Ms. Helen Yang, Investor Relations Director; and Mr. Shuo He, Finance Director.

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

Thank you Katherine. Hello everyone and thank you for joining us. On today's conference call I will provide an update on Sinovac business and operations during the second quarter. Then I will review our financial results for the second quarter and first half of 2015 on behalf of our CEO and CFO.

We are very happy with our performance during the second quarter. We experienced strong sales growth and maintained control of our operational expenses resulting in our profitability for the second quarter.

Our sales this quarter were $18.5 million, an increase of $6.4 million over the prior year period which represents a year-over-year growth of about 53%. The sales increase is driven by a number of factors. First, for the private pay market, sales of our hepatitis A and B combo Bilive, contributed about $2.78 million to the sales growth. As you may be aware, Sinovac is the only supplier of these type of combo vaccines in China and as China's middle class is growing, the demand for these type of premium products will continue to grow as well as parents are willing to pay a premium to have their children inoculated against two viruses with fewer shots.

Bilive is well suited to benefit from parents wanting this ability to spend more on children's healthcare.

Our sales of hepatitis A vaccine, Healive in the private pay market, contributed another $1.59 million to the sales of hep A growth in the quarter. Healive sales into the private pay market this quarter were primarily to replace government funded hepatitis A vaccine in provinces for which the respective provincial government only buys the live attenuated vaccine. Many parents in these provinces are willing to pay out-of-pocket for inactivated hepatitis A vaccine for their children.

Overall the increase in sales to the private pay market is a result of the successful execution of our new sales strategy which is to target the provinces in Central China which up until now are relatively underpenetrated but for which we have identified clear market opportunities.

Additionally, our sales to the public pay market increased as well. The public pay market contributed $1.42 million in sales in sales growth which is due to the timing of product delivery in the second quarter.

As we mentioned last quarter, we believe the current vaccine market in China is stable. While market challenges still remain, we are generally very pleased with our team's ability to adapt their strategy to the market dynamics and execute successfully. We believe we will be able to capitalize on fuller penetration of the domestic market.

Moving on to the pipeline program, as you saw in our earnings release issued yesterday afternoon, the CFDA began its site inspections of our EV71 manufacturing facilities in July. CFDA inspectors simultaneously conducted the site inspections and the GMP inspections both of which were completed last week without any major issue. As we explained in the earnings release, the next step will be sample testing which may take up to two months.

Once the results of inspections are available and the sample vaccine has passed the required testing, the CFDA will conduct a comprehensive review of the vaccine. Upon approval, the CFDA will then issue the new drug certificate and production and GMP licenses which will allow us to begin commercial production of the vaccine.

Our timeline remains the same as we discussed last quarter which is to commercialize the vaccine in 2016. We will continue to keep the market informed of material advancements in this process.

With that I would now like to review our unaudited financial results for the second quarter of 2015.

Quarterly sales were $18.5 million, an increase of 53.1% from $12.1 million in the second quarter of 2014. Gross profit was $15.1 million compared to $9.1 million in the second quarter last year. Gross margin increased to 81.6% from 75% in the prior year period. Our gross margin expansion during the second quarter was primarily due to a higher average selling price of our hepatitis vaccines in the private pay market and supported by a lower inventory provision compared to the same quarter last year.

Selling, general and administrative expenses for the second quarter were $9.2 million compared to $8.6 million in the same period of 2014. This increase was primarily due to increased general and administrative expenses associated with the trial production of the EV71 vaccine for site inspection.

R&D expenses in the second quarter of 2015 were $2.2 million compared to $3.3 million in the same period of 2014. This decrease is primarily attributable to an entrance fee incurred for the licensing of our sIPV production technology in the second quarter of last year and the purchase of the virus seeds for this vaccine candidate during the same period.

For the second quarter net income attributable to common shareholders was $2.3 million or $0.04 per basic and diluted share compared to a net loss attributable to common shareholders of $2.2 million or $0.04 per basic and diluted share in the second quarter last year.

For the first half of 2015, total sales work $27.8 million, an increase of 8.4% from $25.6 million in the same period of 2014. Gross profit was $21.9 million, an increase of 13.5% from $19.3 million in the first half of 2014. Gross margin was 79% in the first half of this year compared to 75.4% in the same period last year.

Selling, general and administrative expenses in the first half of 2015 were $16.1 million, in line with $16.4 million in the same period of last year.

R&D expenses in the first half of this year were $4.4 million compared to $5 million in the same period of 2014. Our R&D expenses thus far this year were primarily associated with Phase III of our PPV vaccine candidate.

Net income attributable to common shareholders in the first half of 2015 was $20,000 or $0.00 per basic and diluted share compared to a net loss of $2.2 million or $0.04 per basic and diluted share in the same period of last year.

Now I would like to turn your attention to the balance sheet. As of June 30, 2015, cash and cash equivalents totaled $64.8 million compared to $91.5 million as of March 31, 2015. Net cash used in operating activities was $7.8 million in the first half of 2015. Net cash used in investing activities was $2.8 million which was primarily used for the purchase of property, plant and equipment for PPV and the (inaudible) production facility.

Net cash used in financing activities was $16.1 million in the first half of 2015 representing $28.5 million for repayments of loans partially offset by proceeds from loans of $12 million.

As of June 30, 2015, Sinovac had $32.6 million of bank loans due within one year. Our cash and cash equivalents position of $64.8 million is sufficient to meet both of these loan repayment obligations and our operational requirements. When appropriate, we plan to seek new commercial bank loans to finance the commercialization of our pipeline products.

Before opening up the call to questions, I would like to mention that management will be traveling to the US in September to participate in the Morgan Stanley Global Healthcare Conference September 16 through 18 in New York City and if you would like to schedule a meeting, please contact Morgan Stanley or you can also reach out to myself or ICR.

With that I would like to turn the call back to the operator for questions. Operator?

(Operator Instructions). Isabella Zhao, Morgan Stanley.

Thank you for taking my question. Congratulations for the strong second quarter. I have two questions. The first question is given the strong sales momentum in the second quarter, what we expect for the second half of the year and I expect the same momentum will be continuing in the second half? That is my first question.

The second question is about the development in other international markets such as Mexico and other emerging countries.

Also my last question is regarding the impact of the renminbi devaluation, how will we think about the impact on our topline? (spoken in Chinese)

(spoken in Chinese)

So actually for Mr. Yin, he thinks that he is not as happy as you are when he saw the second-quarter results even though it was good but it is very hard to trace the sales quarter by quarter. But overall we are still as we explained in the past, we see some moderate growth for the whole year but really the second quarter growth is higher than we expected.

(spoken in Chinese)

So by saying the moderate growth, we are only talking about sales in China and not including any possibility of additional sales coming from international markets. In some of our targeted markets, we are still making efforts however up until now no material orders have been obtained by the Company at this time but we are still trying our best.

(spoken in Chinese)

So by talking about the depreciation of renminbi impact, we think it will be good for the exports but overall we think that we do have a price advantage even before the depreciation of renminbi. And we don't expect any negative impact on the business. However, you know that our revenues are actually is in renminbi and if it is depreciated, our revenue reported in US dollars will have some impact. Does that answer your question?

(spoken in Chinese)

(Operator Instructions). (inaudible) ARC

(spoken in Chinese)

So firstly to translate your question, the question is whether EV71 is a novel product or is a me-too product.

Actually the answer is this is one of the first of this kind available globally so this will be a novel vaccine.

(spoken in Chinese)

I just simply translate the question is related to where we, where the license of EV71 is. Actually we are right now registering the vaccine in China and the other question is related to actually we had already obtained, we already passed the inspection for the new certification two years ago.

Okay.

(Operator Instructions). We are showing no additional questions in queue at this time. Do you have any additional or closing comments?

Thank you. Actually we want to thank you for your participation and we are looking forward to speaking with you after the second-quarter results. Thank you.

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