China Biologic Products Holdings Inc
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good morning, and welcome to China Biologic's First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Now, I'd like to turn the conference over to your host today, Samuel Martin. Please go ahead.

[Samuel Martin:]

Thank you, operator. Hello, everyone and thank you for joining us on today's call. China Biologic announced its first quarter 2019 financial results on May the 10, 2019, after the market close. An earnings release is available on the company's website. Today, you will hear from China Biologic's, Chairman Mr. Joseph Chow, who will start the call with a review of the company's basic operating results and recent developments of the company. He will be followed by Mr. Ming Yin, Senior Vice President of China Biologic who will then give a detailed account of the company's financial results. China Biologic's, CFO Mr. Ming Yang will be available during the Q&A session following the prepared remarks. Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although, we believe that the expectations reflected in our forward-looking statements are reasonable as of today, these statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that our expectations will prove to be correct. Information about the risks associated with investing in China Biologic is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. The company will also discuss non-GAAP measures, which are more thoroughly explained and reconciled to the most comparable measures reported under generally accepted accounting principles in the company's earnings release and filings with the SEC. You are reminded that such non-GAAP measures should not be reviewed in isolation or as an alternative to the equivalent GAAP measures and that no -- non-GAAP measures are not universally defined by all companies including those in the biopharmaceutical industry. Now, I'm pleased to present Mr. Joseph Chow, Chairman of China Biologic.

[Joseph Chow:]

Thank you. Hello, everyone and welcome to China Biologic's first quarter 2019 conference call. We are pleased to report that China Biologic achieved strong financial results for the first quarter with operating profit growth exceeding expectations. Despite this welcome news, the challenging policy headwinds and heightened competition within the Chinese plasma industry persist, and we maintained our overall overlook for the year with guidance for the full year 2019 remaining at bottom line growth of 4% to 6% in RMB terms on a year-over-year basis. This quarter's strong operating results were largely driven by higher-than-expected sales of albumin. The higher sales in albumin were primarily, because of a temporary shortage of supply in the market, due to lower import volumes combined with our broadened sales coverage in Shandong and Jiangsu provinces and supported by substantially increased plasma fractionation volume in our new Shandong facility. The temporary albumin supply shortage may have arise as a result of an incident where a volume of albumin imports were delayed in the lot release process possibly due to the tightened quality standards adopted by the National Medical Products Administration in connection with the Shanghai Xinxing plasma quality investigation. We expect the supply situation will return to normal in the second quarter. As our human albumin was oversold during the first quarter and our remaining inventory of available albumin as of March 31, was the equivalent to just two months of sales. We anticipate lower revenue from albumin sales in the remaining quarters of 2019. Additionally, revenue from albumin maybe adversely impacted by the intensified competition in the market and new tendering rules to benchmark to the lowest price nation-wide, which put downward pressure on our product pricing. Sales of IVIG, hyper-immunoglobulin products, as well as certain high-unit-price coagulation products were below our expectations this quarter. This was due to reduced purchase volume at many regional hospitals as mandated by the government controls on healthcare spending and also impacted by limitations on hospital prescriptions for IVIG following the Shanghai Xinxing quality incident. Furthermore, in some regions, IVIG is still listed as adjuvant drug, making it subject to stricter control on prescriptions. These factors resulted in our IVIG inventory position continue to be abnormally high, in spite of our increased efforts in sales and marketing and broadened sales channel coverage. In terms of price, due to intensified competition and average -- the average price of IVIG in the first quarter dropped a further 4% compared to the same quarter last year. The performance of our placenta polypeptide product was largely in line with expectations, with revenue declining approximately 50% year-over-year. At this point, our PP product has been included on the list of adjuvant drug in many regions and is subject to re-registration with the National Medical Products Administration this year. For the rest of 2019, we anticipate the performance of our PP product will continue to drag down our overall results, given the more aggressive controls on medical reimbursements for regional adjuvant drugs and the likelihood that PP product will be included in the national list of adjuvant drugs within the next few months. Going forward, our new sales and marketing talent will leverage our expanded sales coverage in various channels to improve prescription volumes at regional hospitals and educate doctors about the benefits of IVIG PCC and other coagulation product -- coagulation factor products in treating patients across a wide range of clinical indications. We aim to improve the effectiveness of our sales teams through the integration of marketing teams across our subsidiaries. We will also work to better allocate resources and optimize sales team relationships with distributors to facilitate the sales of new products. We expect these efforts will help decrease our inventory position both internally and with our distributors. As reported in previous quarters, we have been actively exploring M&A opportunities to better position China Biologic for long-term growth. However, the changes to healthcare policies such as the recent introduction of centralized procurement have resulted in drastic price cuts for many drugs disrupted the competition landscape and brought greater uncertainty in relation to company valuations. Our evaluation of previously selected targets has negatively impacted by these developments and we must therefore take measures to adjust our process of selection accordingly. We will continue to explore growth opportunities, while factoring in the most recent developments in government policies. We recently received Dr. Bing Li's resignation as CEO and also from the Board of Directors due to personal reasons. We thank Dr. Li to his contribution in helping China Biologic optimize our sales and marketing team and improve corporate governance. The Board has formed a search committee comprised of independent directors to seek a new CEO and in the interim has appointed me as the acting CEO. Additionally, we may have seen -- you may have seen in the release that we also announced the completion of the share repurchase program previously authorized by our Board of Directors in 2018, repurchasing 1,074,376 shares at a total of $100 million. In May 2019, the Board of Directors further authorized a new share repurchase program under which China Biologic may repurchase up to US$150 million worth of shares over the next 12 months. This reflects the confidence of the Board in the company's long-term growth prospects, as our management team works to improve sales and marketing and to fuel China Biologic's potential to be a world-class biopharmaceutical and biotechnology company. This concludes my prepared remarks. I will now turn the call over to Mr. Ming Yin, our Senior Vice President to review financial results for the first quarter of 2019. Ming, please go ahead.

[Ming Yin:]

Thank you Joe and hello everyone. Now I'll walk you through the key P&L items for the first quarter 2019. Total sales in the first quarter 2019 increased by 23.3% in RMB terms, or 15.4% in U.S. dollar terms, to $129.8 million from $112.5 million in the same quarter 2019. Total sales for our pharmaceutical products, including plasma products and placenta polypeptide products increased by 22.2% in RMB terms, or 15.2% in U.S. dollar terms, to $116.5 million from $101.1 million in the same quarter 2018. This was a result of the increase in sales of human albumin products, coagulation factor products, which was partly offset by decrease in sales of IVIG and placenta polypeptide products. For plasma products, total sales in first quarter of 2019 increased by 35.8% in RMB terms, or 28% in U.S. dollar terms, to $108.8 million from $85 million in same quarter 2018. Total sales for biomaterial products in first quarter 2019 increased by 23.8% in RMB terms, or 16.7% in U.S. dollar terms, to $13.3 million from $11.4 million in the same quarter of 2018. This was the result of a higher sales concentration in higher-unit-price artificial dura mater products. During the first quarter 2019, human albumin and IVIG products remained our two largest sales contributors. Revenue from human albumin product -- albumin increased by 78.2% in RMB terms, or 68% U.S. dollar terms, from $33.8 million in the first quarter 2018 to $56.8 million in first quarter 2019. Revenue from IVIG product decreased by 3.1% in RMB terms, or 8.8% U.S. dollar terms, from $31.8 million in first quarter 2018 to $29 million in first quarter 2019. As a percentage of total sales, sales from human albumin and IVIG products were 33.8% and 22.4% respectively in first quarter 2019. The sales volume of human albumin products increased by 85.8% for first quarter 2019. This was primarily due to increased sales volume in distributor and pharmacy channels supplemented by increased direct sales to hospital and inoculation centers. The sales volume of IVIG products increased by 1.1% for first quarter 2019 as a result of an increased sales through distributor channel. The average price for human albumin and IVIG products decreased by 4.1% and 4.2% respectively in RMB terms in first quarter of 2019 compared to the same quarter of 2018. This was because of a higher sales volume in distributor channel and a lower price to certain distributors reflecting intensified market competition for major plasma products. In U.S. dollar terms, the average price for human albumin and IVIG product decreased by 9.5% and 9.7% respectively in first quarter 2019 compared to same quarter 2018. Revenue from other immunoglobulin products increased by 6.6% in RMB terms, or 0.5% in U.S. dollar terms in first quarter of 2019 compared to the same quarter of 2018 reaching 10.1% of total sales as compared to 11.6% total sales in the same quarter 2018. The revenue increase was mainly attributable to increased sales volume of human tetanus immunoglobulin products. Revenue from other plasma products, including human coagulation factor VIII, human prothrombin complex concentrate, and human fibrinogen products, increased by 64.2% RMB terms, or 54.9% U.S. dollar terms, in the first quarter 2019 compared to the same quarter of 2018, representing six -- 7.6% of sales in first quarter 2019. The growth mainly came from increased sales through distribution channel. Revenue from placenta polypeptide products decreased by 52.4% in U.S. dollar terms for first quarter 2019 as compared to same quarter of 2018 accounting for 5.9% of total sales compared to 14.3% of sales in the first quarter of 2018. This was mainly in line with decreased sales volume as a result of the inclusion of placenta polypeptide products in regional adjuvant drug lists, which put a downward pressure on the prescription volume. Cost of sales increased by 31.2% to $44.2 million in first quarter 2019 from $33.7 million in the same quarter of 2018. As a percent of total sales, cost sales increased to 34% -- 34.1% from 30% in same quarter of 2018. This is largely attributable to decreased sales price for most our plasma products, increased plasma collection costs and increased depreciation expenses due to the launch of our new facility in Shandong in February 2018. Gross profit increased by 8.6% to $85.6 million in first quarter of 2019 from $78.8 million in the same quarter of 2018. Gross margin was 65.9% and 70% in first quarter 2019 and 2018 respectively. Total operating expense in the first quarter 2019 increased by $1.8 million or 4.5% to $41.6 million from $39.8 million in same quarter of 2018. This increase mainly consists of increase of $3.2 million in general and administrative expenses partially offset by a decrease of $2 million in selling expense. As percentage of total sales, total operating expense decreased to 32% in first quarter 2019 from 35.4% in the same quarter 2018. Selling expense in first quarter 2019 decreased by $2 million or 9.7% to $18.7 million from $20.7 million for first quarter 2018. As percentage of total sales, selling expense decreased to 14.4% for the first quarter 2019 from 18.4% in the same quarter of 2018. The decrease in the selling expense is primarily due to decrease in marketing and promotion expense related to placenta polypeptide products, which is partly offset by increased selling expense for plasma products. General and administrative expense in first quarter 2019 increased by $3.2 million or 18.4% to $20.6 million from $17.4 million in same quarter 2018. As percentage of total sales, general and administrative expense increased to 15.9% for the first quarter 2019 from 15.5% for the same quarter 2018. The increase in general and administrative expense was mainly a combined result of an increased allowance for doubtful accounts receivable and increased depreciation expense for Shandong new facility, which was partly offset by a decrease in share-based compensation expenses. Research and development expense in first quarter 2019 increased by $0.6 million or 35.3% to $2.3 million from $1.7 million in the same quarter of 2018. In the first quarter 2019 and 2018, we received government grants totaling $0.4 million and $0.1 million respectively, which we recognized as reduction of our research and development expense. Excluding this impact, our research and development expense increased by $0.9 million for first quarter 2019 from same quarter 2018. As a percentage of total sales, our research and development expense excluding the impact of these recognized government grants increased to 2.1% for 2019 from 1.6% compared to same quarter of 2018. Income from operations in first quarter 2019 increased by 19.4% in RMB terms or 12.8% in U.S. dollar terms to $44 million from $39 million in same quarter 2018. Operating margin decreased to 33.9% in first quarter 2019 from 34.7% in first quarter of 2018. Income tax expense in first quarter 2019 increased by $1.2 million or 17.9% to $7.9 million from $6.7 million in same period 2018. Our effective income tax rate was 15% and 15.1% for first quarter 2019 and 2018, respectively. Net income attributable to the company increased by 26.5% in the RMB terms or 19.3% in U.S. dollar terms to $37.7 million in first quarter of 2019 from $31.6 million in same period of 2018. Net margin increased to 29.1% in first quarter of 2019 from 28.1% in same period of 2018. Diluted net earnings per share increased to $0.94 in first quarter 2019 compared to $0.92 in the same period of 2018. Non-GAAP adjusted income from operations increased by 10.5% in RMB terms or 4.2% in U.S. dollar terms to $52.2 million in first quarter 2019 from $50.1 million in same period of 2018. Non-GAAP adjusted net income attributable to the company increased by 14.3% in RMB terms and 7.7% U.S. dollar terms to $44.5 million in first quarter of 2019 from $41.3 million in the same period of 2018. Non-GAAP net margin decreased to 34.3% in first quarter 2019 from 36.7% in same period in 2018. Non-GAAP adjusted net income per diluted share decreased to $1.11 in first quarter 2019 from $1.21 in the same period of 2018. Non-GAAP adjusted income from operations for first quarter 2019 excludes $6.3 million in non-cash employee share-based compensation expense and $2.1 million in amortization expense of intangible assets and land use rights related to acquisition of TianXinFu. Non-GAAP adjusted net income and diluted earnings per share for first quarter 2019 exclude $5.5 million in non-cash employee share-base compensation expense and $1.4 million in amortization expense and intangible assets and land use rights related to acquisition of TianXinFu. At March 31, 2019 we had $99 million in cash on hand and demand deposits, $653.8 million in time deposit and $171.2 million in short-term investments. Net cash provided by operating activities for first quarter 2019 $32.2 million as compared to $23.3 million for same period of 2018. The $8.9 million increase in net cash provided by operating activities was combined results of increase in both net income and non-cash expense, which mainly including -- include depreciation expense and allowance for doubtful accounts receivable. Accounts receivable increased by $11.6 million during first quarter 2019 as compared to $15.5 million during the same period of 2018. The accounts receivable turnover days for plasma products increased to 100 days during first quarter of 2019 from 84 days during the same period of 2018. This reflects longer credit terms to hospitals as a result of nationwide implementation of health care reform measures and intensified competition in distributor channel. Inventories increased by $4 million in first quarter 2019, which was milder than the increase of $10.8 million in the same period of 2018, mainly comprised of increased raw material plasma both outsourced and from our own collection stations. Net cash used in investing activities for first quarter 2018 was $214.7 million as compared to $135.5 million for same period in 2018. During the first quarter 2019, we paid $7.9 million for acquisition of property, plant and equipment, intangible assets and land use rights, and we also purchased time deposit and short-term investment in amount of $937.4 million. This was partly offset by $730.6 million from maturity of time deposit and short-term investments. Net cash used in financing activities for first quarter 2019 was $60 million as compared to net cash provided by financing activities of $0.3 million for same period of 2018. In the first quarter 2019 we remitted $6 million to investment bank to execute the previously approved share repurchase program on our behalf. As of March 31, 2019 415,356 shares had been repurchased at a total amount of 60 -- $36.8 million with remaining $23.2 million as down payment to the investment bank for further repurchase. That concludes our prepared remarks. Operator, we will now take some questions.

[Operator:]

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Yolanda Hu with Morgan Stanley.

[Yolanda Hu:]

Thanks for taking my questions. My first question is on IVIG. The growth was not very strong in the first quarter. So, in terms of sales and marketing, do you have any detailed plan to turn this around, for example, through bundled sales with albumin or other plasma products, or more aggressive promotions by lowering the prices? Secondly, regarding the resignation of Dr. Bing Li, we understand that Mr. Chow will be the interim CEO. The question is, if I may to Mr. Chow as Managing Director at Centurium Capital, how do you plan to allocate your time between your pre-found and also CBPO during the transition period? Thank you.

[Ming Yin:]

Okay. Yolanda, this is Ming. I'm trying to address your questions. And the first question, I think -- well, you're absolutely right. We actually have a very -- I think for the IVIG performance for the first quarter, it's actually lower than the -- our anticipation and the volume only increased by 1% compared to the same quarter last year in which the sales volume in our distributor channel increased, while the direct channel decreased. The direct sales percentage IVIG remained about 40%. I think this is -- reflects continued limitation in our prescription IG in most hospital we're serving, especially in the wake of the Xinxing quality incident. And after that incident there are -- at least in Shanghai, we already see the local government issue a mandate to limit the hospital to use less IG as much as possible. So, I think that's one of the factor. And we think there are more regional hospitals followed Shanghai's government's mandate trying to limit the IG. I think that's one of the policy headwinds has hit us very badly in the first quarter, especially in the direct sales channel. And I think you may already aware in some regions IVIG recently list as supplementary drugs, which is subject to the stricter – the control on the prescription, I think this – the three main reasons result in we have the disappointing IG sales quarter – in the first quarter. I think to answer your question regarding the promotion and the marketing activities, yes, as you remember in the last two quarters with the new sales marketing team on board, we already implemented a series – the marketing activities trying to more focus on the hospital, trying to educate the doctors. We did broaden the channel with Shandong and Jiangsu's tender completed. We increased the channel coverage. And also, we do sign up more distributors. We've engaged more distributors. As of today, I think we – in the first quarter, we did actually engage more – I think more than 30 distributors trying to sell the IG for us. But I think those – the efforts might not be overnight and can prove – or like show on the financials have a good return. I think going to take some times. And to answer your question, why don't we do the bundled sales? I think particularly, I think we do understand there are pretty decent inventory already in the distributor channel already. So I think it's not possible, just easily to do bundled sales. It's not really respectful for the distributor, you trying to just sell them something which we – they don't need it. I think we were looking for the long-term strategic collaboration with distributors. We're trying to work with on a long-term base. That's why we don't want to stuff in the inventory too much in the channel and cause backfire in later, because you probably already see in the first quarter, we do have a provision for bad debt. I think the nature for that bad debt is actually related to the IG for one of the distributors which we sold them more than year ago, but still in their inventory, which close to the shelf life so – and now have to either write-off that – the accounts receivable, or we have to allow the distributor to return the product to us. So I think to the bundled sales, we don't believe that's a rational approach we should take, maybe it's a short term – it's good for the financials for the – for the – looks good on the financials, but it's going to cause backfire to our long-term operation to – especially with our distributors relationship. That's just our view. So, hopefully that answer your questions.

[Joseph Chow:]

Regarding the third question Yolanda, my understanding was that your question is how – as Chairman of the company and also as a Managing Director of Centurium how do I avoid potential conflict of interest. Well, starting from May 8, 2019 I will take what is called a leave of absence from Centurium, until such time when we find – the company is able to find a permanent CEO. Before such – until such time, I will neither participate in any business operation or any decision-making process at Centurium during this leave of absence. I hope that address your question. Thank you.

[Yolanda Hu:]

Thank you.

[Operator:]

Thank you [Operator Instructions] And the next question comes from Jack Hu with Deutsche Bank.

[Jack Hu:]

Thank you for taking my question and congratulations for a solid quarter. It has been a while. My first question is why don't you increase your guidance? I do know you mentioned there actually are several reasons actually already. But when we look at the competitors, they did not mention albumin will go down this year. So my question is actually are you being too cautious here? My second question is at – when do we actually – or when do you see the price or the margin will stabilize for the entire plasma-derived therapeutics as an industry? My third question is actually for Joe. And so Joe, I'm going to ask a forward-looking question here. So what are the plans to hire, and what are the key considerations here, considering there is a severe lack of talent out there and the industry is a little bit challenging for now? Thank you.

[Ming Yin:]

Jack, I think we missed your third question. Can you repeat that?

[Jack Hu:]

The third question is on CEO search. What are the plans to hire and what are the key considerations here?

[Ming Yin:]

So let me try to answer your question one-by-one. The first question, the guidance, I think yes, we do actually have the solid quarter, first quarter. But I think I will address your the concern. Why don't we raise the guidance, from the couple perspective

[Joseph Chow:]

Third one is…

[Ming Yin:]

The third one, the CEO candidate, I think yes, the Board actually -- just give you the -- what we -- we had a recently had a Board meeting. So basically the Board already adopt or formed a search committee comprised by independent director to search the CEO. I think at the moment the search committee will be -- work with those leading or engage a reputable headhunter to help them to do the search process. I think the criteria as always the candidate should be energetic innovative and has sufficient understanding to the industry to the online industry. And we think the candidate should share the same vision with the Board to develop and execute the business plan focused not only on short-term core business model, but also on the long-term growth drivers that will transform CBPO into a world-class leading biopharma and biotech company. So that's my answer to your third question, Jack.

[Jack Hu:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to return the call to Joseph Chow for any closing remarks.

[Joseph Chow:]

Well, thank you for your participation and ongoing support of China Biologic, and we appreciate your continued interest and have a great day everyone. Thank you.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.