China Biologic Products Holdings Inc
Q1 2018 Earnings Call Transcript

Published: 7 May 2018

[Operator:]

Hello, and welcome to the China Biologic Products Holdings First Quarter 2018 Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I now would like to turn the conference over to Bill Zuma. Mr. Zuma, please go ahead.

[Bill Zuma:]

Thank you, operator. Hello, everyone, and thank you for joining us on today's call. China Biologic announced its quarterly financial results in May 4, 2018 after the market close. The earnings release is now available on the company's website. Today you will hear from China Biologic's Chairman and CEO, Mr. David Gao, who will start off the call with a review of recent company developments, strategies and basic operating results, followed by the company's Senior Vice President, Mr. Ming Yin, who will address financial results in more detail. The CFO, Mr. Ming Yang, is also on the call and will be available during the Q&A session that follows prepared remarks. Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may contain 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, those 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 those projections 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 viewed in isolation or as an alternative to the equivalent GAAP measure and that non-GAAP measures are not uniformly defined by all companies, including those in the biopharmaceutical industry. Now, with that said, I'm pleased to present Mr. David Gao, Chairman and CEO of China Biologic Products. David, please go ahead.

[David Gao:]

Hello, everyone. And welcome to China Biologic's first quarter 2018 conference call. The ongoing reform headwinds initiated in 2017 in China's healthcare market have further negatively impacted our sales revenue and profit growth in the first quarter of 2018. The strict government policy of capping drug sales revenue to 30% of the total hospital revenue in an effort to lower overall regional medical insurance spending significantly impacted our plasma product sales volume in the direct sales channel. Especially, certain hospitals implemented the limits on high-unit-price plasma products prescriptions and directly decreased the policy volumes for these products. Our prices in the distribution channel also faced increased pressure. This more intensified competition among all major plasma products. To remedy these pressures, we increased our investment in sales and marketing, enhancing our marketing and promotional activities to pursue new sales channels and strategic partners, which include the new distributors and the retail pharmacy chains. Together, this new sales channel achieved 20% year-over-year growth. The TianXinFu business demonstrated softer performance as anticipated in the first quarter of 2018. We expect to see greater level of growth from this business in the remaining quarters of the year. Despite our first quarter challenges, we achieved notable operational progress in our business. We began full operations in new Shandong facility in late February, received the long-awaited operating permit at the Daming plasma collection station in early March and immediately commenced commercial plasma collection there. The construction of our Feicheng branch plasma collection facility remains on track for completion by the middle of this year. Our construction of new Wenchang station in Hainan Province is also on track, and it is expected to obtain the operating permit to begin commercial operations before end of the year. For the remaining of 2018, we will continue to focus on solidifying our leadership marketing position, broadening our sales channels, exploring new growth opportunities to offset the impact of ongoing healthcare reform, and further investing in medical marketing with our internal sales force as well as utilizing TianXinFu's team to support our newly launched fibrinogen products. In addition, we remain committed to penetrating into more local markets to ensure optimized pricing, once we secure provisional tenders from the regions such as Jiangsu Province. Although we expect great challenges ahead, we remain optimistic about the long-term development of China's plasma industry. This concludes my prepared remarks. I will now the call over to Ming Yin, our Senior Vice President to review the full year financial results. Ming Yin, please go ahead.

[Ming Yin:]

Thank you, David, and hello, everyone. Now, I'm going to walk you through to key P&L items for the first quarter 2018 to provide more details. Total sales in the first quarter 2018 increased by 13.7% in RMB terms or 23% in U.S. dollar terms to $112.5 million from $91.5 million in the same quarter of 2017. The increase was primarily attributed to $11.4 million contribution from TianXinFu, which accounted for approximately 10.1% of total sales for the quarter. Excluding TianXinFu, total sales in the first quarter of 2018 increased by 2.2% in RMB terms, due to an increase in sales of placenta polypeptide products and certain immunoglobulin products, which was partly offset by the decrease in sales of human albumin and IVIG products. During the first quarter of 2018, human albumin and IVIG products remained our two largest sales contributors. The revenue contribution from our other products continued to grow. As a percentage of total sales, sales from human albumin and IVIG products were 30.1% and 28.3%, respectively, in the first quarter of 2018. Excluding the contribution from TianXinFu, human albumin and IVIG products were 33.4% and 31.4% of total sales, respectively, compared to 40.3% and 34.7% [ph] in the prior year period. This reflects the combined effects of decreased sales volume and sales prices year-over-year. The sales volume of human albumin and IVIG products decreased by 12% and 6.2%, respectively, for the first quarter of 2018 compared to the same quarter of 2017, reflecting the decreased purchase volumes at various hospitals due to government healthcare reform measures. The average price for human albumin and IVIG products decreased by 3.7% and 1.3%, respectively, in RMB terms in the first quarter of 2018 compared to the same quarter of 2017, mainly due to the further price discounts to certain distributors, which reflected intensified market competition for major plasma products. Revenue from human hyper-immunoglobulin products increased by 56.4% in the first quarter of 2018 compared to the same quarter of 2017, reaching 11.5% of total sales. Revenue from coagulation factor products, including human coagulation factor VIII, human prothrombin complex concentrate and newly launched human fibrinogen products, increased by 48.2% in the first quarter of 2018, compared to the same quarter of 2017, which representing 5.7% of total sales. The growth mainly came from most of the human fibrinogen products in the beginning of 2018. Revenue from placenta polypeptide products increased by 45.2% in RMB terms, or 57.1% in U.S. dollar terms, in the first quarter of 2018, compared to the same quarter of 2017, reaching 14.3% of total sales. This growth was supported by higher unit selling prices due to wider implementation of the two-invoice policy, and it was partially offset by lower sales volume due to the government control on medical insurance spending. Cost of sales increased 4.3% to $33.7 million in the first quarter of 2018 compared to the same quarter of 2017. As a percentage of total sales, cost of sales decreased to 30% from 35.2% in the same quarter of 2017. The decrease in cost of sales as a percentage of total sales mainly reflected a higher gross margin of TianXinFu. Excluding TianXinFu, cost of sales was 32.2% of total sales, also lower than the first quarter of 2017, mainly due to the higher sales price of placenta polypeptide product. Gross profit increased by 33.1% to $78.8 million in the first quarter of 2018, from $59.2 million in the same quarter of 2017. Gross margin was 70% and 64.8% in the first quarter of 2018 and 2017 respectively. Selling expenses in the first quarter of 2018 increased $16.9 million to $20.7 million from $3.8 million in the same quarter 2017. As a percentage of total sales, selling expenses accounted for 18.4% in the first quarter of 2018 compared to 4.2% in the same quarter of 2017. More than half of the increase was related to sales of placenta polypeptide products, with the remainder related to the sales of plasma products and TianXinFu's sales of its dura mater products. For placenta polypeptide products and certain hyper-immune products, as certain distribution channels were disqualified due to the two-invoice regulation, we implemented new sales strategy, including using an internal sales force and engaging third-party contract service organizations to promote our placenta polypeptide products. For other plasma products, in order to solidify our competitiveness within distribution channel, we incurred additional promotion and marketing costs. TianXinFu's selling expenses included $2 million amortization expense for the intangible assets of customer relationships associated with our acquisition of TianXinFu. Excluding this intangible asset amortization expense, selling expenses accounted for 16.7% of total sales of the company in the first quarter of 2018 compared to 4.2% in the same quarter of 2017. General and administrative expenses in the first quarter of 2018 increased 14.5% to $17.4 million, compared to $15.2 million in the same quarter of 2017. As a percentage of total sales, general and administrative expenses were 15.5% and 16.7% in the first quarter of 2018 and 2017, respectively. The increase in general and administrative expense mainly included $0.9 million increase in share-based compensation expenses. Excluding the impact of share-based compensation expenses, non-GAAP general and administrative expenses would have been 7.4% and 7.9% of total sales in the first quarter of 2018 and the same quarter of 2017, respectively. Research and development expenses in the first quarter of 2018 increased 21.4% to $1.7 million, from $1.4 million in the same quarter of 2017. As a percentage of total sales, research and development expenses remained stable at 1.5% in the first quarter of 2018 compared to the same quarter of 2017. Income from operations for the first quarter of 2018 increased 0.5% to $39 million from $38.8 million in the same period of 2017. Operating margin decreased to 34.7% in the first quarter of 2018 from 42.4% in the same quarter of 2017. Net income attributable to the company increased 5.3% to $31.6 million in the first quarter of 2018 from $30 million in the same quarter of 2017. Net margin decreased to 28.1% from 32.8% in the first quarter of 2017. Diluted net earnings per share decreased to $0.92 in the first quarter of 2018 compared to $1.06 in the same quarter of 2017. Non-GAAP adjusted net income attributable to the company increased 2.1% in RMB terms, or 10.4% in U.S. dollar terms, to $41.3 million in the first quarter of 2018 from $37.4 million in the same quarter of 2017. Non-GAAP net margin decreased to 36.7% in the first quarter of 2018 from 40.9% in the same quarter of 2017. Non-GAAP adjusted net income per diluted share decreased to $1.21 in the first quarter of 2018 from $1.32 in the same quarter of 2017. Excluding TianXinFu, Non-GAAP adjusted net income attributable to the company decreased 12.1% in RMB terms, or 4.8% in U.S. dollar terms in the first quarter of 2018 compared to the same quarter of 2017. Non-GAAP adjusted net income and diluted earnings per share for the first quarter of 2018 excluded $8.3 million in non-cash employee share-based compensation expenses and $1.5 million in intangible assets amortization expense related to the acquisition of TianXinFu. Now, I'd like turn to the balance sheet and the cash flow items. As of March 31, 2018, we had $118.2 million in cash and cash equivalents, primarily consisting of cash on hand and demand deposits, $106.6 million in time deposits and $141.9 million in financial instruments. Net cash provided by operating activities for the first quarter of 2018 was $23.3 million, including a $4.5 million contribution from TianXinFu, compared to $13 million for the same quarter of 2017. Excluding TianXinFu, the $5.8 million increase in net cash provided by operating activities was a result of increase in other payables and accrued liabilities, an increase in advance from customers, and a small increase in accounts receivable. Net cash provided by operating activities was negatively impact by a decrease in net income, a decrease in accounts payable, an increase in prepayments and deferred expenses, and an increase in inventory compared to the first quarter of 2017. Excluding TianXinFu, the other payables and accrued liabilities increased by $8.5 million in the first quarter of 2018, compared to a decrease of $5.4 million in the first quarter of 2017. The increase mainly reflects more marketing activities carried out by third-party contract service organizations, which we engaged to promote our placenta polypeptide products and certain plasma products in complying with the two-invoice policy. Accounts receivable, excluding TianXinFu increased $15.5 million during the first quarter of 2018 compared to an increase of $17.6 million during the same quarter 2017. The accounts receivable turnover days for plasma products increased to 84 days during the first quarter of 2018 from 46 days in the same quarter of 2017, reflecting longer credit terms to hospitals as a result of the nationwide implementation of healthcare reform measures and intensified competition in the distribution channel. Inventories, excluding TianXinFu increased $10.6 million in the first quarter of 2018 compared to $9.1 million in the same quarter of 2017. This increase was a result of the increase in raw materials due to downwardly adjusted plasma throughput, reflecting weaker market demand due to a more aggressive-than-expected implementation of certain government healthcare reform policies. Net cash used in investing activities for the first quarter of 2018 was $135.5 million, which included a $264.7 million payment for purchase of time deposits and financial instruments, and $11.3 million for the acquisition of property, plant and equipment, intangible assets, and land use rights. This was partly offset by $97.7 million in cash received upon acquisition of TianXinFu and the maturity of $42.8 million in time deposits and financial instruments. Net cash provided by financing activities for the first quarter of 2018 was $0.3 million, which resulted from proceeds of $0.3 million from stock options exercised. Our working capital as of March 31, 2018 was $648.4 million and our current ratio was 6.5. Total shareholders' equity was $1,231.8 million as of March 31, 2018 compared to $664.3 million as of December 31, 2017. In addition, mainly due to an issuance 5,521,000 shares to PWM in connection with acquisition of TianXinFu. Our outstanding shares increased to 33,203,014 shares as of March 31, 2018 from 27,611,841 shares as of December 31, 2017. Guidance and business outlook for 2018. Lastly, allow me to provide an update on the financial outlook for 2018. For the full year 2018, we previously provided guidance of total sales growth of 18% to 20% in RMB terms and non-GAAP adjusted net income growth of 16% to 18% in RMB terms over 2017 financial results. This projection factor in estimated 2018 financial results of TianXinFu that we acquired at the beginning of 2018. Excluding the TianXinFu contribution estimate, sales for 2018 are expected to grow 6% to 8% in RMB terms, and non-GAAP adjusted net income was expected to grow 3% to 4% in RMB terms over 2017 financial results. Our 2018 non-GAAP adjusted net income projection excludes non-cash employee share-based compensation expense and non-cash intangible assets amortization expense associated with the TianXinFu acquisition. However, given the worse-than-expected first quarter results due to ongoing impact of regulatory changes, we expect that it will be challenging to meet the aforementioned guidance. We are actively evaluating the evolving regulatory environment and competition dynamics and may lower our full year guidance should there be no significant improvement in the business operating conditions for the remainder of the year. That concludes our prepared remarks. We will now take questions. Operator, we are now ready to take some questions.

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Yolanda Hu with Morgan Stanley. Yeah.

[Yolanda Hu:]

Thanks for taking my questions. I have two questions. First, you recorded major sales decline through direct sales model for plasma products in first quarter. But over 20% were for new channels and the distributors. My question is do you think the healthy growth for the new channel is sustainable? And when do you think the direct sales will recover? Is this going to be slower than what you expected on last quarter's conference call? And is this why you plan to revisit your guidance and have you started to use TianXinFu's for distributors to promote the plasma products or any updates on - more detailed updates on integration? My second question, similar to peers, we noticed your working capital for plasma products continue to worsen. So by the end of this year, what level do you expect AR days and inventory days to reach? And also, since it is now early May, should we assume the contract with Deyuan will not be renewed anymore, given weaker market demand? Thank you.

[Ming Yin:]

Yeah. I think - let me try to answer your question one by one. I think your first question regarding the first quarter, the first quarter - the performance, as we're actually indicating in our earning release, yes, actually the sales revenue from plasma products did decrease by 3% in first quarter compared to the same period last year, especially for the albumin and IVIG products, wherein both decreased by 12% and 6% respectively year over year. And you mentioned, I guess, it did actually occurred to us that direct channel - direct channel, we experienced more volume dropped in the first quarter, specifically we had about 30% of volumes drop in certain - the large - the regional hospital channel. I think the reason for that is because the many regional government agencies set a stricter requirement to hospital to lower the overall public medical insurance spending and to ensure the immediate compliance with policy that capped drug sales 30% of the total hospital revenue. And also, I think this quarter we do actually notice most of the hospitals' doctors are required to prescribe the products according to the indication. So I think that could be the reason for albumin, the volume drop, hospital channel, because I think we might be aware - in the past there are 7% of the albumin was used in the hospital off label. So I think if I find the doctor to prescribe the medicine strictly in accordance with indication, that's the reason behind the volume drop in the hospitals. And also, in the effort to mitigate the direct channels' volume drop, we do actually increased the number of marketing and promotional activities in the new regions, where we collaborate with the new distributors or some old distributors, trying to increase the sales exposure to the new regional hospitals and even some regional pharmacies. So that's why through the distributors, we do actually experience about 30% year-over-year growth, volume growth in the distribution channel. And - but I think to be honest, I think this year, overall the environment is more challenged or even more worse than we thought at the beginning of the year. So I think whether this channel, this growth in the distribution channel could be sustainable will remain our question mark at this moment, because it's just - for your information we noticed some of our competitors are continuing to lower their ex-factory price. Some of them already - for albumin, it's already we have seen the market for the ex-factory price from our own competitors, about 10% - lower than the ex-factory price to the hospitals. So I think that trend, it is in the remaining of the year, actually with many more challenge for us, because during the first quarter we didn't change - or we didn't lower our ex-factory price due to distribution channel even there much. So in order for us to keep the volume growth in the distribution channel, so probably we have to match our competitor price. So if we do match that price, it's probably going to help on the top-line growth, but definitely going to hurt the bottom line. So I think we're in the - we are in a dilemma to whether we should keep the price or we're trying to keep the profit growth. But I think we're currently evaluating the market condition, trying to get more visibility on the overall supplier and demand situation. Especially, during the first quarter we already see certain - the manufacturer lower the production through the batch approval data, we saw about 7% of - given the volume drop from the domestic manufacturers, so IVIG about 20% volume drop. So I think from that perspective, some of our competitors already started to lower their production. And also, the inventory position at the distributors remains a question. So I think we have to gather more information in the next few months, trying to evaluate what's our best strategy to compete with our competitors. So I think, so that's why at this moment it will be difficult to provide certain update on this regard. Second question is on the working capital condition, right? So I think - I think what I'll highlight is two items. As you mentioned, I just want to highlight the accounts receivable and the inventory situation from our perspective. During the first quarter, as we just mentioned, our plasma inventory turnover days reached 84 days from the 64 days from last year same quarter. The increase in AR is actually in line with our expectation. We actually had a comment in several of our previous earnings calls that AR turnover days would continue to increase due to change in the market dynamics. The overall AR that is increased $19 million compared to the beginning of the year, comprised of $16 million increase of plasma and $3 million from the plasma - from polypeptide products. But the $16 million increase in plasma products reflects the increased price from our direct channel and the distribution channel. In the direct sales channel the receivable turnover - the receivables in plasma products in the direct channel increased by $7 million, mainly due to the recent regulatory change. And also in that - specifically including the Vermont [ph] policy and 30% of revenue capped for hospital drug invoice [ph]. Our turnover days has increased to about 3.5 months in the first quarter 2018 from two months in the same period last year, and that - we believe that the payment terms might be further extended from hospital. So those days could - meaning the payment terms from the hospital could even lengthen to four to five months. And the longer turnover days mainly come from large hospitals. Just to give you some numbers, sales from the top 20 hospitals in the first quarter, we see the sales - the run rate decreased about 10%, but the accounts receivable balance increased over 20%. So that reflects the longer payment term from hospitals. On distribution channel, we do actually experience the payment terms extension. So overall the value - the accounts receivable value in the distribution channel increased $9 million. And basically, it's because we extended credit terms to distributor to reflect the intensified the competition. The - our total days in the distribution channel increased to about two months in the quarter compared to one month in the last year same period. And also we see the - because the two-invoice policies, the impact in certain region, we do start to keep the credit terms to the distributors, who help us to sell the polypeptide products. So I think the polypeptide products, even the total days was relatively slow - are lower than one month, but still we think that trend can - further extended. And then for the remaining of the 2018, the credit terms, as I just mentioned could be further extended due to the prolonged hospital payment terms, and high portions of sales of polypeptide products. And also I want to highlight the inventory situation. I think, as you might see from our - the financials, inventory balance increased close to $11 million, I think the main reason behind this increase is the raw materials earnings increased. We had about $17 million increase in the raw materials account compared to the year and last year. Work-in process and the finished goods actually decreased close to $4 million and $3 million respectively during the first quarter. I think the reason behind the raw materials increase is, because we do notice the weaker market demand, and also the hospitals' demands got weaker in the first quarter, so we downward adjusted our plasma throughput in the first quarter. So - but our plasma collection on the same side has continued to increase, so that's the reason caused raw materials continue to increase. I think the question regarding the TianXinFu is actually - during the first quarter, we actually - we just closed the transaction in January. So we did actually begin to integrate the TianXinFu business in ours during the quarter. In the past quarter, we did - we're mainly actually trying to integrate their HR, financial, IT, operations, the function, the departments into our financial. And by far, we have to reorganize the board and the management team, and also we defined those major management team - each management teams' duties. And we evaluate the growth strategy and we're trying to occupy their product portfolio. And I think, as we talked about in the past that we will use the TianXinFu's expertise to help us to sell the plasma product. As we indicated in the past, our major focus for their sales team is to help us to sell those high-end coagulation factors as a start. So I think, they already start to try to introduce our coagulation products to their audience [ph], the therapeutic - the departments like the neurosurgeon department. They already help us to try to educate the doctors. But I think, in China, for those hospitals to buy our products, we probably need their formulary [ph] committee to approve. So I think, it's going to take a long time for the product goes through the hospital required process to - in order for them to purchase our product. But I think all those already have been laid out and actually in the process. And I think, the last question regarding the Xinjiang Deyuan is - I think, very short answer is given the recent market dynamic change, we're actually in the process of reevaluating the existing contract, which we signed with them three years ago, and we will further negotiate with Xinjiang Deyuan company for the future collaboration. And by far, we have no meaningful progress can be disclosed at this moment.

[Yolanda Hu:]

Okay. Thank you very much.

[Ming Yin:]

I hope that answers your question.

[Yolanda Hu:]

Yes. This is very helpful.

[Operator:]

Thank you. And the next question comes from Jessica Lee with Bank of America Merrill Lynch.

[Jessica Lee-Hansen:]

Well, good evening. Thank you for taking my questions. I have a couple. First going back to your guidance, I understand your hesitation to revise your guidance at this point given the market uncertainty. But would it be possible to provide us with a kind of scenario? Under which scenario of what major signals that you would like to see like for you to maintain guidance? Given what you've described, it looks like it's actually quite difficult for you to maintain your guidance? So I just want to understand under what scenario maybe I'm missing out something. And then, what would be the worst-case scenario. Would 1Q's result be the worse or you see potentially even worse? So second question with the - on your amortization policy for intangible assets related to the TianXinFu acquisition, I notice that you recorded a US$2 million in amortization in the first quarter. So how can I back out that calculation? So these are the two questions. Thank you.

[Ming Yin:]

Yeah, I think - Hi, Jessica, I think the first question as we just answered or maybe I want to repeat what we are concerned or the reason behind why we hesitated to provide the guidance at the moment. I think, there are few key factors, which we - lack of visibility to provide any assumption or we do the modeling. So the first one is the healthcare reform or the regulatory change impact. The second one is the inventory position in the distribution channel. And also the last factor could be the importation volume growth. And the first factor, as we explained in the first quarter, we - our regional hospitals, direct sales channel recorded close to 30% of volume drop. And I think that because of, like many regional hospital, we serve either direct or through distributor, probably reduce the purchase of the plasma products. And because they have to meet 30% of the drug revenue cap rule. And also because of what we start to notice, more and more regional hospitals by the - implemented required doctors to prescribe the medicine in accordance - strictly, in accordance with the approved indications to lower the plasma products prescription. I think that's very - I think those could be of there - dismissing sign for us to - we didn't expect at all, because for the first quarter, we - as David said, this is worse-than-expected performance. But about this policy can drag through the remainder of the year. It remains uncertain, because it's purely a hospital decision. So think this would be the most impact us, because for us, we just want to actually highlight the difference between us and our competitors, because we measure majority of our sales from the direct sales channel, but our competitor maybe sells through distributors. So that's why we have large exposure to the hospital than our peer company in China. So that's why our hospitals strictly try to lower the plasma prescription or they purchase less plasma. We got our - our impact is the largest competitor with any of the competitors. And also, the second concern we have is actually, we do see higher than the usual inventories of large and small distributors as of today, because some of our distributors, we have about five to six months of sales of inventories. So I think this is very - not healthy time for distributor to - if this means the distributor may take a long time to destock their inventory. So the distributors' high inventory position could actually impact our 2018, the whole year, the growth outlook. And even we had about 20% growth by collaborating with new distributors with some new pharmacy customers. But I think that kind of a growth actually are at a cost with lower product costs. So I think those - the overall distribution channel right now represents more challenge than us, because everybody is trying to engage distributor to sell their products with all the favorable terms, lower pricing - continued lower pricing, longer credit terms. So I think for us, it's not really us to maintain our strategy, we have to kind of keep updated with our competitors practice, what the newest policy with distributor, we have to actually kind of adjust our sales strategy to distribution channel by matching our competitors selling terms. So I think that's now uncertain, we cannot foresee at the moment. So the last factor, we don't actually have visibility, it's because of multinational imports for albumin. Even the last quarter of 2017, we see have a little [ph] growth for the multinational. But for the first quarter of 2018, we do see about 7% of year-over-year growth from the import volume. So I think whether that importation volume can continue to grow in the remainder of the year, it will be very difficult to assess at this moment. So I think that's my answer for your question number one. I think the second question regarding the amortization, as we proposed in the earning release the intangible assets amortization expense with association with TianXinFu acquisition is around $2.2 million U.S. dollars in the first quarter 2018. So how do we calculate that is because during the - that basically the - we have reengaged the - of appraisal company who helped us do the appraisal actually, according to their evaluation, the overall intangible assets appreciation - appraisal appreciation is for the US$69 million, mainly comprised of customer relationships of US$55 million, and certain technology about $8.6 million. And because based on the stock price of acquisition day in early 2018, so the total consideration is about the RMB 2.8 billion. So after deducting all the appraisal appreciation and the minority interest impact, we reported about the goodwill U.S. dollars - the $329 million. So I think that's basically just how did we actually calculate the intangible assets, actually calculation. Basically I think most of those intangible assets had about 8 to 10 years amortizable life.

[Jessica Lee-Hansen:]

Great, thank you.

[Ming Yin:]

Thank you.

[Operator:]

Thank you. And the next question comes from Su Zhang with CMS.

[Su Zhang:]

Hi. I have two questions if I may. And so, the first thing is about distribution channel volume. You mentioned that in Q1, the volume went up like 30%. I understand that a lot of it has to do with inventory stocking, and some of it is related to opening new accounts and having new distributor for instance. So can you maybe sort of split it up and remind us how much is that related more to the inventory part and how much is more related to new distributors? That's the first question. And my second question is really regarding your marketing strategy. So as the competition intensifies, so basically what's your priority now? And is it end market share in albumin and IVIG or is it more on profitability?

[Ming Yin:]

I'm sorry. I didn't get your second question.

[Su Zhang:]

Hi, so basically my question is really on your marketing strategy. And so, basically, what's your priority right now? Is it more on the - focusing on the end market share? Or is it focusing more on profitability, because just from the past quarter, I just so can't quite get a direction of your strategy, because it sounds for me that your volume growth is not that good. And at the same time you are suffering from the higher marketing expenses. So apparently you are investing quite a lot in terms of marketing expenses. What's the purpose of that? Is that to win back market share or is it just to help you to launch new products? So just so can you maybe explain that? Thank you.

[Ming Yin:]

Sure, sure, I understand. Yes, yeah, I think the first question, yeah, I think we do actually experienced about 30% year-over-year growth among the distribution channel. Especially for the - but I think that's mainly from the albumin market, because as - I think during the first quarter you already seeing - you mentioned there is inventory stocking by many, many peer company in this industry. I think our position is this - we are actually qualifying what's the percentage from the new account or from existing account, but I just want to share you our pricing strategy. This could be related to your second question. As I talk about our competitors lower even 10% or below the price than the ex-factory price to the hospitals. But we - even within the hospital channel, our price didn't go up. We didn't lower our price that much. So from that perspective, you will see from the distributor perspective they always want to get the cheapest product, right? So for inventory stocking position, they won't choose us, because our price is too high compared to our competitors. So that pretty much just explain most of the albumin or the plasma product in the distribution channel in the first quarter 2018, the growth mainly came from the new accounts from the new region and from certain - the new areas. And that's the first question. And then for the second question, it's regarding our priority, definitely just so like I said, our products - our product pricing, even today, we're not the lowest seller. So basically, we're very hesitant. Our priority is to keep the profit growth intact, so that's why during the first quarter we - you probably see some of our peer company in China, they recorded a very performance in the sales, but on the cash flow and the profitability actually contributed a lot. So from this perspective we actually - our priority is not trying to take as much market share by lowering the product pricing clearly at this level, because we think most of those - the price slashing is not very rationale, because in the past few years, our efforts trying to educate the doctors, trying to promote the products, trying to do all the marketing activities is trying to nurture premium marketing and the brand situation. We're trying to keep the product price high. But unfortunately today you see a lot of the peer companies start to be nervous about the - the dynamics change, their high inventory position, trying to lower price, it definitely hurt us. So we do engage - we do incur a lot of a marketing expense increase. For example, we increased our selling expense significantly in the first quarter. But I would point out, that increase I will say more than half is from the polypeptide products. During the policy change we want to combine with two-invoice policy, so another half is from plasma product. So what we did with that - the half - the increase in the marketing expense in the plasma sector, so around 60% increase, is that came from the same expense - increase related to increased spending, marketing and promotional activity for the certain new - key distributor in new region in the tier 1 cities. And in the second half of 2017, we accessed certain new regional markets by offering a slight product discount. But we won't actually - we agreed to spend more marketing and sales promotion on distributor behalf. So that way we actually collaborated with distributor, help them to do the marketing to reach out to their customer hospitals, trying to have them to switch their existing brands to ours. So that's one of the major spending. And also we have on the 20% of the selling expense increase was caused by the marketing expense incurred by the sales channel change of certain high unit products, due to recent implementation of the two invoice. Certain of the small high unit product, we used to sell through the multiple layer of distributors to the CDC inoculation center. Now, we have to - because of policy change, we cannot - we have to use - we have to sell directly to CDC. So that's why we incurred certain - the marketing and the promotion activities for - to maintain the channel. And I think the small amount of data increase, about 20% of the selling expense increase was related to our internal sales force. We do actually hire additional people. But I will say, most of the spending we did actually trying to open up more channels and open up more hospitals and have the more hospital, doctors educated, have them to switch our existing products to CBPO's products. I think those spending are - even today, I think there are some percentage of our sales, if you back out the polypeptide products, the TianXinFu's, I think we still - our selling percentage, sales percentage on the marketing is still actually below to our Asian companies. So I hope that answers your question, Su.

[Su Zhang:]

Very good, thank you.

[Ming Yin:]

Thanks.

[Operator:]

Thank you. And that does conclude the question-and-answer session. I would like to return the call to management for any closing comments.

[David Gao:]

Thank you for your participation and ongoing support of China Biologic. Have a good day.

[Operator:]

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