China Biologic Products Holdings Inc
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Bill Zima:]

Thank you, operator. Hello everyone and thank you for joining us on today’s call. China Biologic announced its quarterly financial results on May 3 after the market closed. The earnings release is now available on the company’s website. Today, you will hear from China Biologic’s Chairman and Chief Executive Officer, 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 details. The CFO, Mr. Ming Yang, is also available on the call and will be available during the Q&A session that follows 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, 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 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 any 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. With that said, now I am pleased to present Mr. David Gao, Chairman and CEO of China Biologics. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone and welcome to China Biologic’s first quarter 2017 conference call. During the first quarter, we experienced positive sales growth of 13% in RMB terms or 7% in U.S. dollar terms along with non-GAAP adjusted net income growth of 30% in RMB terms or 23% in U.S. dollar terms. This growth was achieved in spite of negative 6 percentage point impact from foreign currency conversion in the first quarter as well as our buildup of plasma inventory in anticipation of our planned temporary shutdown of our current Shandong facility later in the second quarter. Due to this inventory control, our Shandong facility experienced low single-digit sales growth during the first quarter as planned, while our Guizhou facility maintained strong sales growth momentum both for plasma products and for placenta polypeptide products. The strong growth of plasma products was supported by increased outsourced raw plasma from Xinjiang Deyuan and the notable increase for placenta polypeptide products was attributable to greater product demand from distributors possibly stemming from the anticipated nationwide rollout of our two invoice policy system mandated by the Chinese government, which would eliminate multiple layers of sales and potentially result in higher billing prices for the distributors in the future. During the reporting quarter, we continued to concentrate our sales efforts for plasma products on large hospital customers and the larger distributors. This focus has resulted in accelerated growth among major regional hospital customers and distributors, primarily located in Tier 1 and Tier 2 cities. We were pleased to experience year-over-year improvement in gross margin and non-GAAP net margin in the first quarter of 2017. The improvement was attributable to several factors, including greater concentration of products made from company collected plasma instead of higher costs with third-party plasma, strong sales volume growth from our higher margin placenta polypeptide products, greater financial contribution from Guizhou Taibang since our equity interest increased to 100% compared to approximately 85% in fourth quarter of 2016, and finally from the enhanced minority interest contribution from our Xi’an Huitian facility. Additionally, we continue to make progress with our initiatives to increase our future plasma supply. Both our internally collected plasma and outsourced third-party plasma volume continued to grow as expected. The construction of our new Shandong facility remains on track. As I touched upon earlier, they would temporarily shutdown our current Shandong facility in the second quarter for several weeks in order to reallocate personnel to our new location to conduct planned validation procedures and we also expect to experience further periods of production suspension in the second half of the year for the new plant trial operation and the GMP certificate inspection process before we can obtain the GMP certificate to commence final formally operations of the new facility. The cumulative production suspension between our existing and the new Shandong facilities is expected to last up to three months. With respect to our research and development initiatives, we are making good progress and have initiated the clinical trial for the Human Coagulation Factor IX. We are also awaiting the onsite clinical data inspection of fibrinogen by the CFDA to obtain final approval. We believe these new products will further improve our plasma fractionation utilization and contribute to our sustainable financial growth over the long-term. For the remaining quarters of 2017, we will maintain our operational focus in several key areas. These include exploring new regions to expand our plasma collection coverage, enhancing our efforts to introduce new products to the market as planned, and managing public tenders in various local markets to secure business with optimized pricing. Additionally, we will continue to invest in our medical marketing platform to accelerate demand volume for our newly launched products and also for our other products that can benefit from the expanded reimbursable indications of the government recently updated national reimbursement drug list. We believe this bodes well for our outlook this year and in the coming years ahead. I am happy to reiterate our full year 2017 financial outlook of sales growth of 13% to 15% and adjusted net income growth of 18% to 20% over the prior year. This concludes my prepared remarks. I will now turn the call over to Ming Yin, our Senior Vice President, to review first quarter financial results. Ming, please go ahead.

[Ming Yin:]

Thank you, David and hello everyone. We are pleased with our growth in both gross margin and net income during the first quarter of 2017. Now, allow me to walk you through key P&L items to provide you more details on how we achieved this growth. During the first quarter 2017, total sales increased by 12.7% in RMB terms or by 6.9% in U.S. dollar terms to $91.5 million primarily attributable to sales volume increase in human albumin products and placenta polypeptide products. During first quarter, human albumin and IVIG products remained the company’s two largest sales contributors accounting for 40.3% and 34.8% of total sales respectively. The sales volume of human albumin increased by 20.6% in first quarter 2017 while sales volume of IVIG products decreased by 5%. The average price for human albumin products decreased by 1.2% in RMB terms while the average price for IVIG products increased by approximately 3.2% in RMB terms in the first quarter of 2017. Revenue from hyper-immune products decreased by 1.7% in RMB terms accounting for 9.1% of total sales in first quarter 2017. Revenue from other plasma products including human Factor VIII, human prothrombin complex concentrate increased by 8.2% in RMB terms representing approximately 4.7% of total sales in the first quarter of 2017. Revenue from placenta polypeptide product increased by 89.3% in RMB terms accounting for 11.1% of total sales in the first quarter 2017. Cost of sales was $32.3 million in first quarter 2017 compared to $34.1 million in the same quarter 2016. Cost of sales as a percent of total sales was 35.2% compared to 39.8% in the same quarter 2016. The decrease in cost of sales was mainly due to the less use of high cost outsourced raw plasma as well as greater sales concentration of higher margin placenta polypeptide products. This resulted in 15% year-over-year improvement in gross profit to $59.2 million in first quarter 2017. Gross margin also increased to 64.8% in first quarter of this year from 60.2% in the same quarter 2016. Selling expenses increased by 216.7% to $3.8 million in first quarter 2017. As a percentage of total sales, selling expenses were 4.2% primarily due to higher marketing and promotion costs related to certain hyper-immune products and placenta polypeptide products. G&A expenses increased by 34.5% to $15.2 million in first quarter of 2017. The increase in general and administrative expenses was mainly due to a $3.5 million increase in non-cash share based compensation expenses. Excluding the impact of these share based compensation expenses, G&A expenses would have remained stable at 7.9% as a percentage of total sales in first quarter 2017 compared to the same quarter 2016. R&D expenses increased to $1.4 million in first quarter 2017 from $1.1 million in the same quarter 2016. As a percentage of total sales, R&D expenses were 1.5% and 1.3% in the first quarter of 2017 and 2016 respectively. Income from operations increased by 2.4% to $38.8 million. Operating margins slightly decreased year-over-year to 42.4% from 44.3%. Net income attributable to the company increased by 14.5% to $30 million. Net margin was 32.8%, up from 30.6% in the first quarter 2016. Fully diluted earnings per share increased to $1.06 from $0.94 in first quarter 2016. Non-GAAP adjusted net income attributable to the company was $37.4 million or $1.32 per diluted share in first quarter of 2017 representing an increase of 29.7% in RMB terms or 23% in U.S. dollar terms over the prior year period. Non-GAAP adjusted net income and diluted earnings per share excluded $7.4 million of non-cash employee share-based compensation expenses. Now I would like to turn to the balance sheet and cash flow items. As of March 31, 2017 we had $197.4 million in cash and cash equivalents primarily consistent of cash on hand and demand deposits. Net cash provided by operating activities for the three months ended March 31, 2017 was $13.1 million, a decrease of $11.1 million largely due to the increase in accounts receivable and inventory. Accounts receivable increased by $17.6 million during the first quarter of 2017 as compared to $5.3 million during the same period in 2016. The accounts receivable turnover days for plasma products were 46 days during the first three months of 2017 compared with 33 days in the same period in 2016. The increase in turnover days reflects a combination of higher percentage of direct sales and a higher percentage of large hospital customers and large distributor customers that typically request longer credit terms. Inventories increased by $9.1 million as compared to $3.9 million during the first quarter 2016. The increase was mainly because of the company’s stockpiled sufficient inventory for the planned temporary Shandong facility production suspension. Net cash used in investing activities for the three months ending March 31, 2017 was $9.1 million, which included $9.1 million payment for a position of property and plant equipment, land use rights for Shandong Taibang and Guizhou Taibang. Net cash provided by financing activities for the first quarter 2017 was $8.8 million mainly consisting of $8.7 million short-term loan. Our working capital as of March 31, 2017 was $348.8 million and our coverage ratio was 5.14. Total shareholders’ equity was $560.9 million as of March 31, 2017 compared to the $521.1 million as of December 31, 2016. Turning to the full year guidance, we reiterate our full year forecast of total sales for 2017 to grow 13% to 15% in RMB terms and expected non-GAAP adjusted net income to grow 18% to 20% in RMB terms over 2016 financial results. This guidance factors in impacts associated with cumulative production delay of approximately three months at our Shandong facility as we transition into a new facility. This guidance does not factor in any potential foreign currency translation impact. We adopt an exchange rate of approximately RMB6.63 equals to $1 based on weighted average quarterly exchange rate in 2016 when translating our 2016 financial results and expect the total sales and our non-GAAP adjusted net income in U.S. dollar terms in 2017 will be diversely affected by foreign currency translation impact. This guidance assumes only organic growth and excludes acquisitions and necessarily assumes no significant adverse price changes during 2017. This guidance reflects company’s current and preliminary views, which are subject to change. That concludes our prepared remarks. We will now take questions.

[Operator:]

The first question comes from Jack Hu with Deutsche Bank.

[Jack Hu:]

Thank you for taking my question and congratulations for the strong profit growth. I have three questions here, my first question is on the relocation of the manufacturing facility, can you share with us what the key milestones are and the timeline of each of the milestones. My second question is regarding your inventory, I would have expected the increased inventory was mainly finished product, but because you have to prepare for the shutdown of the facility, however the press release mentioned it’s mainly comprised of raw material, so can you explain on this front. My last question is regarding your relocation of the company to Cayman Island from Delaware, can you share with us the reason behind that? Thank you.

[Ming Yin:]

Thank you, Jack. Let me try and answer the questions one by one. The first question related to the Shandong facility transition. As David just mentioned, we actually planned to have the first phase of the plant suspension in the later of the second quarter, which were expected to do the validation procedure for the plant. So basically what we are going to do is we are going to do simulation test on the equipment, which is FDA’s requirement. And the second milestone was the suspension, we are probably going to combinate will be in the third quarter and we will actually do the trial production on the new-to-building facility, which could take up to 1.5 and 2 months. And the third milestone is whenever we feel fully comfortable with the new facilities the trial production, we will submit the safety for the GMP inspection, which hopefully we can actually have that accomplished by the year end in December so which is going to take in general 15 to 25 days in the GMP onsite inspection. And that’s pretty much what all are the major milestone for the plant’s suspension for the cumulative 3 months. And currently, we actually have the plant constructed as planned. We have purchased most of the equipments and we are currently in the process to install all the equipments. And our goal is whenever all the equipments who are being fully installed. We are going to start at the first phase of the suspension hopefully in June. And that’s my answer to your first question. The second question is regarding the inventory buildup, I guess, you are right. If you are looking at the inventory composition for the end of March 31 actually we maintained relatively similar percentage of total inventory in the end of March. And you are right, the raw material do increase more than the finished goods products, because there is two reasons. Number one, our Shandong, Guizhou and even the third-party collected plasma continued to grow very healthy. And the second reason is our Shandong facility is pretty much at full capacity, that’s why we collected more plasma and the current facility doesn’t actually have enough room to further process. That’s why we stopped how the long-term inventory. But regarding for the – the finished goods inventory buildup, you are right because we do reserve certain raw material in the reserved sort at finished goods to prepare for the plant’s shutdown in the second quarter. And if we didn’t plan that, the finished goods in the inventory line will be decreased substantially. So that’s my answer to second question. So, the third question actually is regarding to our recent finding for our plan to redomicile the listed company, the incorporation from U.S. Delaware to the Cayman. And I think we believed the redomicile merger is consistent on our company’s strategy on focusing in China plasma market, including expanding our business in China and which will allow us to reduce operational and administrative and legal accounting cost over the long-term. More importantly, the pharmaceutical industry in China is strictly regulated and officially or unofficially may favor companies that are incorporated in jurisdictions that are not politically and economically perceived to be the competition with China. For example, plasma collection stations provoke the government-sponsored R&D incentive grant and the access to potential key customers, are all controlled by the central government. In addition, we currently have no operations in United States and we believe that there is no particular reason to remain incorporated in the United States. We believe that the most overseas incorporated company whose assets and operation are primarily in China have adopted a corporate holding structure similar to the structure we proposed to adopt in the re-domiciled merger. Therefore, we believe that moving our jurisdiction of incorporation outside in the U.S. better adapt us to the regulatory environment in China and allow us to better compete with our competitors. And for the detail, please refer to the proxy statement and prospectus we filed with SEC for the more information. Thank you, Jack. Hopefully, I fully answered your question.

[Jack Hu:]

Thank you.

[Operator:]

Thank you. And the next question comes from Yolanda Hu with Morgan Stanley.

[Yolanda Hu:]

Thanks for taking my questions and congratulations on a strong quarter. I have two questions. First for albumin, so not only for imported albumin declined lot in the first quarter, do you expect this trend to continue in the next few quarters? You mentioned that ASP of your albumin declined by 1.2% in RMB mainly due to mix change among different dosages. Why is that? And for each dosage, can you tell me did you cut expected price? My second question is for placenta polypeptide. When do you think the two invoices in policy will start to be implemented in your key provinces? If you change to your high expected price for PP, what kind of gross margin also selling coverage ratio do you expect for this product compared to previous level? Net-net, what could be potential impact on the net profit? Thank you.

[Ming Yin:]

Thank you, Yolanda. Let me try and answer your first question regarding the imports. So, I think we do actually notice – we do notice the imported or multinational volume for albumin gets elevated in the first quarter, which shows about 4% decrease compared to year-over-year. And we don’t actually have a visibility on the following quarters what the volume growth will be, because we don’t actually have that kind of insight to share. Regarding to the reported albumin price decrease by 1.2%, because we sold a different dosage, trying to give you some color – and what caused that is because we typically sell albumin in 10 grams and 5 grams in two dosage and even our reported albumin price decreased 1.2% in this quarter in RMB terms. But in reality, the respective average price for 2 dosage 10 grams and 5 grams remained flat year-over-year even quarter-over-quarter. The 1% average price drop is due to actually sales concentration shown between 10 grams and 5 grams and during the reporting quarter, we sold less 5 grams albumin. Actually, we sold out 10% less in the last year essentially and the price actually between the 5 grams and 10 grams I think is about the 10% difference. In other words, the equivalent price of 5 grams on average base could be 8% to 10% higher than 10 grams. And the reason for that is because the 5 grams to albumin used to be non-conventional medicine which is in best regulated price control. In other words, 5 gram product used to – didn’t go through the regular tender, the process and the certain regional governments allows the hospital to directly increase the product. That’s why we sold a lot of volume in the last year in the same period for the 5 grams. But in this recent – the tenders reflecting [indiscernible] and we see other regions, the government already include the 5 grams in the tender process, because the usage or the hospital consumption for 5 grams has been substantially increased. So, that’s why the government is already including the 5 grams in the regular tenders. So, that’s why we viewed in the future the price difference between 5 grams and 10 grams. The advantage might not be very sustainable, because like I said earlier, the 5 grams is not conventional dosage, the hospitals still prefer to use 10 grams or even high dosage, because for the convenience perspective. And for the second question regarding why we had significant volume increase in the placenta polypeptide products. As David mentioned earlier, we do observed or noticed the distributor clear lot of purchase order during the first quarter. Actually a lot of more we expected – originally expected volume for the first quarter. And we think there could be two reasons behind this. Number one is last year we expanded – we significantly expanded our hospital network from 800 hospitals to 1,200 hospitals last year. So increased the hospitals network actually to accommodate a portion of those volume growth. The second reason is we cannot rule out the possibility that some distributor might want to stockpile our inventories, but it anticipated that expected price as you mentioned might increase at the full implementation of the two invoice policy. So even the compliance of the two invoice system is not really determined in the states yet, but on the preliminary paid for this impact will be after implementation of two invoice system or full in compliance with the two invoice system will actually result in the higher per unit the ex-factory price. In other words, our factory price might increase and because the ex-factory price increase, our gross margin will be benefit from that, the margin will go up and under the two-invoice policy, the government requires the manufacturer to issue one invoice to distributor and the distributor issues an invoice to hospital. And since we deal with hospitals directly, so the hospitals typically will plan a longer credit terms, so in this regard, we think our accounts receivable balance or targets might be the impact. But currently we are actively exploring new sales model for the placenta polypeptide product to be in full compliance with the two-invoice regulations such as we are working on the new sales policy to design either jointly or independently promoting the placenta business in the future. If we consider to engage in independent sales and promotion activity in the placenta polypeptide products, which might result in higher spending and marketing expense, but we believe that net profit margins should enhance afterwards and that’s our current trade. We cannot qualify the full impact that are current the estimate for the two-invoice policy for the polypeptide products impact. Hope that answers your question well.

[Yolanda Hu:]

Yes.

[Operator:]

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

[Jessica Li:]

Thank you for taking my questions. Congratulations on the very solid quarter. So I have a few questions, first what’s your expectation for the timeline and price implication from the upcoming Shandong and Jiangsu tendering, so that’s one. Two, on your selling expenses, so it seems that the selling expenses really shot up significantly in the quarter a while back, what should be a more sustainable level going forward. And just finally on your Redomicile merger, any guidance as to how long it would take for this to complete, should we expect the company to get approval for more new plasma centers once you successfully Redomicile from Delaware to Cayman? So, these are my questions. Thank you.

[Ming Yin:]

Okay. Thanks Jessica. Let me try to answer your three questions. The first question regarding the Jiangsu and Shandong tendering, so I think I should give a little bit color on the overall tendering progress and right now there is mostly 31 province and regions already started tender in May 2016. But only partial results for the tenders has been issued among those half of those regions, among half of 31 regions. And typically we currently we actually are pretty much focusing in the 15 including the province and regions. Either we have a direct sales coverage or distributor sales, we have 15. So instead of Shandong and Jiangsu, we have another 13 provinces where we are currently are very focused on those markets. But regarding the Jiangsu, I think it’s already been public, disclosed by government, so basically they released the price, bidding price by all the manufacturers. I think Jiangsu is very interesting. I think it’s worthwhile to just give a little bit backdrop how Jiangsu’s approach is different from other provinces or might be different. So, Jiangsu actually dividing all the company into two groups so there is basically two groups. Number one group actually is they call it priority groups, which they give to basically the state owned company like CNBG subsidiary because the criteria for the long-term priority group is because either the company or their parent company are top ranked Chinese medical company. For example, CNBG’s parent company is China Pharma. They have over RMB100 billion sales so that’s why they are top ranked and that’s they have a priority. So, the second group is pretty much for all the private company and a multinational company where ranking in the second groups, the criteria for the pricing is basically the first priority groups have the priority to submit the pricing and the Guiyang [ph] government requires the lowest bidding price in the top priority group will be used as a selling price for the second group. Some of that as a result you see from the bidding price released on the second groups, which we or other multinational prices are lower than the first group because in that regard, if you have higher price, you will be out of the tender process. So that’s why the pricing in second group will be lower. But the government also put another interpretation view [ph] is if the second group’s price is lower than the first group, so they probably could go back to the first group, even bids to mid high price, they are going to ask them to bring down their bidding price. So that’s the scenario. So based on the – based on our interpreting the Guizhou’s tender, the rule, even the Guizhou, the process is not finalized yet and we expect they are going to finalize within the – hopefully in May. But based on the rules they basically – our Shandong facility pretty much with all of the bid in Guizhou. And our aluminum price is about 5%, on average higher. IVIG is about 5%, 6% higher and you can see they probably only affect whole company in the second group. So it’s where the competition is well phased. So luckily – hopefully in the final stage, we can secure the tender. Based on that move now, we should be able to win the tenders. And Shandong, regarding Shandong, visibility is based on the latest communication with the Shandong government. They are going to initiate the process as soon as possible. But they don’t give us a timeline and but we see they already started the process. Hopefully, they won’t take too much time to complete the process. But what we are trying to say is the progress and it’s actually behind all the expectations at least for one quarter. And the second question regarding why – we have higher selling expenses through the full quarter, is because actually through the last quarter or the first quarter in 2016, you can see the selling expenses only represented 1% of total sale. That base is much lower than the full year, average base for the 2016. So the base is very low. And also in this particular quarter, we did a lot of marketing promotion activities for the hyper-immune products. And also we did a lot of promotion and marketing activity for placenta polypeptide products. So that’s the main activities we have pursued resulting higher than last year’s reporting quarters the selling expense ratio. But in the full year, we expect, while excluding the full compliance with two-invoice system with placenta polypeptide product – with two-invoice system for the placenta polypeptide product, we cannot quantify the full impact at the moment. But excluding that, we believe the plasma products will probably incur the more promotion and marketing expenses we carry out in first quarter typically for those hyper-immune products and also for those coagulation factor like prothrombin complex. So, as a result the full year base we took the same expense. We think it might increase a little bit. So treatment enhances our competitiveness among the peers company. So that’s my answer for your second question. For the third question regarding the timeline for the redomicile, I think – currently we just submit the prospectus to the SEC and it is subject to SEC’s review, but in general, we believe the process should be concluded after the shareholders’ approval – in the shareholders meeting. So typically in the – last year it was in June, so this year it could be in the same period. So, the process will be completed upon the successful – got the majority of those shareholders’ approval. So, that’s my question. I don’t know whether I fully answered your question?

[Jessica Li:]

Very good. Just quickly, so assuming that you will succeed in redomicile to Cayman, would you expect to get more approval for new partners into?

[Ming Yin:]

I think it definitely – redomicile to Cayman will help us to actually eliminate certain regulatory or regulatory hurdles, because certain rules – Chinese have implicit rules which actually distant us, because, for example, our Shandong companies, those parent companies U.S. corporation. So, the placebo, the Shandong, Taiban is actually U.S. company. So, they are concerned about that whoever all approval timelines for U.S. company. So, I think this is very like that, that’s actually what we encountered in the past. So, I mean, that’s how we believe it’s definitely going to be a huge help – big help, yes.

[Jessica Li:]

Great. Thank you so much. Very good.

[Ming Yin:]

Thank you so much.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from Tony Ren with Maybank Kim Capital Securities.

[Tony Ren:]

Yes, thank you for taking my question and congratulations on a very strong quarter. Got a couple of small questions. Three in particular. So, the first one is about your plasma collection volume. We know that during 2016 you guys actually ended up getting more source plasma from Shandong than anticipated. So, wanted to see if that will be continued for 2017? And also wanted to make sure that the two plasma stations you get approved and scheduled to open in 2017 remain on track. So, that’s the first question. And the second question is that we noticed the price of IG immunoglobulin increased by 3.2% in the first quarter. So, could you provide a little bit of color on that? And the last question is about nutritional fees. I wanted to see if you are seeing a trend in the increasing nutritional fees paid to donors?

[Ming Yin:]

Hi, Tony. I think the first question regarding the collection volume is, we talked on the prior earning call, David mentioned we, in 2016, first experienced the collection volume included third-party collection functions under – over 1,000 pounds milestone. So, it represents close to 20% year-over-year growth. So, I think this year, overall, the collection is still on track and the Shandong variance have delivered very healthy growth as well. And our internal, the organic plasma stations also delivered a double-digit collection growth. So the collection efforts actually, has been very well come out in the first quarter for up-to-date. And for the newly approved station in Shandong. We currently are constructing in one location. We have already – fully buy the land and we purchase the land. We are in the process of building the facility. And as we promised on the last earning – on the press release, we hope we have those two stations will be scheduled to have a commercial operation before the end of 2017, which is on track with our expectation. And regarding the question for the nutritional fees, we have seen very stabilized nutritional fee in the last, I will say, last couple of years and our goal is trying to setup. Actually every year, we do a lot of internal evaluation and we do a lot of modeling to see what kind of nutritional fee increase and what impact will increase our collection volume. So I will see, by far, we want to maintain a very stable policy in the nutrition fee increase. So that will pretty much match the inflation, hopefully, anyway no less than the 3%, something like that. So I think that’s for foreseeable future. That’s also our goal.

[Tony Ren:]

And the question about the price increase of IG?

[Ming Yin:]

Yes, I think the IG increase – in the first quarter, we see the IG – the average price increased about 3%. So basically, as we mentioned earlier pretty much, there is Tier 1 cities like Beijing, because – or Guangdong. The IVIG tender price increased. So that’s why we increased the X factor price to distributors, which is the reason we increased the average – the selling price or X factor price for IG from the first quarter.

[Tony Ren:]

Okay, thank you very much.

[Ming Yin:]

Thank you.

[Operator:]

And the next question comes from Iris Wang with Credit Suisse, Hong Kong.

[Iris Wang:]

Thank you for taking my questions. Could you shed more light about your prep timing, the new plasma collection station approval and do you expect to get in your approval in 2017 and ‘18?

[Ming Yin:]

I am sorry, I am afraid I didn’t catch your question, can you repeat?

[Iris Wang:]

Sure. My question is about your prep line for the approval for new plasma collection station and do you expect any new approvals to obtain in 2017 and 2018?

[Ming Yin:]

Okay. Yes, I think as we talked on the last earnings call, so basically we do actually have a few – the pipeline will be candid for the future collection station typically in Shandong. We believe there is a few – several areas that will be eligible, suitable for opening new stations, which actually will add to the pursuing the Daming full process. So hopefully, we can actually have those approved either in ‘17 or next year. We do actually have that pipeline, yes.

[Iris Wang:]

Okay. And can I also ask about your inventory level, if we try to equip it in the impact from the incurred inventories for your production suspension in Shandong, so what would be the inventory level compared to the previous years?

[Ming Yin:]

So I think as I answered the first question, through the Deutsche Bank question is I said already, so this year’s – the increase is mostly reflecting the raw materials from either our independent collected or outsourced from the third-party collection. So basically the raw material increase is actually the main increase for the total inventory balance increase as of March 31. So, I think you know – so that’s a inventory increase. But for the plant shutdown, so basically we were trying to do – have a plant shutdown in June. So basically, we do reserve a few, I would say, up to 1 month additional months inventory in the end of March. So if we – excluding that, so I think it will probably increase – decrease, but I would say probably one-third or less than one-third of finished goods, the value in the – in our the full notes in the financial statements. That’s pretty much the impact.

[Iris Wang:]

If I may, I want to know in the normal case, so what if you – how many vials [ph] of inventory would stock for the finished product in albumin and IVIG?

[David Gao:]

So I think it’s, we have a – yes, we actually have a different strategy for different trends. So, Shandong we have a totally different inventory managing system, because for example, like Shandong we have a direct – almost a direct hospital customers and the Guizhou we do have a more distribute ourselves. So from that perspective, for example, in Shandong, we have very carefully to manage inventory, because we don’t want end up being the hospital have the products short in the hospitals. So I think from that perspective, we don’t typically disclose what’s in the normal the inventory level.

[Iris Wang:]

Okay. Thank you.

[Operator:]

Thank you. Thank you for attending today’s presentation.

[David Gao:]

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