China Biologic Products Holdings Inc
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[Bill Zima:]

Hello, everyone, and thank you for joining us on today's call. China Biologic announces quarterly financial results on November 1 after the market close. An 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 the 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. 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 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 materially 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 Products Holdings 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 Biologics. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone. Welcome to China Biologic’s third quarter 2017 conference call. We are very pleased to report our quarter with double-digit growth in both our top line and the bottom line, despite temporary headwinds and the market has slowed down from the first half of the year caused by recently implemented health reform measures - healthcare reform measures and that intensified market competition. Our total sales in the third quarter of 2017 increased by 15.1% in both RMB and the U.S. dollar terms. Non-GAAP adjusted net income grew 14.8% in both RMB and U.S. dollar terms. Our growth was supported by several factors including our efforts to actively pursue new sales channels and strategic partners, which included new distributors and the retail pharmacy chains. Meanwhile, we continue to deepen our penetration into existing director sales channels, which also helps us stabilize the pricing of our albumin and IVIG products. As compared to the more competitive distributor channels during the third quarter sales of albumin and IVIG manufactured in our Shandong facility continued to decline due to the planned second phase production suspension at our older facility for the new facilities trial production. Our Guizhou facility received our healthy boost in sales growth for plasma products, which was supported by increased outsourced raw plasma from Shandong Guizhou. The Guizhou facilities non-plasma products, placenta for the peptide experienced a substantial sales increase, which stemmed from a higher sales price due to nationwide rollout of two invoice policy. Operationally, the Shandong facility’s transition progress is on track. With the new facility recently pursuing the trial production, we continue to expect that the new facility which will permanently replace the old facility to be GMP certified by the end of 2017 and to commence commercial operation in early 2018. Our research and development initiatives continue to progress as well. We received the long awaited final approval of Fibrinogen by the CFDA in early October and aim to launch the first batch of this product to the market in early 2018. Our clinical trials for human population coagulation factor IX are progressing well. In the preclinical preparation work for human antithrombin III is on track. We believe these new products will address undersupplied market conditions and make meaningful contributions to our sustainable financial growth over the long run. At the end of the quarter, we were excited to announce the intended acquisition of TianXinFu from PW Medtech. We believe the synergies created by this transaction will help us to accelerate our core plasma products growth and solidify our core plasma business leadership in China by adding extensive sales channels and that strengthening our potential market and sales force, especially for our newly launched and the upcoming high margin plasma products. This concludes my prepared remarks. I will now turn the call over to Ming Yin, our Senior Vice President to review third quarter financial results. Ming, please go ahead.

[Ming Yang:]

Thank you, David and hello everyone. We are pleased with our double-digit growth in both top line and bottom line during the third quarter of 2017. Now allow me to walk you through key P&L items to provide more details on how we achieved this growth. During the third quarter of 2017, total sales increased by 15.1% in both RMB terms and U.S. dollar terms to $99.6 million, primarily attributable to the sales increase of placenta polypeptide, sales of IVIG, human rabies immunoglobulin, coagulation factored products and a human albumin products also increased while sales of human tetanus and involving decreased. During this quarter, human albumin and IVIG products remain the company's two largest sales contributors accounting for 33% and 30.9% of the total sales. Respectively, while sales from placenta polypeptide increased to 15.1% of total sales to 9.4% in the same quarter 2017. The sales volume of human albumin products and IVIG increased by 5.8% and 7.9% effectively, meaning due to enhanced production volume in Guizhou Taibang. The average price for this two products decreased by 3.2% and 0.4% in our streams, respectively in third quarter of 2017 compared with the same quarter of 2016. Revenue from other immunoglobulin products increased by 10.5% in U.S. dollar terms, accounting for 14.9% of total sales in the third quarter of 2017, compared to 15.5% of total sales in the same quarter of 2016. Meaning due to ourselves increased of human rabies immunoglobulin which reflect our enhanced production volume in response to strong market demand in third quarter of the 2017. Revenue from other plasma products including human coagulation factor VIII and a human prothrombin complex concentrate increased by 42.8% in U.S. dollar terms representing approximately 6.2% of total sales in the third quarter of 2017. Revenue from placenta polypeptide products increased by 85.1% in both RMB terms and in U.S. dollar terms accounting for 15.1% of the total sales in the third quarter of 2017. Cost of sales was $32.4 million in the third quarter of 2017, compared to $27.6 million in the same quarter of 2016. Cost of sales as a percent of total sales was 32.6%, compared to 31.9% in the third quarter of 2016. The increase in cost of sales was mainly due to a higher sales proportion of higher cost outsourced raw plasma, which was partially offset by higher sales price of placenta polypeptide following a wider implementation of the two-invoice policy. Gross profit increased by 14% to $67.1 million in the third quarter of 2017 from $58.9 million in the same quarter of 2016. Gross margin was 67.4% and 68.1% in the third quarter of 2017 and 2016 respectively. Selling expense increased by $7.3 million to $10.3 million in the third quarter of 2017 from $3 million in the same quarter of 2016, probably due to an increase of approximately $5.7 million in marketing and promotion expenses related to placenta polypeptide products in response to wider implementation of the two-invoice policy. Marketing and promotion expenses relate to certain higher margin hyper-immune products and the coagulation products also increased. As a result, as a percentage of total sales, selling expenses reached 10.4% in the third quarter of 2017, compared to 3.5% in the same quarter of 2016. G&A expenses increased by 15.1% to $17.4 million in the third quarter of 2017. The increase in general and administrative expenses was mainly due to a $1.95 million increase in the share-based competition expenses. Excluding the impact of the share-based compensation expenses, G&A expenses would have been 8.9% and 9.3% of the total sales in the third quarter of 2017 and 2016, respectively. R&D expenses increased to $1.4 million in the second quarter of 2017 from $1 million in the same quarter of 2016. As a percentage of total sales, R&D expenses were 1.4% and 1.2% in third quarter of 2017 and 2016, respectively. During the third quarter of 2016, the company received a government grant of $0.5 million and recognized it as a reduction of research and development expenses. Excluding the effect of government grant, our R&D - our research and development expenses would have remained stable for the three months period ended September 30, 2017 compared with same quarter 2016. Income from operations decreased by 4.2% to $38 million. Operating margin decreased year-over-year to 38.2% from 45.9%. Net income attributable company increased by 11.2% to $31.6 million. Net margin was 31.7% down from 32.8% in the third quarter of 2016. Diluted earnings per share was $1.11 compared to $1.01 in the third quarter of 2016. Non-GAAP adjusted net income attributed with company increased by 14.8% in both RMB terms and a U.S. dollar terms to $39.4 million in the third quarter of 2017 from $34.3 million in the same quarter of 2016. Non-GAAP net margin remains stable at 39.5%. Non-GAAP adjusted earnings per diluted share increased to $1.38 in the third quarter of 2017 from $1.22 in the same quarter of 2016. Non-GAAP adjusted net income and the diluted earnings per share exclude non-cash employee share-based compensation expenses of $7.8 million and $5.9 million for three months ended September 30, 2017 and 2016, respectively. Now, let's look at our results for the first nine months of the 2017. Total sales for the first nine months of the year increased by 10% in RMB terms or 6.4% in U.S. dollar terms to $280.3 million. The increase in sales was The increase in sales was primarily attributable to the sales increase of both plasma products and the non-plasma products. As a percentage of total sales, sales from human albumin products and IVIG products accounting for 36.4% and 32.9% respectively for the first nine months 2017. Gross profit increased by 8.9% on year-over-year to $185.5 million in the first nine months of 2017, resulting gross margin up 66.2%. Income from operations in the first nine months in 2017 decreased by 3.6% over the prior year period to $116.3 million. Net income attributable to company increased by 8.5% to $92.6 million for the first nine months of 2017, resulting net margin up 33%. Non-GAAP adjusted net income attributable to company increased by 19.4% in RMB terms or 15.4% in U.S. dollar terms to $115.3 million in the first nine months of 2017. Non-GAAP adjusted earning per diluted share increased to $4.05 cents, non-GAAP adjusted income and the diluted earnings per share excluded non-cash employee share based compensation expenses of $22.7 million for the first nine months of 2017. Now I would like turn to the balance sheet and the cash flow items. As of September 30, 2017, we had $216.4 million in cash and the cash equivalents, primarily consisting of cash on hand and demand deposits. Net cash provided by operating activities for the nine months ended September 30, 2017 was $72.6 million, as compared to $87.3 million for the same period in 2016. The decrease was largely due to increase in accounts receivable and inventory. Accounts receivable increased by $37.8 million for the first nine months of 2017, as compared to $16.1 million during the same period 2016. The accounts receivable turnover days for plasma products increased to 55 days during the first nine months of 2017, from 45 days in the same period of 2016. The increased turnover days reflect a combination of a higher percentage of drug sales and higher percentage to the large hospital customers and large distributor customers who typically are requested longer credit terms. Inventory increased by $34 million in first nine months of 2017, mainly due to increase in outsourced and self-collected raw plasma. This increase was higher than the inventory increase of $24.5 million during the same period in 2016, primarily because of the raw material and work in process stockpiled during the planned temporary production suspension at our Shandong facility as well as increasing our warm material purchase from Shandong Taibang and a relevant working process at the Guizhou facility. Net cash used in investing activities for the nine months ended September 30, 2017 was $28.4 million, including a $28.4 million payment for acquisition of property, plant and equipment, intangible assets, and land use right for Shandong Taibang and Guizhou Taibang. Net cash used in financing activities for the first nine months of 2017 $18.4 million, mainly consist of dividend paid by Shandong Taibang to its non-controlling interest for shareholder. Our working capital as of September 30, 2017 was $428.5 million and our current ratio was 6.45. Total shareholders’ equity was $665.1 million as of September 30, 2017 compared to $521.1 million as of December 31, 2016. Lastly, turning to our full-year guidance, we reiterate our full-year 2017 non-GAAP adjusted net income growth 18% to 20% in RMB terms over 2016 financial results. We are adjusting our full-year 2017 total sales growth to 9% to 10% of range in RMB terms compared to the previous estimates of the range between 13% to 15%. This adjustment to our full year sales growth is due to a slower than expected of tendering process for plasma product in Shandong and Jiangsu province, and also because of lower the estimate of placenta polypeptide revenue growth caused by the later implementation of the two-invoice policy in 13 province markets. This guidance factors in the impact associated with cumulative production delay of approximately three months at our Shandong facility as we transition into new facilities. It does not factor in any results from acquisition of Jiangsu, which is expected to close at the end of the year. This guidance also does not factor in any potential foreign currency translation impact. We adopt exchange rate of approximately $1 equal to RMB 6.63 based on the weight of it. Average quarterly exchange rate in 2016 when translated our 2016 financial results and expects to total sales and non-GAAP adjusted net income in U.S. dollar terms in 2017 will be diversely effect by the foreign currency translation impacts. This guidance also assumes organic growth only and the necessary assumes no significant diverse price change during the 2017. This guidance reflects company’s current and the preliminary reviews, which are subject to change. That concludes our prepared remarks. We will now take questions. Operator, we're now ready to take some questions.

[Operator:]

[Operator Instructions] And today's first question comes from Jack Hu of Deutsche Bank. Please go ahead.

[Jack Hu:]

I have two questions this evening and the first one is, how do you think of albumin and IVIG volume and the pricing dynamics going forward? My second question is around reimbursement to the RDO implementation started in the early September. What have you seen, and how do you think of that impact on the P&L in the near-term? Thanks.

[David Gao:]

Well, thank you, Jack. Let me try to answer your question one by one. The albumin volume and IVIG, I will actually keep provide some of the batch approval data. And as of the current available you know, the information provided by the relevant government Research Institute, which could be incomplete, because certain research institute have not published their recent data. The albumin - the overall supply in the third quarter in 2017 decreased by 6.5% year-over-year, and 20% quarter-over-quarter with albumin import volume declined approximately 3% year-over-year. While the domestic album supply volume declined approximately 10% year-over-year, and we don't know whether this declined albumin supply reflected a recent - those including both the domestic manufacturer and the multinational companies reaction to the intensified competition in the industry. And for the nine months actually the overall the gross - the volume growth still represents a positive sign, because the nine months the overall albumin growth is 13% compared with the same period in the last year. Albumin import volume now grow about 21% compared with the first nine months of last year and overall, the imports right now accounting for about 31% percent of the market share. And speaking for the China Biologic, our albumin supply increased by about 8% in the third quarter 2017, compared with the same quarter last year. And we increased approximately 10% in the first nine months and the period - the year-over-year, and we still are ranked at among top three manufacturers for the first nine months, and pretty much we have a 15% of the market share among domestic manufacturers. And just for information, our third quarter sales volume of 6% albumin volume increased actually consistent with our the batch approval data, and for the IVIG overall the third quarter the national supply volume decreased by 24% year-over-year. For the nine months, the data shows this year’s volume was similar to the last year’s level. And for China Biologics, our IVIG supply decreased by 17% in the third quarter compared with the third quarter of 2016. The reason why we have such lower albumin production volume in the third quarter is because we allocated more production capability to certain hyper immune products, for example like rabies immunoglobulin which we have increased production in response to the business for our market demand. And for the first nine months, you know our IVIG production volume remained stable compared with the same period last year. And also we ranked around the top three manufacturer list with about 16% of IG market share in China. And although our production volume decreased in the third quarter and we still actually achieved some 8% year-over-year volume growth. And the reason why we’ll be able to do that is because the proportional inventory which we intentionally held on the first half as of June 30, 2017 in anticipation of implementation of the new tendering price in certain key markets such as Jiangsu and Shandong. However those tender process unfortunately have not been complete in those relevant market by as of now. However, we need to supply those - the key customer in those regions to secure the market share. So, that’s why we actually had a healthy IG ramp-up in the third quarter even our production volume went down because we sold a proportion of inventory. So, before the SP pricing, overall I can only trust the albumin and IG, the pricing situation from all prospected, maybe different from the other domestic manufacturers because all of our condition could be different, so we can only speak for on behalf of ourselves. So, we expect albumin overall at least for the first quarter stable pricing from the our direct sales, the hospital channel, assuming the upcoming group to come in the price negotiate efforts has no significance in price erosion. And we continue to expect the price from an institutional channel will be contained relevant similar level as we reported in the third quarter. And overall, we think our SP for the - in the first quarter could be same in to the third quarter, as in the lower single digit, but that the price erosion compared with last year. And for IVIG, I think you know the similar all pricing expectation from the hospital direct sales channel could be stable, and distribution channel, we might continue the trend in the third quarter to provide certain maybe the low to single digit price discount to certain key distributor in certain key markets. So that's my answer for your first question. So the second question is regarding the reimbursement, as many of you probably knew the central government actually in early this year, they released the 2017 version, the NDRL, National Drug Reimbursement List, in 2017, February, I remember. And also required each province to release the provincial, the level of drug reimbursement list by the end of the summer. Our observation is actual progress has been slower than expected. So far our statistics shows over 20 province have announced their respective provincial level drug reimbursement list, and a portion of this province have implemented the new or revised provincial level, the drug reimbursement list. From our observation, most province have adopt the national list and most of province have adjustment in certain provincial D category drug reimbursement list. And for plasma products, and we haven't seen a major deviation from the central governments aversion in most of provincial government’s aversion. But the detailed implementation plan could be you know significantly different you know province-by-province. For example, some province have the reimbursement caps while some other province doesn't have the cap in place. And also the implementation of the list also depending on the impairment condition or the social security reserve at each provincial level. So, for example, our largest the two markets Shandong and Jiangsu and they have recently adopted a new provincial level of drug reimbursement list of four plasma products and we noticed for example, Jiangsu or Shandong for patients who are subject to the urban residents insurance program in Shandong province, the reimbursement ratio is up to 40% for both of albumin and IVIG consumption and also Shandong government adopt a full - expanded that these are the indication for the usage for both the albumin and IVIG. And for Jiangsu province, our observation is the reimbursement ratio are even higher, so the current Jiangsu government data shows up to 80% of IG consumption could be reimbursable. If the patient actually subject to the urban residence insurance program and so we expect the other key province market could actually publish their respective reimbursement soon. And just - I just want to - so our observation is one with those market, especially like Shandong and Jiangsu, roll out their provincial level throughout the reimbursement list. For our plasma products, we already feel there are potential, the usage increased by the on all those big, the key, the AAA hospital level. So we believe they expanded their condition will further spur the demand for our key plasma products in the long-term. So, hope that answer your question, Jack.

[Operator:]

And our next question today comes from Jessica Lee of Merrill Lynch. Please go ahead.

[Jessica Lee:]

Congrats on the solid quarter given the tough environment. In fact, this is quite a challenging year for you. You have the impact from production suspension which will take out a quarter worth of numbers, and making things even more complicated. 2017 having a busy year as far as health policy implementation goes. We do believe that longer term, these policies will be good for the industry. However, near-term they seem to put more pressure on industry participants even for leading players like you. So, in order to help us better assess the situation whether it’d be possible for you to delineate the impact of those key reform policies on your business and the industry, and to elaborate a little bit on your corresponding strategies. So I think we can just focus on maybe the three key health policies including cost containment on drugs in public hospitals two-invoice and zero markup. Thank you.

[David Gao:]

Just I think the question, it's - so it’s a market related. I think it could be - it's a big question. I'm trying to answer - trying to answer your question for those three the key comments, healthcare reform policy as you mentioned, one by one. So you're right. This year we have seen the most public hospital in China implement the policy, cancel the drug price markup first; and then more and more public hospital and in the second half start to implement policy for from the public hospital started to limit the drug sales revenue to within 30% of the total revenue. And compared with the zero markup policy, the consume - the drug sales percentage, the policy, 30% of the policy we believe have a more impact on us. As most of our products have a higher unit selling price and a large purchase volume might - may easily trigger each individual hospital drug revenue limit line. As a result we’re seeing many hospitals reduce their purchase volume in each order and although they may increase order frequencies. So, so for example there are certain key hospital customers. They use the order once a month with a big order, so for all the products could be one order over you know RMB 10 million. But because of the policy for the - that limit their drug sales revenue win 30% of the total hospital, the revenue. So the hospital have to break their purchasing order to you know smaller order like the order frequency could be weekly instead of monthly. So that's the observation. And as we just talk about this in the last earnings call, remember, the implementation of those policies have demonstrated mix impact across different tiers, hospitals, among our customers. And our experience is sales performance in top tier hospitals in the Tier 1 or Tier 2 cities will be better than the lower tier hospitals, especially those county level hospitals. The top tier hospitals have greater energy to generate more service income with their respective drugs sales percentage are not impact and as a result our sales have been less impact. Small hospital, however has less surgical income or service - other service income, they could generate. So they’re used to be heavily rely on the drug sales income. And those are actually are the small hospital, we actually face more challenging. So overall, you know we still maintain close to 60% of revenue generated from the direct sales channel, as which is consistent, as we reported in the prior quarters, in the third quarter. Specifically for the product albumin we have maintained a rough 80% of our total sales directly from hospital channel. And we just want to actually stress our hospital, the sales for albumin are more concentrating in big hospitals, and for the third quarter the albumin sales volume to big hospitals remain stable compared with the same quarter last year. And as a result, the increase in sales volume to launch hospitals and unfortunately the volume to small hospitals decreased. The average sales volume to the top 50 hospital I would say contribute about 60% of the total albumin sales increased close to 15%, very healthy growth rate compared to the same period last year. And also we maintain a very stable sales price within those channels. And our strategy to focus on large regional hospital has benefited with us with less imminent pricing pressure, and also they stabilize the volume growth. The product IG as we discussed in the last quarter we had about half the volume generated from the direct channel and in other we have from the distribution channel. And among those 50% the direct sales channel we still maintain over 80% of the volume directly sell to the AAA hospitals. And for the third quarter in the 2017, our IT volume to the hospital, you know the sector, you know maintain you know the high-single digit growth compared with same quarter last year. And also as a combined result of increased sales volume to watch hospitals and decreased sales volume to small hospital which is consistent with the albumin situation. The average sales volume include you know, I would say the top 20 hospitals contributed to around 50% of IG direct sales volume, increased very healthy, you know, the growth rate about 20% compared with the same period in the last year, and also we maintain a very stable price. We win those you know direct sales channel. So, I think in the near term, the assessment is that near-term volume pricing pressure could be more concentrated in the lower tier hospitals, and since we have a large the concentration in the big hospitals. And so hopefully we have less negative impact compared to our peers, and but I would have to admit the reason a government, you know the healthcare initiative, you know including real markup and limit drug spending ratio in hospitals have resulted in the payment terms for the industry. And I think you know just I want to actually give a quick summarize for what we have been performed or pursued in the third quarter or in the past couple of quarters as a strategy to support our efforts to kind of fair through their regional government, their healthcare reforms. As David just mentioned earlier, well, in the third quarter, even with the changing healthcare, the reforms environment and has to maintain their healthy growth, those growth actually are supported by our efforts, actively pursue new sales channel and the strategic partner which could include the news distributor and the retail pharmacy chance. And just very specifically, our albumin distribution channel sales volume which previously account about 20% of the albumin sales and we maintained about 35% of growth within those channels in the past quarter. And our IG distribution channel volume growth maintained high double - close to the 10% of revenue, the volume growth. And this growth actually may come from the new distributors. We entered a new certain regional market in the middle of the year like Georgia Province and a certain region in Jiangsu province where we used to have a very limited exposure or have almost zero sales coverage in the past. And we collaborate with the largest local distributor in those regions. So which are - helped our volume growth in those regions. And we’re also developing the new channels, including the certain drugstore chains or the external, the retail pharmacies formerly operated by the hospitals. And sales from the drugstore chains have continued increased in the past few quarters. And as we've talked about we trying to resume the supply relationship in the last quarter, you know typically we're trying to resume the supply relationship with certain hospital we used to work with, in the past. As we discussed in the past that we have about served - used to serve 1,000 hospitals in China, but we downsize our hospital coverage to 600 hospitals due to the limited available products that we could provide at in the past couple of years. And because of recent - the government healthcare reform and policy - a cost of certain hard wins in the sector. So we start to - trying to resume those supply relationship and so far fortunately we have been successfully - we resume the supplying close to 50 hospital customers and our efforts are continuing. And even those hospital could be small, relevant in terms of their size, but we believe the volume could be bringing for - if we could put in database, and also we’re trying to capture the potential market opportunity in regions where we have completed the public tenders. For example, we only sell a few larger hospitals in Jiangsu in the past and even the Jiangsu tender, the process is not complete. And you know we have started that you know, select - active and select the key distributor customers and also we’re trying to you know sign up with certain big hospitals in the region as well. So actually you know that's my answer for the policy impact you know for the zero markups and you know to control their drug spending policy. I think the key policy you know for the two-invoice, I think you know I will look at it is short is, by far you know I will, all observation close 34 province in China have provided detailed guidelines and about half of the province including certain key markets to us like Chungcheong, Shanshu base before have started their former implementation. And most of other province have entered the transition periods and it may implemented by end of the year. So for plasma products as we explained that in the past earning call, our pro memory assessment is that impacts are still many in the distribution channel, where many distributors are becoming more proven - prudent and are willing to purchase product onto to have a better price variability. So in order to offset that impact, you know we just detailed discussed the strategy implemented recently to overcome those difficulty as we talked about earlier as we trying to enter into the retail pharmacy chains, we want to actually sign up a new distributors and a deepened the penetration in existing hospital channels. For the plasma products, I think that the rollout of the two-invoice policy actually have significant impact to our performance. So, in general, the innovation of the multiple layers of disputer give us opportunity to raise the expected price, resulting the higher gross margin and incurring higher selling expense. And for example, in third quarter because of those key province market like us which one, the Hebei know that the two-invoice policy, all kept our products, it trends year-over-year growth over 85%, and mainly those - the revenue growth are attributable to the sales price increase. And I think it's worth to mention, there are certain province implementation are still behind our expectation, such as Guangdong province, Guizhou and Xi’an Huitian, which we expect they - we expect to launch the formal implementation in third quarter. Right now, our assessment is actually the implementation could be delayed to 2018. So that's why our third quarter actual performance and estimate of fourth quarter sales volume for product, the placenta polypeptide product is below our prior estimation we provided at second quarter earnings call. Therefore, we lowered the full year top line growth partially because of this. And the strategy we already implemented to kind of overcome the two-invoice policy impact is actually for the placenta polypeptide products is you know, is actively exploring new styles and the models and penetrating the more hospitals and to jointly or intently promoting the products, on our behalf and all we could engage independent third party, the company actually to carry out the promotion activity for the product, polypeptide product. And so hopefully that answers your questions Jessica.

[Operator:]

[Operator Instructions] And our final question today comes from Yolanda Hu of Morgan Stanley. Please go ahead.

[Yolanda Hu:]

I have three questions. First your credit guidance, self guidance to a 9% to 10%. You mentioned two reasons, can you give us more color on the change for example, how much is driven by plasma and how much driven by PP. And when do you expect the two tenders to be completed and to be fully implemented. Secondly, you maintained a profit guidance unchanged that means margins is higher than your expectation. So, is that largely driven by gross margin expansion or lower minority interests or do you think they, they are sustainable. I know you do not have official guidance which is on 2018 yet, but it's already November. So, do you have any comments on next year’s outlook? Last question, so we heard last month safety released the document and started nationwide inspection on plasma distributors. Do you think this will have any negative impact on the overall industry? Thank you.

[David Gao:]

I think you know as we just talk about the reason we lower the top line guidance for the 2017 was negatively impacted by the healthcare reform matters and intensify the competition. Of course, we - as we discussed on the last earning calls, and we enjoy expect the faster growth in the second half of 2017 based on the plasma at that time, the revenue contributions from non-plasma product, placenta product could actually grow faster and the two offset the shortfall from plasma products for the expedited nationally nationwide while of the two-invoice policy. So, however, the certain province implementation of those policy are behind our expectation for certain key markets like Guangdong, Guizhou and Xi'an Huitian which I just mentioned. And as a result, the third quarter’s performance and as the fourth quarter performance is below our prior estimation at the second quarter. So that's why the lower - the full year top line growth because of this. And also, another reason trigger we lower the top line guidance is actually as you might aware the [indiscernible] process in Jiangsu and Shandong has been delayed almost a year. So which actually caught us as a surprise, we thought that process should actually have been completed in third quarter of this year, but unfortunately no regional government hasn’t completed those process. So that's why the top line - the revenue growth partially we expect at the beginning of the year or second quarter are certainly as ASP grows are not going to happen, so that's why we have to factor in those two changes in our top line guidance at this moment. So I think just very quick to quantify the true impact I will think - maybe 100 basis points to 200 basis points or the revenue decline attributed to the delay of the tendering in those province, another 300 basis points to 400 basis points actually came from the impact from placenta polypeptide. And your second question regarding the top line growth and the lower but we still maintain the bottom line growth. Actually as you already observed for the first nine months we achieved about 19% of the bottom line growth, even the top line only 10%. And you’re right, the higher than expected gross margin and certain cost of spending activities we believe that’s pattern we’re continuing in the first quarter. And the last question is, I think you mentioned the reason is central CFDA is actually time to - they already published the guideline They want to actually - they want to pursue a formal inspection on the coaching, the shift in environment on the distribution channel including distributors, including retail pharmacies. And you know, our experience is, you’re right. There are certain impacts especially also in the distributor in-house and also on the retail pharmacies. I think you know the - the overall the - the governments rational to perform such inspection at this time, we believe the government’s intention is trying to actually trying to assess the overall - the compliance level of the two-invoice system, amount the distribution level for the plasma products. So I think you know that this impact [indiscernible] is temporary. So it's not going to be long lasting. And I just missed your question for the 2018 outlook. I think we're in the process to prepare for the 2018 financial budget, and we’ll update the market, you know in the - the next earning call while we complete such procedure. Thank you.

[Operator:]

This concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

[David Gao:]

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

[Operator:]

And thank you. The conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.