China Biologic Products Holdings Inc
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Hello and welcome to the China Biologic Products Fourth Quarter and Full Year Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now 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 announces quarter end full year financial results in February 28, 2018 after the market close. And 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. And 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. Company's 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 Biologic Products. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone. And welcome to China Biologic's fourth quarter and fiscal year 2017 conference call. 2017 was a challenging year for our industry and for our business. More-aggressive-than-expected implementation of certain government healthcare reform policies impact our performance especially the fourth quarter. For example, to ensure immediate compliance with the strict 30% cap of drug sales revenue to total hospital revenues reissues. Many regional hospitals reduced purchases on certain high-unit-price plasma products, which reflected the collective efforts of regional government agencies to lower overall medical insurance spending. Intensified marketing competition in the lower sales propulsion from higher unit price dosage decreased to the average price of human albumin products. Additionally in order to maintain our leading market position and intensify the competition and the regulatory pressure. We engaged in more marketing and promotional activities which increased the selling expenses year-over-year. On the other hand, the government's reform measures provided us with certain opportunities for growth due to a higher proportion of higher invoice per shipments resulting from wider implementation of two-invoice policy across China in 2017. Our revenue from placenta polypeptide products grew significantly year-over-year allowing us to meet our revised overall sales guidance of 10.5% year-over-year growth in RMB terms or 8.6% in US Dollar terms. We also made great progress operationally in 2017. Our new Shandong facility received its final production certificate and it began full operation in later February 2018. We believe this facility will ease our capacity constraints and improve our production volume. We also received the operating permit and launched trial operations for our Ju County plasma collection station in Shandong Province in December 2017. And expect to complete the construction of our Daming plasma collection station and the Feicheng branch plasma collection facility in the first half of 2018. In addition, in February 2018, we received approval from Hainan Province to build a new plasma collection station in Wenchang City for which we expect to begin commercial collection operations before the end of 2018. We will remain focused on exploring new regions to expand our plasma collection coverage and improve the collection efficiency of existing stations. On the R&D side, our fibrinogen products have already been commercially launched to the market. We completed the clinical trial of human coagulation Factor IX and we expect to obtain approval for commercially launch this product by the end of 2018. The clinical trial process of human anti-prothrombin III and the Human Cytomegalovirus Immunoglobulin for intravenous injection remain on track. In the year ahead, we expect continued have beens [ph] from government healthcare reform policies. However, we look forward to leveraging the synergies from our acquisition of 80% equity interest in TianXinFu, which closed in January 2018, to broaden our sales channels and explore new growth opportunities to offset potential volume growth deceleration in our existing product in connection with the continuation of healthcare reform. We remain committed to further investing in medical marketing to accelerate volume growth for newly launched product. In managing public tenders in various local markets to secure optimized pricing opportunities. Additionally, we will further increase our productivity and solidifying our medium market position by accelerating the commercial launch time of our various pipeline products. We will continue to invest in China Biologic sustainable long-term growth and ensuring that we're on the right path to capturing the opportunities presented by the development of China plasma industry. This concludes my prepared remarks. I will now turn the call over to Ming Yin, our Senior Vice President to review the full year financial results. Ming, please go ahead.

[Ming Yin:]

Thank you David and hello, everyone. We managed - to our revised top line guidance for the fiscal year of 2018 while missed - to the bottom line guidance due to the more aggressive than expected implementation of certain government healthcare reform policies. Before discussing our financial performance for the full year of 2017. I would like to address a few key items for the fourth quarter. Total sales increased by 12.2% in RMB terms or 16.1% in US Dollar terms to $90.1 million in the fourth quarter of 2017. Gross profit increased by 26.7% to $59.3 million in fourth quarter of 2017 from $46.8 million in the same quarter of 2016. Gross margin was 65.8% and 60.3% in fourth quarter of 2017 and 2016 respectively. Income from operations decreased by 15.5% to $19.6 million. Income tax expense was $44.7 million for the fourth quarter of 2017 compared to $4.3 million in the same period of 2016. Income tax expenses includes a one-time charge of $40.3 million in fourth quarter of 2017, which represents management's estimate of the amount of US corporate income tax based on the deemed repatriation to the United States of the our accumulated earnings mandated by the new US income tax law that went into effect on December 22, 2017. Excluding the one-time charge, non-GAAP income tax expense for the fourth quarter was $4.4 million. The one-time charge for deemed repatriation will be payable by us over an eight-year period commencing in April 2018. The actual impact of the US Tax Reform on the Company may differ from our estimates, and we may update our judgments based on our review, our future regulations or guidance issued by the US Department of Treasury and specific action we may take in the future. Factoring in the one-time $40.3 million income tax charge, was $24.6 million in the fourth quarter of 2017 compared to net income attributable to the Company of $19.4 million in the same quarter of 2016. Factoring in the one-time expense we had a net loss attributable to company of $24.6 million while non-GAAP adjusted net income attributable to the company was $25.9 million representing a decrease of 6.8% in RMB terms or 3.7% in US Dollar terms from the same period in 2016. Non-GAAP adjusted earnings per diluted share decreased to $0.90. Now let's move on to the full year 2017. Total sales in 2017 increased by 10.5% in RMB terms and 8.6% in US Dollar terms to $370.4 million from $341.2 million in 2016. The increase was primarily attributable to the increase in the sales of placenta polypeptide and certain immunoglobulin products. During 2017, human albumin and IVIG products remained the Company's two largest sales contributors, while the revenue contribution from the Company's other products continued to grow. As a percentage of total sales, sales from human albumin and IVIG products decreased to 35.8% and 31.7%, respectively. In 2017 compared to 39.2% and 34.6% in 2016. The sales volume of human albumin products increased by 3.5% while sales volume of IVIG remained stable for 2017. The average price for human albumin decreased by 2.5% in RMB terms while the average price for IVIG increased by 1.3% in RMB terms in 2017 compared to 2016. Revenue from other immunoglobulin products increased by 24.9% in 2017 compared to 2016, reaching 13.5% of total sales as compared to 11.8% of total sales in 2016. Revenue from other plasma products, including human coagulation factor VIII and human prothrombin complex concentrate, increased by 22% in 2017 compared to 2016, representing 5.7% of total sales as compared to 5% of total sales in 2016. Revenue from placenta polypeptide products increased by 52.8% in 2017 compared to 2016, reaching 13.3% of total sales, mainly attributable to a higher unit selling price following the wider implementation of the two-invoice policy across China in 2017. Cost of sales was $125.5 million in 2017 compared to $124 million in 2016. As a percentage of total sales, cost of sales decreased to 33.9% from 36.4% in 2016 mainly due to the higher sales price of placenta polypeptide following the wider implementation of the two-invoice policy and a greater proportion of sales derived from certain hyper-immune and coagulation products with a higher profit margin. Gross profit increased by 12.8% to $244.9 million in 2017 from $217.2 million in 2016. Gross margin was 66.1% and 63.6% in 2017 and 2016, respectively. Selling expenses in 2017 increased to $34.8 million from $11.7 million in 2016. More than half of the increase was related to the sales of placenta polypeptide products and the remaining was related to the sales of plasma products. For placenta polypeptide products and certain hyper-immune products, as certain previous multiple layers of distribution channels were disqualified due to the two-invoice regulation, we implemented new sales strategies including using an internal sales force or 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 customers, we incurred additional promotion and marketing costs. As a percentage of total sales, selling expenses accounted for 9.4% in 2017 compared to 3.4% in 2016. G&A expenses in 2017 increased by 24.2% to $67.7 million compared to $54.5 million in 2016. The increase in general and administrative expenses was mainly due to the increase of share-based compensation expenses of $9.5 million and $1.9 million in one-time expenses related to our change of domicile and acquisition of TianXinFu. Excluding the impact of share-based compensation expenses and this one-time expense G&A expenses would have 8.6% and 8.3% of total sales in 2017 and 2016 respectively. R&D expenses in 2017 decreased by 7.1% to $6.5 million from $7 million in 2016. As a percentage of total sales, research and development expenses decreased to 1.7% in 2017 from 2.1% in 2016. During 2017 and 2016, the Company received government grants totaling $0.4 million and $0.8 million, respectively, and recognized them as a reduction of research and development expenses. Excluding this impact, our research and development expense would have decreased by $0.9 million in 2017 compared to 2016. Income from operations in 2017 decreased by 5.6% to $135.9 million. Operating margin was 36.7% in 2017 as compared to 42.1% in 2016. Income tax expenses in 2017 was $64.2 million compared to $25.1 million in 2016. Income tax expense includes a one-time repatriation of $40.3 million in the fourth quarter of 2017 excluding the one-time charge now Non-GAAP income tax expenses for 2017 was $23.9 million and non-GAAP effective income tax rate remains 16.3% in 2016. Net income attributable to the Company which includes a large one-time income tax expenses decreased by 35.2% to $67.9 million in 2017. Net margin was 18.3% down from 30.7% in 2016. Diluted earnings per share was $2.38 compared to $3.74 in 2016. On non-GAAP basis, adjusted net income attributable to the Company increased by 13.7% in RMB terms and 11.4% in US Dollar terms, to $141.2 million in 2017 from $126.8 million in 2016. Non-GAAP net margin increased to 38.1% from 37.2% in 2016. Non-GAAP adjusted earnings per diluted share increased to $4.95 in 2017 from $4.52 in 2016. Non-GAAP adjusted net income and diluted earnings per share for 2017 exclude $31.1 million in non-cash employee share-based compensation expenses. $40.3 million a one-time income tax expenses as result of US tax reform and $1.9 million, a one-time expense related to our change of domicile and acquisition of TianXinFu. Now I would like turn to the balance sheet and the cash flow items December 31, 2017. The Company had $219.3 million in cash and cash equivalents, primarily consisting of cash on hand, and demand deposits. Net cash provided by operating activities for 2017 was $102.2 million as compared to $123.3 million for 2016. The decrease in net cash provided by operating activities was primarily due to an increase in accounts receivable and inventories, which was partially offset by the increase in other payables and accrued liabilities during 2017. Accounts receivable increased by $39.9 million during 2017 as compared to $11 million in 2016. The accounts receivable turnover days for plasma products increased to 58 days during 2017 from 41 days in 2016, 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 increased by $42.1 million in 2017 as compared to $40.1 million in 2016. This increase was due to an increase of raw materials during the production suspension at our old Shandong facility, and the increase of work-in-process and finished goods reflecting the weaker market demand due to more aggressive-than-expected implementation of certain government healthcare reform policies. Net cash used in investing activities for 2017 was $60.9 million which includes a $38.3 million payment for the acquisition of property. Plant and equipment, intangible assets, and land use rights for Shandong Taibang and Guizhou Taibang and we also made time deposit of $22.7 million. Net cash used in financing activities for 2017 was $18.3 million mainly consisting of dividend payment of $18.8 million made by our subsidiary to the noncontrolling interest shareholder, which was partially offset by proceeds of $0.9 million from stock options exercised. Our working capital as of December 31, 2017 was $495.5 million and our current ratio was 6.07. Total shareholders' equity was $664.3 million as of December 31, 2017 compared to $521.1 million as of December 31, 2016. In addition, due to the issuance 5,521,000 shares to PW Medtech in connection with acquisition of the TianXinFu. Our outstanding shares increased to 33.1 million shares as of February 26, 2018 from 27.6 million as of December 31, 2017. Guidance and business outlook for 2018. Lastly, turning to our 2018 guidance. For the full year 2018, we expect total sales to grow 18% to 20% in RMB terms and non-GAAP adjusted net income to grow 16% to 18% in RMB terms over 2017 financial results. This projection factor in estimate 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 to 6% to 8% in RMB terms and non-GAAP adjusted net income expect growth 3% to 4% in RMB terms over 2017 financial results. The 2018 non-GAAP adjusted net income projection excludes non-cash employee share-based compensation and non-cash intangible assets amortization expenses associated with TianXinFu acquisition. This guidance does not [technical difficulty] foreign currency translational impact. Having previously adopted exchange rate of approximately RMB6.76 equals to $1 based on weighted average quarterly exchange rates in 2017 in translating 2017 financial results. The Company expects that the total sales and non-GAAP adjusted net income in US Dollar terms in 2018 could be affected by the foreign currency translation impact. This guidance also assumes no significant adverse price changes during 2018. This guidance reflects Company's current and preliminary views which are subject to change. That concludes my prepared remarks. We will now take questions. Operator, we're now ready to take some questions.

[Operator:]

[Operator Instructions] The First question comes from Yolanda Hu with Morgan Stanley.

[Yolanda Hu:]

I've three questions. First on the guidance, the guidance for organic business was quite weak. Can you walk us through a few key assumptions for example what levels of price cuts do you assume for key products? It will be great, if you can also give us some color on competitive prices - recent today. Meanwhile, is it possible to break down your revenue growth by direct sales and interest sales in the fourth quarter, which part is seeing more pressure? Second question, the industry recovery seems quite low when do you expect industries to fully recover. Also according to release data imported Albumin grew only high single-digit and domestic with almost flat in 2017. Do you expect this kind of growth to accelerate in 2018? Last question, can you give us some more details on the post-acquisition integration between TianXinFu and the old business, how is the sales and marketing team doing so far? As we already leverage the quite a team to promote the new product and what have you done and what have you achieved? Thank you.

[Ming Yin:]

Let me try answer your question one-by-one. The first question regarding the assumptions behind our financial outlook for 2018. I think, trying to accommodate your - first trying to actually walk you through the big picture, the guidance for the different products. Firstly, I think you know as David mentioned the healthcare reform negative impact probably going to continue to drag on through 2018 and continue to negatively impact our overall the business performance. And for the plasma products, the overall revenue rate the growth rate expect to be slightly increased to high single-digit in 2018 from the 6% in 2017 RMB terms. Which assuming no additional aggressive healthcare reform matters implemented more significant adverse price changes resulting from new rounds of regional or provincial tenders or any pricing war initiatives by our competitors, so that's for plasma products. For polypeptide products, we model the relatively flat to revenue growth for 2018 compared to 2017 based on preventing market conditions. We expect the proportion of high invoice shipment to possibly to continue to increase which will might offset the potential decline in the short-term sales volume. Additionally, we think that our the placenta polypeptide product recently have not been including in many provincial drug reimbursement catalog and unfortunately, with certain province the list of polypeptide products under the so-called the company inventory drug treatment list which presenting many outsiders [ph] for possible substantial volume drop at hospital churn. So given the fact that polypeptide usage covered by provincial healthcare reimbursement without such reimbursement supporting for the hospital usage. We believe the hospital purchase volume will not be secured in 2018. Certainly for the newly acquired TianXinFu business we expect the overall business to grow around double digits in sales and also in the earnings in net income earnings earning growth, factoring should certainly under the policy headwind impact such as the two-invoice implementation in the medical device sector might started in the year 2017, so that's pretty much the assumption for our plasma and polypeptide product and TianXinFu business. I think your question regarding our assumption for the drug sales and distribution channels, we don't actually give that kind of that guidance, but I actually just for the modeling purpose I think I can basically provide some color on that. For the direct sales channel, actually the expected products to hospitals is decided by the provincial tendering price. The continuing negative impact of the zero mark-up policy and drug sales ratio limit and in our, the model for 2018 we assume relatively similar or competitive pricing in hospital channels. And our new objective is to maintain our products selling price at hospital level. We will further penetrate into more regional hospital where we secured the provincial tenders in 2017 such as Jiangsu province. We currently sell through few largest hospitals in few cities. We expect to pursue more hospitals for the through a distributor to sell through more hospital in Jiangsu and the tenured process complete. So with that effort, we predict the revenue growth to increase from the around 6% in 2017 to high single-digit in 2018. I just want to remind certainly for the channel for direct sale channel is the Central Government might restart a new round of tenders to consolidate the existing provincial tenders that are already implemented in 2017. So I think this could be another risk factor for 2018 among our hospital's sales channel. For distribution sales channel, we expected the slighter higher growth rate than our direct sales channel, but we have to provide some concession to our distributor for possible future or further price discount and or we have to invest in more in the sales and marketing expense. Recently we just saw some competitors continue to low their expected prices, distributor in the last quarter of 2017 which resulting the distributors negotiation results for either to match our competitors price or discontinue working with us in 2018. So from that perspective our pricing of now distribution channel in 2018 could be subject to further pressure. In addition, the accumulated inventory at a distributors to backfire and to resulting the lower purchase volume than anticipated in 2018. For the major products, I think for Albumin IG we budget about 3% to 5% of price decrease, on average for post-Albumin and IG - from volume side. Probably we expect the volume to grow around 10% and IG, we expect a little bit more than 10% of volume growth. So I think that's my answer to your first question. So the second question regarding whether the recent, the slowdown in the industry whether it has been in the bottom of - whether how soon we can get a recovery. And quite honestly our general feeling is the industry is not actually at the bottom yet and given the continued the negative impact from the government healthcare reform probably going to last 2018. And just like David mentioned earlier 2018 could be another challenging year. So I will talk about the perspective from few angles. Number one, is that we want to point out the difference between China Biologic sales model and our peer company and China Biologic has largest drug sales coverage by far, which pretty much over 6% of our plasma sales revenue generate directly from direct sales channel and the remaining 40% from distribution channel. The healthcare reform matters targeting the public hospital to control drug consumption and the limit the drug sales revenue to 30% in total revenue has direct and greater impact on us compared with our any peer company in China. In late 2017, many regional government agents set a stricter requirement to hospital to lower the overall public medicine insurance spending to ensure immediate compliance with 30% of drug revenue ratio policy. I think the most plasma product has a relative higher unit selling price and the purchased volume than they easily contribute the hospital drug revenue limits. Therefore many regional hospital that we directly serve or through our distributor to sell them too, we are observe the substantial volume drop at those hospitals. As a result our plasma product sales revenue increased only by 4% in the last quarter of 2017 compared with the same quarter a year before. Driven by the decrease in the Albumin IVIG sales in direct sales channel. That the decrease occurred in most province and region we covered. For example, in Shandong Province where we have the large market share by far. Our sales volume for Alubmin IG increased 10% and 20% respectively in the first nine months of 2017. While in the last quarter both products dropped substantially Albumin we believe we saw over 15% volume drop, IG we saw over close to 10% of volume drop. So that's our experience in 2017 in the last quarter, but for the first two months of this year we haven't seen any meaningful improvement in the hospital sector, the direct sales channel yet. Secondly, we want to point out actually we're building higher than normal level inventory as of end of last year. Our current Albumin storage expect to support with over close to four months of sales IG. Our IG inventory can last for about five months on the sales. In the end of 2016, the average Albumin IG inventory only can support us less than two months on the sales. So in general, I think that building additional inventory could actually be another the problem not only for us, but for all the players in the industry. And another important factor we want to point out is actually we also acknowledge our distributors starting view to more in their normal level inventories, so large inventory distributor we will work with, they normally carry less than three months of inventory. For example now, they told us they have about six months of inventory already. For the smaller players, they also build up inventory so usually they keep less than one month of inventory. Now there is the distributor even have about three months of inventory, so I think this has really concerned us. Just like David said earlier, we had great achievement in our Shandong facility, we have timely completed our GMP certification process. We originally expect we can grow 30% to 40% in 2018 compared to 2017 due to the previous result plasma inventory. However the cost of the healthcare reform net impact on the sales volume such high growth might result us to building actually finished goods inventory. Therefore, we have to conserve the adjust our production plan. So which factors I just mentioned high single-digit of direct sales channel growth and also the higher growth rate for our distribution channel in 2018 compared with 2017. In order to mitigate the policy, how do we impact our direct sales channel we have started to increase our distributor network by expanding to the new region based on the higher projected growth rate at our new distribution channel. Our Shandong facility to grow from 2017 the low single-digit the growth rate in 2018, we expect Shandong facility to grow to low teens overall. So I think this is really, it was flat because our new capacity the constraint resolve that we actually we can accept the - the new facility can support with the accelerated the volume process. I think that's pretty much my answer for second question. With regarding the Albumin the growth are looking 2018, I think for the first two months we still observed pretty much consistent trend in the last quarter 2017. Both the domestic and the imported Albumin growth rate has turned down compared with year before. So to be honest, we don't actually have too much visibility on the imported volume in the remaining years growth, the growth rate or from the domestic players, what's their production plan? But for our self I'll just walk you through our production plan, so that's my answer for third question regarding the Albumin growth rate. For the TianXinFu acquisition we closed it in January, so we're right now in the process integrating the business and the plan to utilize TianXinFu sales and the marketing expertise to deeply penetrate certain the possible surgical, the department we sell the high end of our products. But for 2018, we just stay the NII [ph] cut the increased cost, we will focus on our pre-operative therapeutics including PCC or newly launched Fibrinogen and the new pipeline Fibrinogen seal [ph] and to the newer surgery department of the hospital currently served by the TianXinFu at first. However the prerequisite for committee approval at each hospital could take up to one-year before we actually shift the products, so therefore the immediate benefit for 2018 might not be meaningful, but in the mid-term, we intend to expand penetration into other departments of those hospitals TianXinFu serves such as cardio surgery or other surgery departments. And we also want to actually to have the TianXinFu sales people to help us to sell other the plasma products in the long-term, so hopefully that answers your question. Yolanda.

[Yolanda Hu:]

I guess and thank you very much.

[Operator:]

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

[Jessica Lee:]

I have two questions. My first question regards your new product Fibrinogen. Would like to get a better understanding of this sales ramp up in the next several years and market potential, so you mentioned that the TianXinFu acquisitions should help you sensing your hospital sales capability to potentially help drive softer uptake for the product. But you also mentioned that first it may take a year or so for you to getting to the hospital. So given these assumptions how shall we be look at the ramp up in 2018, 2019 and going forward? Are we supposed to see a real sort of strengthening or pickup in sales starting from 2019? So that's the first question. And then second question is on margins, given all the moving pieces this year, so it's going to be a bit difficult for us to forecast the margins. So, would appreciate if you could give us some guidance on that. Thank you.

[Ming Yin:]

Thank you. I just want to talk about, Ms. Jessica you said that, the second question regarding the gross margin guidance, right?

[Jessica Lee:]

Yes, gross margin and operating margin if possible for 2018.

[Ming Yin:]

Okay, so I think for your first question, for the new product Fibrinogen. I think before I directly answer our outlook for the sales, outlook for this product in 2018 and 2019. I think I would - to show some color for this products, the current market conditions. So currently there are actually eight domestic manufacturer to produce this product, including us. According to the latest batch approval data there are two local producers and two largest manufacturers in this products. So there are two manufacturers adds up about 80% of our market share in production in 2017. So - product has been short supply in the past several years. So after the price the same removal in 2015 price for this product has been surged as much as tripled in compared with price in 2015. The production volume has grown significantly at the compound rate of 60% from 2014 to 2016. However because such significant volume growth may exceed the growth of demand especially in the areas likely in the training or the medical education competition among the manufacturer mainly intensify also put pressure for price in the 2018. In 2017 we already observed the batch approval data shows about slightly on decline in China. So actually the Fibrinogen it's mainly now currently pretty much was used in the top tier cities of the biggest hospital. So based on the research data basically, so basically the [indiscernible] province are the main market for this product. Beijing, Shanghai, Guangdong [indiscernible] Guangzhou are the top five province accounted by 80% of the usage volume by far. So just like I said, we're the number eighth manufacturer for this product, so we're late comer to the game. So basically we need actually rely on the marketing, the deployment to do a lot of the education work to persuade the hospital to switch our competitors the brands to use our product. So our marketing strategy is to take over competitors market share in both direct sales of provincial hospital or tier 1 cities through distributor, so that's our priority. Compared to the our products with our competitors' products, we still believe our products by far has the better quality because we have a shorter dissolving time so which makes significant difference in the clinical side because when doctors trying to - which can actually significantly shorten the life saving time for the doctors, so which we believe we think are top quality [technical difficulty] definitely stands out with competition. Plus we need to spend time to educate the doctor and also we need to actually pursue the hospital from committed to accrual to replace our products with the existing trend, that definitely going to fix trends. So therefore we believe our products sales going to actually gradually ramp up from 2018. Hopefully we can take up 5% to 8% of existing market share from our competitors. We estimate about $5 million to $7 million sales with our revenue contribution in 2018. In 2019, I don't actually have too much information but basically we think hopefully we can continue to grow our volume in 2019. The question regarding the gross margin, we actually - the 2017 I think you know our gross margin definitely benefited 300 basis points from the higher selling price for polypeptide products and due to from the resulting from implementation to US policy and remaining increase basically came from in flex of product mix change and sort of [indiscernible] product price increase. For 2018, our expectation is around 64% to 65% results at any additional implementation of healthcare reform matters, while significant diverse product price changes resulting from new rounds regional tenders any price engaged by the competitors. Specifically we estimate the new facility in Shandong will resulting additionally by 100-basis point. The margin erosion for overall margin in 2018 and but such margin erosion will be offset a margin enhancement for the new product launch for Fibrinogen. Our major platform product, estimate to have a 35% of decline compared to 2017 as I just talked about more about the flattened revenue in 2018 for the non-plasma polypeptide product. And we expected the portion of higher invoice shipment continue to increase while the volume decrease probably decreased proportionally. So therefore the gross margin the positive impact by the 100 basis point for the PP products in 2018. And our operating margin, I think pretty much will be effected by the probably the another year with higher selling expense as we just, as you might notice in 2017 the fourth quarter overall with selling expense ratio surge close to 20%, so for the full year of 2018 we expect overall selling expense of about. Hopefully we can manage to make sure about the low double-digit as definitive total revenue. For R&D expenses we expect the same revenue the percentages revenue for G&A expense we hope we can achieve some efficiency and achieve certain savings. Excluding the compensating expense hopefully we can make the G&A expense under 8% as full year 2018. So hopefully that answers your question, Jessica.

[Jessica Lee:]

It's very helpful. Thank you.

[Operator:]

Thank you. And the next question comes from Jack Hu with Deutsche Bank. Please go ahead Mr. Hu your line is live.

[Jack Hu:]

Good evening, can you hear me?

[Ming Yin:]

Yes.

[Jack Hu:]

Thank you. So actually I have a follow-up question on Jessica's sales and marketing cost. So if we were to exclude impact of two-invoice polypeptide, what would be growth of sales and marketing expense in 2017? And how should we move this going forward. My second, maybe you can adjust this question first. Thank you.

[Ming Yin:]

So I think just like I said, we talk about order in the last quarter 2017 more than half the selling expenses increase associated with polypeptide products and in the 2018. I think the overall outlook for this product volume growth could be - we probably see the volume drop and even with [indiscernible] pilots [ph] continue to implement in other regions. The overall the sales revenue with budget of flat revenue growth, so as a percentage-wise the selling expense for polypeptide products might come down. So that's why we can benefit with this seeing some decrease to reach our low double-digit as our total sales revenue selling expense combined with the plasma products. I don't know, if that makes sense to you Jack?

[Jack Hu:]

Let me ask you this question again, so if we were to exclude the impact with the invoice [indiscernible] full year basis, what would be the growth of sales and marketing expense full year basis?

[Ming Yin:]

I think the - result the polypeptide products on the full year base are selling expense for plasma products also especially in the last quarter doubled. So I think on the full year base for plasma products we probably going to increase from the low single-digit in the previous year to high single-digit in the 2018, so that answer your question, I believe.

[Jack Hu:]

Thank you. My second question is really just regarding what Chairman said before but I just want to get maybe more clarity on the numbers. So if you can actually to allocate a percentage of the impact on each of the driver, so for example you have healthcare reform related reasons or demand or supply related reasons and the competition. So can you maybe allocate a percentage to each one of them regarding the target for the whole plasma space or CBPO as a individually as a company? Thank you.

[Ming Yin:]

I'm sorry I don't actually have ability to allocate a percentage to each factor. I guess as a company I think our - is below the number one, the factor impact at most should be the negative healthcare reform the impact. The second impact at most is actually the inventory position in the channel. So the least or the - the important the factor impact us I think could be the importation volume growth or the peer companies volume growth. But I think Jack since you raised this point, I think overall sectors in the last couple of days our peers company already reported their full year earning guidance announcement. So I think we saw few company has very solid top line revenue growth in 2017, we acknowledge that. We also congratulate and respect them for their achievements. However just one point also - your attention. Our internal analyst showed for the at least for the nine months which is on 2017 which we have ability to analyze their financial statements CBPO are stood amongst the top tier performer in terms of earnings performance such as net operating cash flow, generation ability. The shorter accounts receivables payables days and the higher profitability ratio. I just want to actually point that out. Jack, so hopefully answered your question.

[Jack Hu:]

Thank you.

[Operator:]

Thank you. And it is all the time we have our questions at the present time. So I would like to return the call to management for any closing comments.

[David Gao:]

Yes, thank you. So we saw there are several people in the queue for more questions. So feel free to contact Ming Yin after the meeting directly for more discussion. 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.