China Biologic Products Holdings Inc
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Hello, and welcome to the CBPO third quarter 2016 earnings conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bill Zima. Mr. Zima, please go ahead.

[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 November 2, after the market closed, 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 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 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 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 Biologics 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, that non-GAAP measures are not uniformly defined by all companies, including those in the bio-pharmaceutical 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 third quarter 2016 conference call. We are very pleased to report strong third quarter financial results with higher-than-expected gross margin, and a robust bottom-line growth. Our higher gross margin and net profit are primarily due to the combined effect of the increased product pricing for certain products, a more profitable product mix and a higher sales contribution of products made from in-house sourced raw plasma at lower cost. Our overall earnings result this quarter also benefited from several capital injections in our Guizhou facility over the past 12 months, which resulted in the higher-than-expected profit contribution. Our Huitian facility also began to contribute to our third quarter earnings, after a two-year production suspension for facility upgrade. Our third-quarter revenue experienced approximately 10% year-over-year growth in US dollar terms, which can be translated into approximately a 17% growth in RMB terms, despite the delay of certain new region drug tenders. During the third quarter, albumin sales volume experienced an 11% increase; in line with our expectations. We believe that demand in the pricing in this segment of our business will remain stable over the near term. Because we continue to allocate more production capacity to a higher-margin tetanus immunoglobulin, our IVIG production and sales were lower this quarter, compared to unusually higher levels in the corresponding period of last year. Despite the tender delays, we expect to secure additional tenders in some of our main regional markets over the next few quarters, and potentially procure higher pricing associated with the completion of the tendering process. In the third quarter, we made great progress focusing our initiatives to enhance our near- and longer-term growth strategy. We are very pleased to complete AIC registration of our full equity ownership from 85% to 100% in our Guizhou facility, following a negotiated capital withdrawal by its two former majority [ph] shareholders. This effort allows us to fully capture the high growth potential and receive the full benefits and earnings accretion of existing and future products produced at this facility. In addition, through the successful execution of our plasma outsourcing arrangements for the first year, our partner delivered more plasma than the contractual volume, and we expect to market more finished products made from our Guizhou facility in the fourth quarter, as well as next year. On the R&D front, we recently achieved a milestone achievement by receiving approval from CFDA to commence clinical trials of two new first-to-market products in China

[Ming Yin:]

Thank you, David. Hello, everyone. Very pleased to announce that we achieved a robust growth in both gross margin and net income during the third quarter of 2016. Now let me walk you through key P&L items to provide more details on how we achieved this growth. During the third quarter of 2016, total sales increased by 9.8% year over year to $86.5 million, from $78.8 million in the same quarter 2015, or by 17.3% in RMB terms. The increase was primarily attributable to increase in sales price of human tetanus immunoglobulin products, as well as increase in sales volume of human albumin products and human tetanus immunoglobulin products, which were partially offset by the decrease in sales volume of IVIG products. Our human albumin and IVIG products remain the two largest sales contributors. The revenue contribution from other products continued to grow. As a percentage of total sales, sales from human albumin products and IVIG products accounted for 37% and 33.1%, respectively, in third quarter of 2016. The sales volume of human albumin products increased by 11.4%, and the sales volume of IVIG products decreased by 10.6% in third quarter of 2016. The average price for these two products increased by approximately 0.9% and 4.8%, respectively, in RMB terms in third quarter of 2016, compared to the same quarter of 2015. Revenue from hyper-immune products increased by 168% [ph] in third quarter of 2016, compared to same quarter of 2015, representing a 15.5% of total sales. Revenue from placenta polypeptide products increased by 6.6% in third quarter 2016, compared to the same quarter 2015, remaining stable at approximately 9.4% of total sales. Revenue from other plasma products, including Human Coagulation Factor VIII and Human Prothrombin Complex Concentrate, also increased by 34.4% in third quarter 2016, compared to the same quarter of 2015, representing 5% of total sales. Cost of sales was $27.6 million in third quarter 2016, compared to $28 million in same quarter 2015. Cost of sales as percentage of total sales was 31.9%, compared 35.5% in same quarter 2015. Gross profit increased by 15.9% year over year to $58.9 million, from $50.8 million in same quarter 2015. Gross margin was 68.1% in third quarter of this year; increased from 64.5% in the third quarter of 2015. Selling expenses increased by 11.1% to $3 million, from $2.7 million in same quarter 2015. As a percentage of total sales, selling expenses remained stable at 3.5%, compared with 3.4% in the same quarter 2015. G&A expenses were $15.1 million, compared to $11.5 million in same quarter 2015. The increase in general and administrative expenses was mainly due to a $3.4 million increase in share-based compensation expenses. Excluding the impact of share-based compensation expenses, G&A expenses would have been 9.4% and 10% as percentage of total sales in third quarter 2016 and 2015, respectively. R&D expenses decreased to $1 million, from $1.6 million in same quarter of 2015, primarily because we received a government grant of $0.5 million and recognized it as a reduction in R&D expenses. Income from operations increased by 13.4% to $39.7 million from $35 million in the third quarter of last year. Operating margin increased, year-over-year, to 45.9% from 44.5%. Income tax expenses was $7.2 million, representing an effective income tax rate of 16.8%. Net income attributable to company increased by 24% to $28.4 million, resulting in net margin of 32.8%. Fully diluted net income per share increase to $1.01 from $0.82 in third-quarter 2016. Non-GAAP adjusted net income attributable to the company was $34.3 million, or $1.22 per diluted share, in third quarter 2016; representing an increase of 39.8% in RMB terms, or 30.9% in US dollar terms, over the same period last year. Non-GAAP adjusted net income and diluted earnings per share for three months ended September 30, 2016, excluded $5.9 million of non-cash employee share-based compensation expenses. Now let's look at our results for the first nine months of 2016. Total sales for the first nine months of the year increased by 15.5% over the prior-year period to $263.5 million, or increased by 23.1% in RMB terms. The increase in sales was primarily driven by the increase in sales volume of human albumin products; human tetanus immunoglobulin products; and placenta polypeptide products; as well as increase in sales price of human tetanus immunoglobulin products. As percentage of total sales, sales from human albumin products and IVIG products were 38.9% and 35.5%, respectively, for the nine months ended September 30, 2016. Gross profit increased by 14.5% year-over-year to $170.3 million, resulting gross margin of 64.6%. Operating income in first nine months of 2016 increased by 9.7% over the prior-year period to $107 million - $120.7 million. Net income attributable to the company increased by 17.2% to $85.3 million for first nine months ended September 30, 2016, resulting in net margin of 32.4%. Non-GAAP adjusted net income attributable to the company was $99.9 million, or $3.57 per diluted share, representing an increase of 33.7% in RMB terms, or 25.3% in US dollar terms, over the same period last year. Non-GAAP adjusted net income and diluted earnings per share in the nine months ended September 30, 2016, exclude $14.6 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 September 30, 2016, we had $203.2 million in cash and cash equivalents, primarily consisting of cash on hand and demand deposits. Net cash provided by operating activities for the nine months ended September 30, 2016, was $87.3 million; an increase of $15 million, compared to the same period last year, largely consistent with improvements in results of operations, and an increase of non-cash operating expenses for first nine months 2016, as compared to the same period in 2015. Our cash inflows from operating activities are negatively affected by increases of accounts receivable and inventory. Accounts receivable increased by $16.1 million during the first nine months of 2016, as compared to $16.2 million during the same period in 2015. The accounts receivable turnover days for plasma products remained stable at 45 days during the first nine months of 2016, compared with same period in 2015. To enhance our business relationship with certain key customers, we granted longer credit terms to certain qualified hospitals during the first nine months of 2016, and granted special credit term extensions to certain distributors of rabies immunoglobulin products during the same period of 2015. Inventory increased by $24.5 million, as compared to $26.1 million during the first nine months 2015, primarily due to the increase in our inventory of raw materials purchased from Xinjiang Deyuan. Net cash used in investing activities for the nine months ended September 30, 2016, was $44.1 million. During the first nine months 2016, we paid $42.5 million for acquisition of property, plant and equipment, intangible assets, and land use rights for Shandong Taibang and Guizhou Taibang; and granted a loan of $12.3 million to Shandong Taibang, which was partially offset by a receipt of a refund of $10.3 million from the local government in Guiyang, with respect to deposits of land use rights. Net cash provided by financing activities for the first nine months of 2016 was $19.6 million, mainly consisting of the proceeds of $3.2 million from stock options exercised, and the maturity of a $37.8 million time deposit as a security for a bank loan, which was fully repaid in June 2015; partially offset by payment of $13.5 million to former minority shareholders of Guizhou Taibang in connection with their capital withdrawal from Guizhou Taibang, and a dividend of $7.9 million paid to minority shareholders by Shandong Taibang. Our working capital as of September 30, 2016, was $362.5 million and our coverage ratio was 6 times. Total shareholders' equity was $567 million as of September 30, 2016, compared to $467 million as of December 31, 2015. Turning to the full-year guidance. Due to better-expected market price increases for new tenders for certain higher margin products during the first nine months of this year, we are raising our full-year total sales growth forecast to 22% to 24%, from 21% to 23%, in RMB terms, due to favorable pricing of certain products; a higher sales contribution from products made from in-house sourced raw plasma with lower cost; and enhanced earning contribution at our Guizhou facility, after acquiring full ownership. We are raising our full-year forecast of non-GAAP adjusted net income growth to 33% to 35%, from 24% to 26%, in RMB terms over 2015 financial results. This guidance does not factor in any potential foreign currency translation impact. We previously adopted an exchange rate of approximately RMB6.21 to $1.00, based on weighted average quarterly exchange rates in 2015, in translating 2015 financial results. We expect that total sales and non-GAAP adjusted net income in US dollar terms in 2016 will be adversely affected by the foreign currency translation impact. This guidance assumes only organic growth, excludes potential acquisitions, and necessarily assuming no significant adverse product price changes during the fourth quarter 2016. Our full-year forecast reflects our current and preliminary views, which are subject to change. That concludes our prepared remarks. We will now take questions. Operator, we are now ready to take some questions.

[Operator:]

[Operator Instructions] And the first question comes from Jack Hu of Deutsche Bank.

[Jack Hu:]

Thank you. Good evening. Congratulations on another great quarter. Thank you for taking the questions. I have two housekeeping questions. First, can you share with us the valuation of the recent Guizhou deal; and also, the impact to 2017 bottom line? My second question is on the AR and inventory days, and how should we think of the trend in 2017? Thank you.

[Ming Yin:]

Hi. Thanks, Jack. The valuation for the recent minority withdrawal, as we disclosed, the total consideration is RMB415 [ph] million, which is about $60 million, $61 million. Among the RMB415 [ph] million, approximately 50% of the consideration is respect of equity. The actual cash payment or the premium amount is only about RMB200 million. So we negotiated the transaction structure and the valuation with counterparties and RMS, and the valuation of the whole RMB415 million was based on the multiple no higher than 10 times in reference to Guizhou Taibang's net profit in 2015. However, if we consider the real cash consideration of about RMB200 million, the valuation is only single-digit P multiple, based on Guizhou Taibang's 2016 profit. The second question regarding the AR and the inventory turnover days, the expectation of 2017, I think I shall share some the background for the 2016, both the balance composition. Let me start with the AR. Our accounts receivable balance was mainly due to the increase - it was mainly due to the revenue increase. Although the AR balance increased close to 6% compared to the ending [ph] balance of 2015, if we compare the accounts receivable balance to the end of the September last year, our ending balance for this - for the increase, actually, 23% in RMB terms, which is consistent with our revenue growth in the first nine months of this year. If we analyze accounts receivable balance composition, the substantial balance due was from direct sales customers, which is mainly public hospitals. Among the direct sales channel, the receivable balance grow approximately 45%, mainly because we granted longer credit terms to certain qualified key hospital customers, after evaluating their request in 2016, to enhance the supplier relationship with them. Over 60% of our relevant receivable increase was from, actually, top 30 hospital customers, which contributed about 60% of our direct sales revenue during the first nine months this year. Within our distribution channel, our receivables due from distributors actually decreased about 35%. The relevant turnover days for the distribution channel actually decreased to about 15 or 16 days. And this is because in 2015, we adopt a special sales strategy for promoting our human rabies immunoglobulin products in order to penetrate the market for these products. So excluding the rabies distribution business, our plasma products carried through distributors grew about 30% in revenue, and in the same rate increase in receivables. So looking to 2017, we believe the accounts receivable turnover days might not be shorter in the near term as we deal directly with hospitals. The direct hospital, right now, accounts for about 60% of total plasma sales. And in China, the public hospitals generally grant about 6 to 180 days, depending on the region, for the generic drugs. So the plasma products, given the shortage nature, we already get the special treatment, the shorter days. And also, another reason we believe that might contribute a lower accounts receivable turnover days in 2017 is because, in order to comply with the new regulation related to the double-invoice system, our - right now the current cash-out delivery model might not be sustainable. Given the two-invoice system implementation that requires the hospital paying for the manufacture directly, instead of the distributor for the drug procurement, this change to the payment model may further lengthen our accounts receivable turnover days. The second question regarding inventory turnover days, the same. Let me try to share some color for 2016, the inventory - year-to-date inventory balance. We do actually have the increase in the nine months of this year. The increase in the inventory balance and the turnover days was mainly due to the increase in sourced plasma provided by collection stations from Xinjiang Deyuan, which account about approximately 20% of total inventory at the end of September 30, 2016 and about 25% of inventory balance increase during the first nine months of 2016. The plasma should have been put into production, if we get those quarantined data for those plasma provided by Xinjiang. As David mentioned earlier, we do actually incur the longer-than-expected quarantine data for those newly collected plasma from Xinjiang. So that's why we had - less the production schedule in the first nine months, than original - the expectation for those Xinjiang Deyuan plasma. So excluding that external plasma production or the inventory, our inventory turnover days should be around 330 days, which is consistent with last quarter. So looking ahead to the next quarter, or 2017, we're expecting the turnover days could be -fluctuate. But in general, we believe, when we start to accelerate the process, Xinjiang Deyuan plasma, the inventory turnover days might be decreased. But in 2017, we might consider the Shandong new facility transition between old plant and the new plant, so that will be a certain one-off impact to the inventory turnover days in the second half of 01. Jack, back to you. Hopefully, I answered all your questions.

[Jack Hu:]

Can you - just hold on. The second part of my first question is regarding the Guizhou deal, actually. What's the impact to the 2017 bottom line? Or what you can share with us, analyze the impact to 2017? Thank you.

[Ming Yin:]

Yes. So the - I think the 15% equity interest product recently expect to contribute 2% to 3% of total net profit in 2016. But for 2017, we're not in a position to provide a forecast for 2017 as there are a number of factors are not fully clear at the moment, and including the timing of the launch of the new plant in Shandong. And so we will expect to provide a greater visibility for 2017 outlook when we report the full-year 2016 - the results, early next year. But our preliminary estimate, those - the minority - 15% minority the capital withdraw, should, in theory, translate about 4% to 5% of the bottom line growth in next year.

[Jack Hu:]

Thank you.

[Operator:]

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

[Jessica Li:]

[indiscernible] Thank you for taking my questions. First of all, congratulations on your strong quarter. Actually, I have two questions. The first one is on the gross margin. I know that in this quarter your gross margin increased quite a little bit because of the favorable pricing, but how should we see the trend in the following few quarters, as well in the future year? And my second question is on your topline. I am much glad you have obtained the CFDA approval for several of your products, so which ones do you think are the most promising ones and what about the timeline? If you can give us some color on these candidates, that would be very helpful. Thank you.

[Ming Yin:]

Thanks, Li. Let me try and address the gross margin question, first. You're absolutely correct, the third quarter's gross margin improvement was mainly due to the price increase in most of our products, supplemented by the more profitable product mix and less-than-estimated volume sold generally from external plasma. So, just trying to give you a qualified impact from those factors, the - compared to last year's third quarter the gross margin improved about 450 basis points. Approximately, around 300 basis points of improvement came from the product pricing increase; and also, about 100 basis points improvement came from better product mix, especially more portion of - proportion of tenders in our own products than the regular IVIG. And those - the increase was offset by about 50 basis point decline, due to the general cost increase, our own collected plasma. So that's just qualified the impact for those factors contributed to the better margin this quarter. And additionally, this quarter, I just mentioned, last year, the third quarter, we had about 3% of the total plasma products sold was from external plasma. But this quarter, due to the quarantine data delay, so we have zero sales in this quarter, so that's another benefit to our - this quarter's - the gross margin. As we look ahead to the final quarter of this year, our primary estimate is that more product delivery from external plasma will be brought to the market. Our preliminary estimate is about 15% to 20% of the last quarter, or the fourth quarter in 2016, the sales volume could - came from the external plasma. With that, the gross margin expect to decline to the range about 64% to 66% in the last quarter. Assuming the product pricing remains unchanged, compared with third quarter, in addition, for the non-plasma polypeptide - placenta polypeptide products, the gross margin might be - fluctuate to the magnitude of the sales model change in compliance with new double-invoice system regulation in selected regional markets, which is also difficult to assess the impact at the moment. The full-year gross margin, on preliminary estimates, will be in the range of 63% to 65%, without considering the product price changes from new future tender price, and other potential adverse price volatility related to certain products. Again, for 2017, I just answered previously, because we might not accelerate, produce those external plasma, so the impact to the margin might be greater than this year. And, at this moment, we just don't actually have the visibility for next year's gross margin. For the question for the recently pipeline products, we did actually recently announce we start the clinical trial for the Antithrombin III, and Factor IX. I think before I talk to the detail for those products, I think it might be beneficial to listen or to give a background information for these new drugs in the pipeline. Antithrombin is kind of a natural proteins in the body to regulate the clotting process; that is to prevent the blood clotting from forming too much as to block the flow of blood to vital organs in the body, which might be life-threatening. Antithrombin III is one of the most important antithrombin protein in the body. Antithrombin deficiency might be inherited or can result from health problem, such as liver disease, or certain types of kidney disease, that decrease the body's ability to produce functional forms of Antithrombin III protein. Our new product, Antithrombin III, is intended to treat Antithrombin III deficiency, surgical - closed surgical [Technical Difficulty] procedures, and to treat thromboembolism, which is a formation of blood clotting in a person's heart, or in one of their blood vessels, which can cause deaths. We expect to complete the trials around 2019. What no manufacture currently in China offer a plasma drug Antithrombin III products, so it will be difficult to quantify the potential financial contribution when it commercially launches. But I think I also want to share some international data for this product. According to the global survey in 2016, Antithrombin III has a worldwide market value of about $300 million worldwide, contributed about 1% to 2% of total plasma products at market. And the drug Human Coagulation Factor IX is mainly used to treat the B-type of hemophilia, which is an inherited Factor IX deficiency, and also for acquired clotting Factor IX deficiency as well, to prevent and control the bleeding in the patients. Human plasma-derived Factor VIII contributed near 2% of global market share, according to the recent survey in 2014; and the sales volume increasing from 2012 to 2014 at the compound annual growth rate about 10%. The Federation of Hemophilia estimate approximately 80,000 to 120,000 individuals in China are afflicted with hemophilia, and the registered B-type hemophilia - B-type patients represent a small portion of hemophilia patients, due to the poor level of diagnosis in China. Currently, there is no plasma-derived purified Factor IX product in China. We plan to begin the clinical trials for this product in 2017, and expect to complete the trials within two years. And I think it worthwhile to mention when we commercially launched the Factor IX product we expect that our Prothrombin Complex Concentrate product, which is used currently to treat the B-type hemophilia patient, while the affordable Factor IX products are unavailable at the moment. So we will target our Prothrombin Complex product to more extensively in the general blood-clotting treatments in China, including liver disease and surgical bleedings, which we believe has a greater market potential. Li, I hope I answered your question.

[Jessica Li:]

Yes, that's very helpful. Thank you.

[Operator:]

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

[Yolanda Hu:]

Congratulations on a great quarter. I have two questions. First, on the tenders, I just want to understand more about the potential price increase, and also competition dynamics. In your key provinces, like Shandong, or maybe also Jiangsu, how do you expect price for key products, like IVIG and albumin today? And when do you expect they can be completed? Also, what do you think are your key advantages or disadvantages on those tenders' compared to competitors, which could lead to different tender results? And maybe, if possible, can you share with us your expectations for the ASP increase of key products in 2017? My second question is on the other plasma station in Hebei. As this is already November, when do you expect it to get final approval and start to make contributions? Do you have any updates from the Government? Thank you.

[Ming Yin:]

The first question is a little bit complicated. I think I tried to - before I talk about the tendering or the ASP visibility, I think maybe worthwhile to share some, or discuss, factors resulting to the recent quarter price changes; and then talk about a little bit our sales practice for those products in those regions. Our recent quarter, the third quarter, the average price for albumin and IVIG increase about 1% and 5%, respectively, compared to the same period of last year. And, as you might know, we utilized the two sales model, including direct sales and distribution sales model, in the different regions. The direct sales currently accounts about 60% of our sales, and the rest is distributor sales. Within our direct sales model, approximately 80% of albumin products are directly supplied from factories to hospitals and clinics. And just due to the delayed drug tender implementation, and those regions just you mentioned, like Jiangsu, Shandong, and our ex-factory price for both albumin and IVIG are substantially same, at a similar level as last year. But for the distribution channel, we have a relatively small albumin concentration, but a higher IVIG presence. The sales volume split between direct sales and distribution channels, approximately, about 50/50. And among those 50% of distribution channel IVIG sales, majority volume has been sold within the tier 1 cities. Among those tier 1 cities, including Beijing, Guangdong, has recently completed the new tender with higher price this year, which mainly reflecting to our recent quarters' the ex-factory IVIG price increase. Because of this, our IVIG - our average base increased about 5% when compared to the same period last year. But for albumin, since we have very limit presence in those tier 1 cities, even the albumin tender recently in Guangdong and Beijing has been lift. But it does not translate directly into our ex-factory price, because we have a very small sales in those market. And we expect those large regional markets, including Shandong and Jiangsu, which we have a greatest, or greater sales contribution, sales concentration, could complete their tenders, hopefully, by end of this year. We are not exactly sure when the provincial governments like Shandong and Jiangsu will complete the tenders. But we - because even when they complete the tenders we're not sure whether the new tender price will be implement right away, or wait for the early next year. Our preliminary estimation for IVIG, because of shortage condition in the market supply, we do expect certain level of the price adjustment, or increase, in those regional market, like Jiangsu and Shandong, if the new tenders we implement, or we can win the tenders. And for the reason why the Shandong and the Jiangsu delay, I think I just want give you little bit background for why the government delay. Because the Shandong province, initially, we expect they should finish the tender by the end of the third quarters, but apparently they didn't. The main reason we knew is because the relevant authority in Shandong tried to be very creative to implement a different format in Shandong, which turned out to be a failure at the moment. So the Shandong government has to restart the process for the plasma products again, so that's why the new tenders in Shandong was delayed. For Jiangsu, actually, is our second-largest regional market. They took some normal, the double-envelope, practice for the drug tenderings, even for the plasma products. And right now, we have passed the first step of technical score evaluation phase. And we are waiting the second step of commercial score evaluation process, which is still ongoing. And we're hope they can finish the process by end of the year. And to answer your question regarding our advantage, or our competitiveness in those regions, just like I mentioned earlier, in those markets like Jiangsu, Shandong, which accounts our largest two regional market, we are very prominent in Shandong province. We probably have about 70% of market share in Shandong. I think Shandong hospitals have a strong brand preference to our products. So I think that's already a very good advantage to secure the tender in Shandong already. Jiangsu, we have a very similar advantage as well. For the price visibility for albumin, I think I will give you some update for the reason the best pool of data. For this entire third quarter of 2016, the Beijing steward, which is one of the most important the government agent to prove the plasma products, transfer about 35% of historical albumin approval, the volume, has not published their data for entire third quarter. That's why we don't actually have the data to evaluate importation volume in third quarter. And even for certain large manufacturer in third quarter, as well. So that's why we're a bit very difficult to project importation growth, even for the last quarter as well. In the meantime, we have observed certain degree of higher-than-expected albumin inventory in the channels, mainly because we observed elevated levels import volume in early 2016. And the second reason is we do observe there's certain channel restructuring, based on recent government regulations, stemming from the China vaccine incident earlier this year. In the past, certain level of albumin inventory were carried by certain regional distributor at local pharmacy market. Now, this inventory might be required to go back to hospital channel because distributor license were revoked by the China FDA, because of vaccine scandal. Due to the potential greater importation volume growth, which is unfirm at the moment, so even those province complete the new round of tender with higher price, the hospital might request a further price negotiation on individual base, or as a group, if the government agency view the supply is abundant. That's why our near term for the albumin visibility is not very high. But we believe the impact to ourselves won't be much, because our direct sales account for 80% of albumin supply to the hospitals. The price are very stable. The second question regarding Hebei, the new centers, the update is we do actually have behind - the construction behind our earlier estimate because of the local government has proposed a number of additional requests, which has delayed our anticipated timeframe for the construction. We recently commenced the construction on secured land, and expect to complete construction of this collection station, hopefully, in the second half of 2017. Yolanda, hopefully, that answers your questions.

[Yolanda Hu:]

It's very helpful. Thank you, Ming.

[Operator:]

Thank you. And the next question comes from Iris Wang with Credit Suisse.

[Unidentified Analyst:]

Mr. Gao, this is Jason asking on behalf of Iris. First of all, thank you very much for taking my question; and congratulations for the Company's strong third-quarter performance. I've just got two very simple questions for you. The first one would be why was the selling and administrative expenses ratio so volatile in recent quarters? And the second one would be about the two-invoice system, specifically, on how do you think it's going to impact your business? Thank you very much.

[Ming Yin:]

I'm not understanding your first question, can you actually repeat it?

[Unidentified Analyst:]

The selling and administrative expenses ratio, why is it so volatile recently?

[Ming Yin:]

The selling expense, you mean the G&A expenses, right?

[Unidentified Analyst:]

Yes.

[Ming Yin:]

Actually, the G&A expenses, as we discussed earlier, in the recent quarter is mainly because of the increase for the non-cash employee compensation expense. Excluding that part, the G&A expenses was largely consistent in last three quarters this year.

[Unidentified Analyst:]

Okay.

[Ming Yin:]

But I think, since you already mentioned this, but I think might give you a little bit the expectation for the last quarter this year, which we believe G&A expenses might have a certain increase associated with certain special non-operating expense-related charges. And because we're expecting the January expenses to be increased when we are preparing for the Shandong new facility transition. Therefore, we might need to conduct certain accelerated depreciation and disposure at old facility, which might result in additional - the special non-operating charges for the last quarter this year. That's why the estimate, the G&A expenses, including the compensating expenses, might be higher than third quarter. Our preliminary estimate will be around 14% to 15% range in the last quarters. The second question, regarding the two-invoice system, I think as we mentioned earlier, the impact for the past three quarters is not that meaningful

[Unidentified Analyst:]

Yes. Thank you very much.

[Operator:]

And that was the last question, so I would like to return the call to management for closing comments.

[David Gao:]

Okay, if there is no questions, thank you for your participation, and ongoing support of China Biologic. Have a good day.

[Operator:]

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