China Biologic Products Holdings Inc
Q4 2016 Earnings Call Transcript

Published: 25 Feb 2017

[Bill Zima:]

Hello everyone and thank you for joining us on today's call. China Biologic announced its quarterly and full-year financial results on February 23, 2017 after the market closed. An earnings release is now available on the Company's website. Today you will hear from China Biologics Chairman and Chief Executive Officer, Mr. David Gao, who will start off the call with a review of recent Company developments, strategies, and basic operating results; followed by the Company's Senior Vice President, Mr. Ming Yin, who will address financial results in more details. The Company's Chief Financial Officer, Mr. Ming Yang, is also on the call and will be available during the Q&A session that follows the prepared remarks. Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in China 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 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 Biologics fourth quarter and fiscal year 2016 conference call. We are very pleased to announce another year of strong financial performance in 2016. Despite the negative impact associated with RMB depreciation in 2016, we were able to meet our upwardly revised revenue and profit forecast. We achieved 22.8% revenue growth in RMB terms or 15.1% in U.S. dollar terms and our non-GAAP adjusted net income attributable to the Company increased 35.2% in RMB terms and 26.7% in U.S. dollar terms over the prior year. Our successful results were aided by our continued increase in plasma supply in the production volume, modest product price increases, optimization of our product portfolio mix, continued penetration into our key markets, greater financial contribution from our Guizhou Taibang subsidiaries as our equity interest increased as well as the stronger-than-expected contribution from our Xi'an Huitian facility. After removal of retail ceiling price controls by central government in June 2015, our product pricings were largely determined by the regional government tenders where the pro market driven prices mechanism provided us greater opportunity to achieve premium pricing for products in significantly short supply tightens even though globulin prices continued to rise in 2016 due to limited supply as we allocated greater production capacity to this product at the expense of IVIG production volume. By the end of 2016, our tetanus immunoglobulin captured the largest market share in China. Prices of our main plasma products such as albumin and IVIG also experienced modest increases despite the slow progress of provincial tenderings. Additionally, we were pleased to experience a continued revenue ramp-up with our Factor VIII and PCC products, which together accounted for approximately 5% of our total revenue in 2016, which is an increase from 3% in the prior year. In 2016 we continued to focus on increasing our raw plasma supply and achieved double-digit growth for a fifth year in a row. In 2016 we added a new plasma collection station in Hebei Province and continued to make progress on the other station in Hebei, which is expected to be operational in 2017. Recently we also obtained approvals to build two new plasma collection facilities in the Shandong Province and outsourced plasma supply by our collaboration partner exceeded its contractual volume requirement in 2016. With this agreement in place, we expect to significantly improve the utilization rate and deliver substantially more finished products to the market in 2017 from our Guizhou Taiban facility. When factoring in our outsourced plasma agreement, the total annual plasma collection volume for China Biologic surpassed 1,000 metric tonnes in 2016, a new milestone for the Company which will enable us to sustain strong growth in the years ahead. In December 2016 a new guideline was released by the relevant authorities, which included granting more licenses for new plasma collection stations preferably to large companies that can improve plasma quality and the safety controls. We believe this guideline represents stricter regulation requirements for opening new plasma collection stations and will potentially favor large players like China Biologic. In addition to improving the utilization rate at our current facility with additional raw plasma, we also made excellent progress on the construction of our new fractionation facility in Shandong. We expect it to commence operation at the end of 2017 and to double Shandong's production capacity once the new facility is completed. Our operations team is actively calibrating to shorten the transition period and stock sufficient inventory to ensure adequate products supply prior to shutdown of the older facility. Furthermore, we were pleased to fully acquire 100% equity interest in Guizhou Taibang and our Xi'an Huitian facility in which we have minority interest resumed operation in 2016 and contributed more significantly to our business this year than originally forecast. On the R&D front, we also made a significant progress in 2016. We received clinical trial approvals for three new products; Human Coagulation Factor IX, Human Antithrombin III, and the Human Cytomegalovirus Immunoglobulin for intravenous injection products. Each of these products is new to the market in China. Additionally, our long-awaited fibrinogen product has recently completed CFDA's onsite inspection for the production facility with a marked launch date expected for the second half of 2017 assuming that the CFDA completes its inspection for our clinical trial data at participatory hospitals over the next few months. We believe these new products will further improve our plasma fractionation utilization and contribute to CBPO's long term financial growth. Looking into 2017, we expect another healthy year of growth even when factoring in impact of our plant transitioning in Shandong. Ensuring a smooth plant transition with no supply disruption to our core customers is a major priority for our team. We are pleased with the government's recent published update to the National Reimbursement Drug List known as NDRL. We believe the update will greatly improve future access and affordability of China Biologic's core products including IVIG, albumin, and certain coagulation products with expanding indications included. While most of these products remain in the B category of the NDRL, which means that various provincial governments will update their respective Provincial Reimbursement Drug List prior to July 31, 2017 and begin implementation later on this year. We expect the expanded insurance reimbursement will further enhance demand for our core products and fuel our growth over the long term. We also acknowledge certain challenges resulting from recent government healthcare reform initiatives such as the two-invoice policy system in the pharma supply chain and the initiative to implement a zero-markup policy of drug sales by hospitals. We welcome these coming changes and believe they will provide us the opportunities to expand our revenue and profit growth particularly for our placenta polypeptide type products by eliminating the multiple layers of distributors and better controlling the end customers. Our operations team is actively preparing for the anticipated regulatory changes closely monitoring the implementation of such new regulations for 2017 and will make appropriate and timely adjustments to our sales model and sales policy. We will continue to focus on key long-term operational growth strategy in 2017 including further market expansion, increasing plasma supply, developing new products, as well as improving the production yield of existing products. Based on these efforts, we expect to achieve revenue growth of 13% to 15% and adjusted net income growth of 18% to 20% in RMB terms in 2017 over 2016. 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 are pleased to announce that we achieved robust growth in both revenue and adjusted net income during the fourth quarter and the fiscal year 2016. Before discussing our financial performance for the full year of 2016, I would like to address a few P&L items for the fourth quarter. Total sales increased by 21.7% in RMB terms or 13.6% in US dollar terms to $77.6 million in fourth quarter 2016. Gross profit increased by 13.3% to $46.8 million in fourth quarter 2016 from $41.3 million in the same quarter of 2015. Gross margin was 60.3% and 60.5% in the fourth quarter of 2016 and 2015 respectively. Income from operations increased by 2.7% to $23.2 million. Net income attributable to the Company increased by 19% to $19.4 million while non-GAAP adjusted net income attributable to Company was $26.9 million representing an increase of 40.7% in RMB terms or 31.9% in US dollar terms from the same period in 2015. Now let's move on to the full-year 2016. Total sales increased by 22.8% in RMB terms or 15.1% in US dollars terms to $341.2 million primarily driven by the increase in sales volume of human albumin products, placenta polypeptide, and human tetanus immunoglobulin products; and the increase in sales price of human tetanus immunoglobulin products, partially offset by the decrease in sales volume of IVIG products accounted for 39.2% and 34.6% respectively in 2016. The sales volume of human albumin products increased by 26.2% while the sales volume of IVIG products decreased by 3.6%. The average price for these two products increased by 1.5% and 4.2% respectively in RMB terms in 2016 compared to 2015. Revenue from other immunoglobulin products increased by 78.2% in 2016 compared to 2015 representing 11.8% of total sales. Revenue from placenta polypeptide products increased by 18.4% representing 9.4% of total sales. Revenue from other plasma products including human coagulation Factor VIII and human prothrombin complex concentrate also increased by 68% in 2016 compared to 2015 representing 5% of total sales. Cost of sales was $124 million in 2016 compared to $106.5 million in 2015. Cost of sales as a percentage of total sales was 36.4% compared to 35.9% in 2015. The increase in cost of sales as a percentage of total sales was mainly due to the higher concentration of outsourced raw plasma with higher cost, which was partially offset by the increase in the average sales price of certain plasma products and a more profitable product mix. Gross profit increased by 14.3% to $217.2 million in 2016. Gross margin was 63.6% in 2016 compared to 64.1% in 2015. Selling expenses in 2016 increased by 17% to $11.7 million and as a percentage of total sales remained unchanged year-over-year at 3.4%. G&A expenses increased by 31.6% to $54.5 million in 2016. The increase in general and administrative expenses was mainly due to the $12.3 million increase in share- based compensation expenses. Excluding the impact of share-based compensation expenses, G&A expenses would have been 8.8% and 9.9% as a percentage of total sales in 2016 and 2015 respectively. Research and development expenses in 2016 were $7 million compared to $6 million in 2015. During 2016 and 2015, the Company received government grants totaling $0.8 million and $1.2 million respectively and recognized them as a reduction of research and development expenses. Excluding this impact, research and development expenses increased by $0.6 million in 2016 from 2015 and this expense as a percentage of total sales decreased from 2.4% to 2.3%. Income from operations were $144 million representing increase of 8.6% over the prior year. Operating margin was 42.1% in 2016 compared to 44.7% in 2015. Net income attributable to the Company increased by 17.8% to $104.8 million in 2016. Net margin was 30.7% and 30% in 2016 and 2015 respectively. Fully diluted net income per share was $3.74 compared to $3.27 in 2015. Non-GAAP adjusted net income attributable to the Company was $126.8 million or $4.52 per diluted share in 2016 representing increase of 35.1% in RMB terms or 26.7% in US dollar terms over the prior year. Non-GAAP adjusted net income and diluted earnings per share excluded $22 million of non-cash employee share-based compensation expenses. Now I would like to address selected balance sheet and the cash flow items. We had $183.8 million in cash and cash equivalents at the end of 2016 primarily consisting of cash on hand and demand deposits. For 2016 net cash provided by operating activities was $123.3 million, an increase of $13.9 million compared to 2015. The increase in net cash provided by operating activities was primarily in line with the increase in net income, partially offset by increasing accounts receivable and inventories. Accounts receivable increased by $11 million during 2016 as compared to $7.1 million in 2015. The accounts receivable turnover days for plasma products increased to 41 days during 2016 from 34 days in 2015 primarily due to longer credit terms we granted to certain qualified hospitals to enhance the business relationship with certain key customers. Inventories increased by $40.1 million in 2016 as compared to $32.1 million in 2015 primarily due to the increase in our inventory of the raw materials purchased from Xinjiang Deyuan as well as the increase of finished goods in the preparation of the Shandong facility transition. Net cash used in investing activities was $52.5 million, which included $51 million payment for acquisition of property, plant, and equipment, intangible assets, and land use rights and $12.3 million payment for long-term loan to Xinjiang Deyuan and our Guizhou Taibang subsidiary partially offset by $10.3 million in government grants related to property, plant, and equipment. Net cash used in financing activities in 2016 was $22.1 million mainly consisting of a payment of $58.1 million to former minority shareholders of Guizhou Taibang in connection with their capital withdraw from Guizhou Taibang and a dividend of $7.9 million paid to minority shareholders by Shandong Taibang partially offset by the maturity of a $37.8 million time deposit and a security for bank loan, which was fully repaid in June 2015 and the proceeds of $3.6 million from stock option exercised. Our working capital as of December 31 of 2016 was $319.9 million and our coverage ratio was 5.36 times. Total shareholders' equity was $521.1 million as of December 31, 2016 compared with $467 million as of December 31, 2015. Guidance and the business outlook for 2017. Turning to our 2017 guidance. We expect total sales for 2017 to grow 13% to 15% in RMB terms and expect non-GAAP adjusted net income to grow 18% to 20% in RMB terms over 2016 financial results. This guidance factors in the impacts associated with production delay of approximately three months at our Shandong facility as we transition to the new facility. This guidance does not factor in any potential foreign currency translation impact. We adopt an exchange rate of approximately RMB6.63 equals to $1 based on weighted average quarterly exchange rates in 2016 when translating our 2016 financial results and expect the total sales and non-GAAP adjusted net income in U.S. dollars in 2017 will be adversely affected by foreign currency translation impact. This guidance assumes only organic growth and excludes acquisition and necessarily assumes no significant adverse price change during 2017. This guidance reflects the Company's current and preliminary views, which are subject to change. That concludes our prepared remarks. We will now take questions.

[Operator:]

Today's first question from the line of Yolanda Hu with Morgan Stanley.

[Yolanda Hu:]

First on the guidance, can you walk us through your key assumptions for the guidance? For example you expect three months production suspension in Shandong, but how much of it will be offset by stocking more inventories? Meanwhile I know the plasma collection from Guizhou and Deyuan will not be affected. What's the implied sales growth for Shandong Taibang and Guizhou Taibang separately? I'll ask my second question later.

[Ming Yang:]

So, the key assumption for the 2017 guidance primarily we are factoring up to three months of the plant transition suspension at our Shandong facility. So specifically for the revenue guidance for the pricing except for the albumin, the rest of plasma products we expect a slightly stable price or slightly ASP increase especially for IVIG if those original tenders can conclude with favorable implementation pricing later this year. For albumin prices, we conservatively model the price at our direct sales channel. The price will be stabilized or slightly increased if the tender price at regions like Shandong and Guizhou, the price can go up. But for the distribution channel, we do conservatively model certain slide in price discount given the consideration of the intensified overall market competition and uncertainty related to the regional governments tender results. That's for the pricing assumption. For the volume, most of the products in 2017, we think the overall volume will be pretty much in line with our topline growth. Just want to clarify, our albumin growth in 2017 could be lower as compared to 2016 because we have less production arrangement. So, our IVIG and other specialty immunoglobulin products volume expect to add up will be in line with the overall revenue growth. For the rest of the assumption, we assume a relatively stabilized selling expense for the plasma products, about 3% to 4%. And for the non-plasma products, placenta polypeptide products, since we're in the process need to comply with the double invoice system. Due to the magnitude of the implementation schedule in the various province will be different so it will be difficult to qualify the overall impact associated with to be in compliance with double invoice system. So, that's why 3% to 4% the selling expenses excluding the impact with placenta polypeptide in order to comply with double invoice system. For G&A expenses excluding the share-based compensation expenses, we expect certain savings from the G&A expenses. So as a percentage of our total revenue, we expect probably the ratio might slightly go down compared to 2016. For R&D expenses, we expect a very similar level about 3% of total revenue in 2017. And I think that's just the key assumption for our guidance for 2017. And Yolanda, I just wanted to clarify your question regarding the plasma collection is about 2016 or 2017?

[Yolanda Hu:]

2017.

[Ming Yang:]

You mean the collection. So I think before I talk to 2017, I just want to address our collection for 2016. So, our organic collection volume without the Xinjiang Deyuan outsourced plasma we disclosed in the 10-K achieved 17% growth. So included the Xinjiang Deyuan plasma the first time, overall the plasma volume reached 1,000 metric tonnes so that's the milestone. And with Xinjiang Deyuan plasma included, we think the overall collection volume was about 20% in 2016. So 2017, our priority is try to maintain the double-digit plasma collection growth as a group. So, hope that answer your questions.

[Yolanda Hu:]

My second question is on tenders and policies. Can you give us some updates on the timeline of Shandong and Jiangsu tenders? When do you think they will be concluded and what kind of price are you looking for in these two provinces? Also do you expect more negative impact from policy uncertainties such as post tender price negotiations and also two invoice system? And finally, can you share with us your view on the new guideline released by NHFPC last December regarding the plasma collection stations? Thank you.

[Ming Yang:]

So, that's more than two question. So, I will answer the questions one by one. For Shandong and Jiangsu, the tenders actually are further delayed and we expect those tenders to be completed or concluded by end of December 2016, but those two provincial governments didn't make it. So, our expectation is they might further delay to the end of the first quarter or even to the second quarter. So, that's just our latest information. And the pricing upside on the tender perspective so I think right now China recently the government initiative is trying to benchmark. They are putting the so-called online disclosure requirements. They require the different provinces to submit all the tendering price for different provinces in the centralized database system. So, our concern is if that's implemented so the Shandong and the Jiangsu's tender price might benchmark to the lowest price bidder in the different parts. So from that perspective, it's very difficult to qualify or to estimate what's price upside from those two provinces at the moment. So for the question regarding to the recent guidelines, the healthcare reforms initiative. Yes, we do just like the David mentioned, we do feel certain challenge. For example for the post tender negotiation, we do expect those post tender negotiations there will be [uncertainty] at the different regions at different timelines. So, Shandong we already noticed from the government so they after the provincial level tender concluded, the different regions were at this group to further negotiate for the plasma products. So, impact is uncertain at this moment as well. So for the two-invoice system, the update is just as David mentioned earlier so we do think it's challenged. But on the other side, it might create certain opportunities for us to better control the end customers because the government's initiative is trying to just eliminate the multiple layers of distributors so it will give us some opportunities. But in the short term for the products like placenta polypeptide products, our volume might be negatively impacted. But the reserves revenue might go up if we fully compliance the double invoice system, but the selling expense will go up as well. So, hopefully we can end up with better profit. But for the plasma products, our general belief is the double invoice system basically has very limited impact to our existing distribution format. And for the NDRL, yes, it was released yesterday by the Ministry of Human Resource and Social Security and we just did a quick comparison with the prior version, which is 2009's version. Just want to highlight the changes for the key products like albumin and IVIG. In the 2017 version, albumin can be reimbursable for more conditions such as life savings in severe disease or patients suffer from hypoproteinemia that result from plasma infusion in connection with liver psoriasis or other cancers. But back to 2009's NDRL version, albumin can only be reimbursed for the life savings for the patients who have work injury insurance. For IVIG, the 2009's NDRL version only allowed the reimbursement indication in the patients who have work injury insurance or children with severe virus infection. And the new addition for this year, the reimbursement condition much more expanded into primary immunoglobulin deficiency, neonatal septicemia, severe primary immunoglobulin, thrombocytopenia, Kawasaki disease, myasthenia gravis, and acute green diarrhea syndrome. So, we believe those expanded indications will further demand for plasma products in the long run typically for IVIG. But given that most of those products still remain the B type reimbursement drug list, each provincial government has the power to make the certain adjustment to the B type drug list to decide how much to reimburse. And so, it won't be clear or we will not be able to quantify the specific impact from this NDRL's new addition at the moment.

[Yolanda Hu:]

Actually my last question was on your comments on the new documents released by NHFPC regarding the development of plasma collection stations?

[Ming Yang:]

So, I think at the end of last year the National Health and Family Planning Commission and SFDA jointly released the new guidance on approval of the plasma collection stations. We believe the main intent of the guidelines is to strengthen the regulatory oversight for existing collection stations and approval requirement for granting more license for new collection stations preferably to large company so to improving the quality and safety control on the plasma through the new initiatives. So we believe in general, the government new initiative will indirectly benefit the large plasma companies such as China Biologic.

[Operator:]

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

[Jessica Li:]

Congratulations on finishing the year strong. First very quickly, Ming, you mentioned that some of the provincial government may not endorse the coverage expansion or the indication coverage expansion, so can you elaborate a little bit on that? Any reason to believe what major provinces could have issues with maybe providing the expanded sort of coverage? So, that's one. And then second, mainly on the supply side. Do you have any increase in visibility for opening new plasma collection centers in the next couple of years and also what's the likelihood for you to expand the Xinjiang Deyuan deal beyond 2018? Thank you.

[Ming Yang:]

So I think, Jessica, the first question regarding the provincial government's decision for whether including those drugs in their reimbursement catalog or just put a limitation. So, our comments is based on the historical practice of certain provinces because each provincial governments were actually to decide basically the funding position to decide how much drugs to be reimbursed. Because in the history for example like albumin's reimbursement practice so we observed province like Beijing, Shanghai, those Tier 1 cities; the reimbursement practice is much better compared with those less developed province like in the southwest region. So I think from that perspective, we expect that each province might take a different magnitude to including the different drugs or put a different reimbursement ratio for each drug for the reimbursement. The second question regarding the plasma collection visibility. Just like we mentioned earlier, the new government guidelines published end of last year we believe will be favorable for large players like us because in the past especially in the past three years, we believe there's 13 new centers approved by the various provincial governments. Most of the centers were approved in Guangdong province. Actually those centers were approved to smaller manufacturers who doesn't actually qualify to be approved for new stations because most of the smaller manufacturers only have one or two products. In the central government's guidelines, the company eligible for opening new center or approved new centers, they need to have at least three types of products. So from that perspective, we believe the local government didn't fully comply with central government's guidelines for approving the new centers. So, I think the recent government's mandate to strengthen the approval process will definitely just further give the local governments pressure too. We believe it might actually turns out to less centers will be approved by the small manufacturer, who doesn't qualify to be approved for new centers. For China Biologic, our strategy is still trying to improving the efficiency at the existing collection centers but opening new centers is also our top priority. Just like we announced at the beginning of the year, we had the two new centers in Shandong recently approved. So, I think our primary focus for the new centers will be in Shandong and Guizhou regions since we have a major operation presence there. And our visibility is in Shandong, we believe there's still three to five regions has potential to be opened with new center or to be opened as the branch center for existing centers. So from that perspective, we believe that Shandong still have quite a large potential to have three to five centers approved, but the timeline to approve those new centers is beyond our Company's control. For Guizhou, we are actively working with Guizhou local government trying to convince them to allow us to open new centers and we hope there's certain positive developments maybe in the later of 2017. And by now, we have nothing concrete to announce at the moment. So the Xinjiang contract, 2016 actually is the second year of the 500 tonnes contract so the contract is very well executed. We saw this 18% over the contract volume delivered to us and from that perspective, we believe it might actually have maybe 15% to 20% over the 500 tonne volume might be supplied to us by 2018. So for the renewal of the contract we think it's too early, it's immature at the moment to discuss with our partner at the moment. And so I think that's for the plasma questions. And can you remind me your third question, Jessica.

[Jessica Li:]

I think you've addressed all my questions. But just quickly on the first, as you mentioned Beijing and Shanghai tend to have more friendly reimbursement policy so have you actually tried to quantify the potential impact from the coverage intervention for albumin and IVIG in Shanghai or Beijing?

[Ming Yang:]

I think for albumin, we have a very limited presence in Shanghai and Beijing because the Tier 1s pretty much the supply is from the multinational companies for Albumin market. So from this perspective, the future benefits from Tier 1 series like Beijing and Shanghai may be marginal. But for IVIG, it will be very difficult to quantify at the moment because historically all those usage for those now reimbursement indications like the syndrome for those acute disease even without insurance coverage, patient will pay out of the pocket. So, I think the consumption is already partially realized because patient will pay for the consumption anyway. So, I think it's very difficult to quantify the overall potential at the moment.

[Operator:]

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

[Iris Wang:]

So what is your expectation about the ASP changes for your core products, the IVIG and the albumin? And secondly, how do you foresee the market share changes between the imported albumin and the domestic albumin? Thank you.

[Ming Yang:]

So since you mentioned the market share for 2017 so I think just quickly review what happened in 2016. So I think in the 2016, the overall albumin the national wide supply increased about 20% so the domestic albumin supply increased about 24%. The imports actually decelerated in the second half and ended up with 18% overall year-over-year growth. The imported albumin accounts about 56% overall of the supply during 2016. I think given what we acknowledge for the country's collection volume about 20% in 2016, we believe in 2017 the albumin in general from the local producers will continue to accelerate in 2017. But from multinational perspective, we're not very certain what's their position and what their volume were committed to China in 2017. So from that perspective, the local made albumin volume will continue to go up in 2017. That's our impression. For the core products the pricing assumption, like I said earlier, for IVIG we expected pretty much stabilized prize for overall IVIG market. But for the direct sales channel such as the province like Shandong and Jiangsu, those provinces if the governments tendering price can go higher, we might end up with slightly price increase for those markets because we're pursuing direct sales strategy. But for the distribution channels, we pretty much sell in the Tier 1 cities; Beijing, Shanghai, and Guangdong. Beijing and Guangdong, the price already reflected last year's price increase because last year our IVIG price increased by over 4% because of a benefit from Guangdong and Beijing's price. And Shanghai, we don't actually have any visibility of any imminent pricing or the tendering for the IVIG price increase in that region. So overall I think among distribution channels, price might be flat. So for albumin, the direct sales region similar to the IVIG in Jiangsu, Shandong; if the government tendering results are favorable, then we might end up with slight price increase. But for distribution channels just for the reason we mentioned earlier we saw the 20% plasma collection volume increase in 2016, that may actually enhance the competition among the local made plasma in 2017. So for distribution channel on the conservative front, we estimate a slightly price decrease. So, overall our priority is trying to maintain the stabilized price for albumin in 2017. So, hopefully that answers your question.

[Iris Wang:]

Sure. Can I have a follow-up question?

[Ming Yang:]

Yes please.

[Iris Wang:]

Ming, could you please remind us your revenues split between your direct sales and the distribution channel for the core products?

[Ming Yang:]

We still remain very similar. The percentage 40% of the product sales from distribution channel and 60% from the direct channel.

[Operator:]

Thank you. And our next question comes from Ling Qiu with Deutsche Bank.

[Ling Qiu:]

This is Ling from DB and I would like to ask two questions on behalf of Jack. My first question is on the pipeline of fibrinogen, could you please share with us some colors on the current market landscape and your expectation on the ramp-up cost if you are able to obtain the approval this year? And my second question is could you please give us more colors on the trend of account receivable days, please? Thank you.

[Ming Yang:]

So actually David mentioned earlier, we made certain positive progress for the fibrinogen products in the last quarter. The CFDA onsite inspection for the production facility has been completed at the end of the last year. We're currently awaiting for the CFDA's inspection on clinical hospitals, which is a new requirement compared with last year's drug application procedure. So, we now expect to obtain the GMP certification to launch these products in the second half of 2017 if the clinical data inspection carried out by the CFDA is completed before the mid of 2017. And the ramp-up for these products might take a couple of years because at least for 2017 because we only have maybe less than a quarter's production, we think the contribution for this years could be marginal. And just want to give you some sense of how this product could ramp up in two or three years. And we believe just like our other coagulation products, Factor VIII takes few years to ramp up to the current position. So I think in two, three years we could expect this product to generate 2% to 3% of revenue. So, that's the answer for your first question. The accounts receivable days, I think you might notice the accounts receivable days for the plasma products increased in 2016 compared to 2015 from 34 days to 41 days and the accounts receivable balance increased by 45% in RMB terms as compared to the ending balance of last year. The main reason for the increases came directly from the receivable balance increase associated with direct sales channel which grew about 60% because we granted long terms to certain qualified key hospital customers meaning large hospitals. The concentration among those large hospital channels is relatively high. So, our Top 30 performing hospitals contributed about 75% of revenue increase. Actually within our distribution channels, the receivable days actually decreased about 25% in 2016. And in 2017 our general view is accounts receivable turnover days could trend longer because there's certain challenges associated with the recent government's reform initiatives including local governments are facing the budget constraints and also the hospitals are not allowed to maximize the profit from the drug sales under zero mark-up policy. And also we think the policy to limit the drug sales as a percentage of hospital total income may further constrain the hospital's payment terms. So, in our view the preliminary estimation of 2017 accounts receivable turnover days may go up to 50 days. But this 50 days without counting the impact associated with placenta polypeptide to be fully in compliance with two invoice system because that might require the hospital to pay on behalf of the distributor first to the manufacturer because hospital needs some terms. So I think including that, the receivable days might seem longer but we will not be able to quantify the specific impact associated with the policy change for polypeptide products. So, the 50 days only carrying the plasma products.

[Operator:]

Thank you. And the next question comes from Tony Ren with Maybank Kim Securities.

[Tony Ren:]

Congratulations on another strong year. The question is about the cost of plasma collection particularly when the nucleic acid testing goes into effect, want to see how much of a cost impact that might have on the cost of plasma? And the second question is just to clarify the NDRL which was released yesterday. For immunoglobulin, it removed the restriction in the 2009 edition for pediatrics, right? So, it removed the restriction for severe viral infection for children and replaced it with neonatal sepsis so I wanted to see if it's actually a restriction?

[Ming Yang:]

So, the first question is for the policy change for the new testing requirements. We're still evaluating the implementation procedure and it's hard to quantify the impact because the implementation date is by end of 2019 so it's still early stage at the moment for us to quantify. But I guess our general understanding so basically if the customer increases, we need to purchase the equipment and also we need to purchase the testing material as well. So, overall the potential cost might go up to 1% to 2% based on the current estimation which are subject to change. So for the second question, so I think it's not very clear to us either. So, for us basically I think the replacement should be better. We think that replacement have better the favorable impact than the prior restriction.

[David Gao:]

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

[Operator:]

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