China Biologic Products Holdings Inc
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Welcome to the China Biologic Products First Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Bill Zima from ICR. Please go ahead.

[Bill Zima:]

Hello, everyone and thank you for joining us on today's call. China Biologic announced its quarterly financial results on May 6, after the market closed. An earnings release is now available on the company's website. Today, you will hear from China Biologic's Chairman and CEO, Mr. David Gao, who will start off the call with a review of 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. 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 Biologic 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're 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 & CEO. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone and welcome to China Biologic's first quarter 2015 conference call. We're pleased to report a strong first quarter, with sales, net income and the plasma collection volume all achieving double-digit growth. Incremental revenue growth and net margin improvement were largely attributable to increased sales of IVIG and the placenta polypeptide products during the quarter. In the first quarter of 2015, our Guizhou facility experienced an annual sales increase of over 50%, now that our GMP upgrade is complete and the production has fully resumed. In anticipation of stable pricing and market demand in Tier 1 cities, we have reserved a substantial amount of plasma pastes for IVIG production and utilized pre-served plasma paste for IVIG production during the quarter. Additionally, the remodeled, expanded production capacity for our placenta polypeptide products resulted in large sales volume and reduced the selling expenses through the utilization of our internal promotion team. During the reporting quarter, sales of our Human Coagulation Factor VIII continued to ramp up, resulting in a 63% increase in revenue and significantly improved the plasma utilization efficiency. We also initiated the commercial sales of first batches of PCC which will further help raise plasma yields. Operationally, we continue to make strategic developments, through increasing plasma collection volumes and seizing all sourcing opportunities to drive future growth. We were excited to announce that our Guizhou Taibang facility recently received special approval, from the China Food & Drug Administration, to purchase up to approximately 143 tons of source plasma and plasma pastes from a local plasma manufacturer. With the CFDA's special approval, this plasma purchase represents a unique growth opportunity for China Biologic over the next two years. The additional supply of source plasma and the plasma pastes which represents over 20% of our overall current annual collection volume, will enable us to significantly improve the production utilization rate of our Guizhou production facility and better meet growing demand of plasma products, including IVIG in Tier 1 cities in China. To comply with the government regulation and better ensure quality control, we will prioritize usage of such purchased raw materials during the remainder of 2015 and reserve certain amount of plasma collected from our own plasma stations for future production. Given the long production cycle, we currently expect that the finished products made from such purchased raw materials will begin to be delivered to the market later this year, contributing to our top-line performance in the relevant period. Going forward, we expect that our earnings in 2016 and 2017 will also benefit as more reserved raw materials collected at a lower cost in 2013 are put into production. Finally, we're pleased that earlier this week the Chinese National Development & Reform Commission announced removing the retail price ceiling for all drug products, except for anesthetics and Category I antipsychotics. The long-waited regulation move will come to effect on June 1, 2015. Although it is still early to speculate implementation details and timeline for different regions or to assess the impact of the price ceiling removal on our plasma products, we believe this deregulation move should be a favorable policy development for our industry and business in the long run. Before handing over the call to Ming Yin, our Vice President, to review financial results in greater detail, I'd like to give you update of our current R&D status. As a leading plasma-based biopharmaceutical company in China, we place high value on production quality and innovation to service the unmet patient needs. In 2015, we expect to initiate commercial production of human Hepatitis B immunoglobulin for intravenous injection, a product used in the prevention of measles and contagious Hepatitis. During the year, we also expect to receive approval for clinical trials of two products; human immunoglobulin intravenous which is IVIG new generation and the Human Antithrombin III. We're confident that this investment and the efforts, together with recent development in our business and the industry, we will position China Biologic for continuous strong growth in the years to come. That concludes my part. Ming, please go ahead.

[Ming Yin:]

Thank you, David; hello, everyone. First a review of the key P&L items for the first quarter of 2015. Total sales were $70.4 million, an increase of 25% from $56.3 million in the same quarter of 2014. The increase was primarily attributable to sales increase in plasma-based products and placenta polypeptide. During the quarter, human albumin products and IVIG products remained the largest two sales contributors. The average price for both products increased slightly, as a result of a combined effect of a reduced value-added tax and our sales effort to increase market share in Tier 1 cities and new markets. As a percentage of total sales, human albumin products revenue was 38.2% compared as to 42.3% in same quarter of 2014. The sales volume of human albumin products increased by 13% in the reporting quarter. As a percentage of total sales, IVIG revenue was 46.7% as compared to 36.5% in the same quarter of 2014. The sales volume of IVIG products increased by 57% in the reporting quarter, mainly due to the increased sales through distributors in Tier 1 cities and new markets, supported by increased production volumes by utilizing pre-reserved plasma paste for IVIG production. Gross profit increased by 18.9%, to $45.9 million in the first quarter 2015, from $38.6 million in the same quarter of 2014. Gross margin was 65.2% and 68.5% for the three months ended March 31, 2015 and 2014 respectively. Total operating expenses increased by 4.7% to $11.1 million, due to a combined effect of decreased selling expenses and an increase in R&D expenses and the G&A expenses. Selling expenses decreased by 13% to $2 million, from $2.3 million in the same quarter of 2014. As a percentage of total sales, selling expenses were 2.8%, down from 4.1%. The decrease was primarily due to the decrease per-unit selling expenses of placenta polypeptide during the year. G&A expenses increased by 9.7% to $7.9 million from $7.2 million in the same quarter of 2014. As a percentage of total sales, G&A expenses were 11.2% and 12.8% in the first quarter of 2015 and 2014, respectively. The increase in general and administrative expenses was mainly due to the increase in share-based compensation expenses. R&D expenses were $1.3 million, representing an increase of 18.2% from $1.1 million in the same quarter of 2014. As a percentage of total sales, R&D expenses for three months ended March 31, 2015 and 2014 were 1.9% and 1.9% respectively. The increase in R&D expenses was primarily due to the expenditure paid for certain clinical trial programs and raw materials consumption for certain pipeline products. Income from operations was $34.7 million, an increase of 23.9% from $28 million in the same period 2104. Operating margin was 49.3% as compared to 49.7% in the same quarter of 2014. Income tax expenses was $5.6 million as compared to $5.3 million in the same quarter of 2014. The effective income tax rates were 15.9% and 18.2% for three months ended March 31, 2015 and 2014, respectively. Net income attributable to the company, increased by 26.8% to $23.2 million, resulting in net margin of 33%. Fully diluted net income per share was $0.87 per share. Non-GAAP adjusted net income attributable to company increased by 30.9% to $25 million or $0.94 per diluted share. Non-GAAP adjusted net income and diluted earnings per share excluded $1.8 million of non-cash employee share-based compensation expenses. Now, I would like turn to the balance sheet and the cash flow items. At March 31, 2015, the company had cash and the cash equivalents of $86 million compared to $80.8 million as of December 31, 2014. Net cash provided by operating activities for three months ended March 31, 2015, was $16.5 million as compared to $11.5 million for three months ended March 31, 2014. The increase in net cash provided by operating activities was primarily due to the increase in net income. Accounts receivable increased by $9.2 million during the three months as ended March 31, 2015, as compared to $6.4 million during the same period in 2014, primarily due to a change of sales strategy to collaborate more closely with specialized distributors in their bidding efforts with provincial centers for disease control and the prevention to facilitate the sales of Human Rabies Immunoglobulin products. As a result, the company granted credit terms ranging from two to three months to the specialized distributors rather than requiring full prepayment prior to deliveries. Net cash using investing activities was $8.5 million, as compared to net cash provided by investing activities of $0.9 million for the same period in 2014. During the three months ended March 31, 2015 and 2014, the company paid $8.5 million and $7.5 million, respectively, for acquisition of property, plant, equipment, intangible assets and net use Shandong Taibang and Guizhou Taibang. During the three months ended March 31, 2014, the company received a refund of deposit of $1.6 million from the local government, due to the decrease in size of land parcel that was granted to the company in Guizhou and received $6.6 million upon maturity of time deposit. Net cash used in financing activities was $2.1 million as compared to $78.2 million used for the same period in 2014. The net cash used in financing activities for three months as ended March 31, 2015 mainly consisted of a repayment of $31.6 million on a short-term bank loan and a dividend of $3 million to be held in escrow by a tri-court in connection with disputes with the majority shareholder of Guizhou Taibang, partially offset by a maturity of $32 million deposit, as security for same short-term bank loan. The net cash used in financing activity for three months ended March 31, 2014, mainly consist of a payment of $70 million for share repurchase; a deposit of $72.1 million as cash collateral for certain long-term bank loans; a repayment of $4.9 million on a short-term bank loan; and a dividend of $1.1 million paid by our subsidiary to non-controlling interest shareholders; partially offset by proceeds of the $70 million from certain long-term bank loan. Our working capital on March 31, 2015, was $185.7 million and our current ratio was 2.5. Total shareholders' equity was $306.5 million as of March 31, 2015, compared with $275.3 million as of December 31, 2014. We believe that the company has sufficient cash on hand to capitalize on its growth initiatives for 2015 and it can continue to produce positive cash inflow from operations. We also plan to maintain a healthy balance sheet going forward. Turning to our 2015 guidance. We're awaiting our full year sales forecast. Total sales are expected to be in the range of $290 million to $295 million which represents gross 19% to 21% over 2014. Full year non-GAAP adjusted net income expected to be -- remain in range of $95 million to $97 million, excluding the potential adverse impact of foreign currency which represents growth of 26% to 28% over 2014. This guidance assumes only organic growth and excludes acquisition and the [indiscernible] assumes no significant product price changes during 2015. This forecast reflects the company's current and the preliminary views which are subject to change. That concludes our prepared remarks. We're now ready to take some questions. Operator, please pool the question.

[Operator:]

[Operator Instructions]. Our first question is from Yolanda Hu of Morgan Stanley. Please go ahead.

[Yolanda Hu:]

I actually have three questions. First, I think [indiscernible] will lead the price control on drugs. So what's your expectation on the real impact for our key product price? And by how much do you think the price for albumin and IVIG could likely increase in 2015 and 2016, as well as over longer one. And what's your strategy would raise the price proactively or you simply follow your competitors? Second, can you also help us quantify the impact on sales and earnings from the one-time purchase of plasma from Xinjiang Deyuan? And do you expect to see similar chance in the future, say, to acquire additional plasma from a third party? And last, can you help us understand the albumin market dynamic in 1Q? What's the growth for imported products and domestic products, respectively? And do you expect this trend to continue in the rest of the year? Thank you.

[Ming Yin:]

Okay, let me try and answer the questions one by one. Regarding the NDRC recent notice to remove the retail pricing for all drugs, except for the anesthetics category and the psychotic drugs. As David mentioned earlier, it is too early to speculate the implementation details and timeline for different regions or to assess the impact for this removal of retail pricing on the market price for plasma products, particularly IVIG albumin. The impact on the different products may vary. The reason is, as you might understand, China has a very complex, the tendering process and which each province has their sole decision to run their own tendering process, because the different provinces adopt a different policy for implementing their tender process at different times. Also, each province has its own timeline requirements for tendering on different drugs. Just for your reference, there are a few provinces just recently completed their respective tendering process, such like Anhui province, Yunnan and Guizhou. Therefore, at this moment, we don't actually have a very clear view when those provinces will initiate the process to re-launch the tendering process. And even they decide to re-launch the tendering process it might take some time. So that's why it will be very difficult for us to assess the different impact on the different products. But, in general, we believe this deregulation move should be a favorable policy development for the industry and also for our business in the mid or long term. That's my answer for your first question. For the purchased plasma impact, as we also addressed in the press release and also in the early call, we mentioned that we already raised the top line, the guidance, but maintained the same bottom-line guidance, because the purchased plasma, the cost is considerably higher than our own plasma, but there's little additional operating cost associated. So net margin on products made from those purchased plasma will be comparable or just a few percentage less margin contribution to our bottom line, as compared to our own plasma. Also, we think the purchased plasma can only be used to produce albumin and IVIG which is in accordance with the CFDA's compliance requirement. In that way, the purchased plasma will generate less revenue and profit than our own plasma, because we can use our own plasma to produce other products, like PCC. The third reason, the impact for 2015, because the long production cycle, because we have to retest the raw materials for those purchased plasma before we put in production and wait for the regulatory approval for every batch of finished products. Our current estimation for the products produced from the external required plasma to be in the marketing data 2015. As a result, we expect only a proportion of final products made from those purchased raw materials to be delivered in the market in late 2015. Another reason we couldn't reach the bottom-line guidance is because, as David mentioned earlier, we will prioritize usage such purchased raw material during the remainder of 2015, in order to meet the CFDA compliance to ensure separation in processing external purchased plasma and our internal [indiscernible] plasma to avoid any contamination risk which will constrain our operational flexibility in 2015 to process additional [indiscernible] our own plasma in order to generate high-margin products available for sale this year. But in 2016 we will have the capacity to process our own lower-cost plasma to generate higher margin products. The final reason we think it might be after than this moment, because the final albumin and IVIG finished products' volume generated from the external purchased raw materials, pending on both the raw materials retesting results and also the protein and the IGG contents which determine the final production yields level. So it will be difficult to assess before we put into production. But our preliminary estimation for the overall revenue contributed from the finished products will be in the range of $35 million to $45 million, based on our current yield level which subject to change after the testing results. So I think that's my answer to your second question. So regarding your question whether we have a possible future additional opportunity to purchase any external plasma, because this transaction we received a special approval from the CFDA. It is the first of this kind and with many detailed compliant terms attached. The authority could be comfortable approving additional transactions, but it's likely they will want to evaluate the successful execution of our current transaction before allowing for any additional similar transactions in the future. But we will keep the opportunity open in the future. Currently, our focus remains on the organic growth. For the albumin, the market share, the update for the first quarter, according to the latest batch pool of data, the overall albumin market supply increased 11%, as compared to the first quarter in 2014. But it is worth mentioning that the import growth rate in the first quarter of this year same slow down a little bit, remained flat as comparable to the last year, the same period. While the domestic-produced albumin increased 27% in the same period. Right now, the imported albumin accounts approximately for 54% of the total market share, as compared to approximately 59% one year ago. The rapid increase in market share of domestic producers is mainly because the domestic producers' production resumption since most the albumin manufacturers have completed their GMP upgrades at the end of 2014. For the going-forward trend, at this moment we're just not sure whether the imported albumin will pick up the speed in the rest of 2015. That's my answer to your questions.

[Operator:]

[Operator Instructions]. And our next question is from Bin Lu of MLV. Please go ahead.

[Bin Lu:]

I have two questions. First is regarding the sales model. According to your remarks, it seems that the distributor model works very well for the past quarter. So I was wondering, are there going to be any increased efforts on that side? Also, are you going to increase your workforce for the direct sales as well? And the second question is do you think you're going to pursue more plasma collection permits in other provinces? And if so, what's the timeline of doing that? And what provinces are you considering? Thanks for taking my questions.

[Ming Yin:]

I'm sorry, I didn't get your second question. Did you ask for the plasma collection?

[Bin Lu:]

Yes. Are you going to pursue plasma collection permits in other provinces, other than what you have right now?

[Ming Yin:]

Okay. So maybe I answer your questions in the reverse order. I'll try to answer your second question first. Developing the plasma resource or establishing new stations, is always our most important strategic focus. So our management team remains very focused to identify any appropriate regions which suitable to establish the plasma centers. But the establishing new centers in China requires the multiple level of government approvals which are very difficult and uncertain. So because those challenges and we also don't want our competitor to know exactly where we want to build new stations. So for that reason we believe it is premature to disclose any of our plasma station development plan at current time. That's my answer for your second question. So for the sales model, the questions, yes, we do actually have a very successful sales model. Especially in 2014 we started the Tier 1 cities strategy and we have very successful results. Over the year we have over 200% growth in IVIG in Tier 1 cities alone in 2014. This year we also have close to the same; first quarter we have over 100% growth in volume as compared to last year in Tier 1 cities as well. So in Tier 1 cities we utilize local, largest, very reputable, distributors to help us to penetrate in the large hospitals. So in that respect we don't need to add any direct sales staff in this regard, because our partner, those large distributors, will mainly help us to distribute the products. In the future we definitely will focus on this model. In Tier 1 cities we're going to focus on the distributor model. And for our local market, like Shangdong and the Middle East, like which we have a direct sales model, we're going to commit to the direct sales model as well. That's my answer.

[Operator:]

Our next question is from Matthew Prior of Evans & Partners. Please go ahead.

[Matthew Prior:]

Just two questions, Ming. The first question is just in terms of how sustainable your growth in IG is. And can I ask the question around how much of your plasma you're actually [indiscernible] for IG? And my follow-up question, just in terms of the great extra plasma you've been able to secure from the CFDA, can I ask how long can you store plasma or the intermediates of plasma if you were to win additional plasma in the future? Thank you.

[Ming Yin:]

Okay. So the first question is for the IG growth, whether it's sustainable. Yes, as David mentioned earlier, we do actually have a pre-reserved paste from 2013 which gives us actual the growth momentum in 2013 and 2014; and which results in a higher growth, the rate, than the albumin. And 2015, in the rest of 2015, because those paste pre-reserved paste will be pretty much consumed. So the rest of the year, the IVIG, the protection level will probably come down. But our recent purchase from the Xinjiang, the external plasma and the paste we just acquired, will actually give us an actual lift in 2016, as addition for our IG growth. That's my answer for your first question. So for the second question is, so basically, the China, the CFDA regulation has a very special rule. Basically, you may -- where the intermediate like a paste, cannot be shipped, even it's in the same group. It has to stay with the parent company. Meaning the plasma collected from the vertical -- like a parent company can only use their wholly-owned plasma station, generally the plasma and intermediates. The regulation is for the sourced plasma, basically, the shelf life is three years; for the paste, it's two years. So basically, the Xinjiang -- the case is because their GMP, the upgrade was not completed yet. So that's why they have some paste, will pretty much -- will be running out of their shelf life. So basically, we had this opportunity to purchase their paste and sourced plasma. That's the background for the purchase. I don't know whether I answered your question, Matt.

[Operator:]

Our next question is from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

I just have one question. Can you provide us an update on your own plasma collection costs? Last year, I think you mentioned the plasma collection costs had been increasing. Can you provide us an update on what's been the trend that you've seen in the first quarter of this year?

[Ming Yin:]

Yes. So basically, Kas, if you read our gross margin, it's come down from 68% to 65% this quarter. Because if you look at the cost of sales, particularly gross margin, affected by various factors, like volume, pricing and, also, the raw material cost, it's a very important factor. Also, it would be -- depends on the production mix and also in respect of yields and inventory impairments, production cycle and routine maintenance costs, etc. So for this year and also on a continual basis as last year, we continue to make efforts to increase plasma collection. We particularly increase the fees to pay our donors. But the fee increase is based on the various factors, such as the collection regions; economic development; and the demographic situation; historical collection fees, as compared to national average, the potential room for collection volume to grow. And our average fee increase for last year, we've not increased the fee this year yet. But as reflected in the gross margin you saw this quarter, the impact from the fee increase is about 5% to 7%, the impact from the collection cost. As you might -- where the collection cost, the plasma cost is contributing about 80% of our overall COGS, the cost increase accounts for majority of this quarter's cost, the COGS increase. And also, the remodel, the Guizhou facility has resulting certain high-depreciating expenses, reflecting the manufacturing cost also contribute about 10% of our overall COGS increase in this year. But in the future, we will ensure to adopt a more stringent policy, to ensure a more moderate fee increase in collections. So in other words, we expect probably slower rate fee increase in the future years. Kas, that's my answer.

[Operator:]

[Operator Instructions]. Our next question is from Isabel Buccellati of Putnam. Please go ahead.

[Isabel Buccellati:]

I just want to come back to the point of the sustainability of IVIG growth. If I understand it correctly, you say the guidance for this year is, basically, 19% organic growth. So that comes from your own new production, plus, basically, the preserved paste which you have had from the past which is probably running out by the end of this year. And then next year's growth is coming mainly from the $35 million external plasma, because you, basically, have to replenish the paste which you had reserved this year? Is that the right way to think about it?

[Ming Yin:]

No, because like David mentioned earlier, because we have a contract, the obligation to prioritize usage, the purchased plasma, in the remaining of the year. Meaning we have to process the purchased plasma this year, but because of long production cycle and the available finished products, generally from the purchased plasma, will be available to sell in the late of this year. So this year, the IVIG or the albumin sales, we have a promotional products, finished products, generated from this purchased plasma. But I think it's worth mentioning, the majority part, the finished product, generally from the finished product, will be realized in 2016.

[David Gao:]

Again, I just want to make additional comment. The purchase of the other people's plasma is going to be incremental growth opportunity for us over the next two years. However, as Ming said, we're not really relying on this. As we said before, our own plasma collection is in the double-digit. Actually, we've seen a very good sign early this year, our plasma collection over the last three years is -- actually, it's higher than the national average. So we see actually the company is really significantly gaining the market share. So I think that is really the fundamentals of our future growth are sustainable. But again, as I said, this purchase, the plasma additional is going to be an incremental growth opportunity for us.

[Isabel Buccellati:]

So basically, it's we don't have to worry that the benefit which you have this year from the preserve paste is, basically, a negative impact on 2016?

[David Gao:]

No. Actually, as Ming said, it's going to be a very positive impact for 2016 or even beyond, 2017 because some of our accumulated -- collected our own plasma at a lower cost is going to be fully into production later this year. So we see it's going to reflect in 2016 or 2017.

[Operator:]

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

[David Gao:]

Thank you, everyone to participate our conference call. And have a good day.

[Operator:]

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