China Biologic Products Holdings Inc
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Bill Zima:]

Hello everyone and thank you for joining us on today's call. China Biologic announces Quarterly Financial Results on August 6, after the market close. An earnings release is now available on the Company's Web site. Today, you will hear from China Biologic's Chairman and CEO, Mr. David Gao, who'll 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. The Chief Financial Officer of the Company, Mr. Ming Yang, is also 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 and 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 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 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 biopharma industry. Now, with that said, I'm pleased to present Mr. David Gao, Chairman and CEO, China Biologic Products. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone, and welcome to China Biologic's second-quarter 2015 conference call. As you saw in our earnings press release, China Biologic continued to deliver robust financial results with high growth on both the top line and the bottom lines for the second quarter of 2015; specifically, our total sales during the quarter increased by almost 32% over the second quarter of 2014, reaching over $79 million. Human albumin and IVIG continued to be the largest contributors to sales in the second quarter with human albumin revenue accounting for approximately 35.7% of sales, and IVIG contributing 43.1%. We also experienced solid performance across our entire product portfolio. Placenta polypeptide products remained a stable sales contributor, accounting for 9.7% of our total sales. Other immunoglobulin products contributed 8.5%. Sales of our Human Coagulation Factor VIII and PCC nearly doubled and contributed a combined 3% to total sales, significantly improving our plasma utilization efficiency. These impressive results were bolstered by a few primary factors. First, market demand for our major products remains strong, and our market share increased as a result of our production volume growth outpacing the domestic average and the effectiveness of our sales model. Additionally, we continue to benefit from our direct sales strategy, which allowed us to maintain price stability in the second quarter. Finally, our IVIG sales were supported by our focused effort to further penetrate markets in Tier 1 cities. This strategy enabled us to continue to grow our IVIG sales by volume, and reinforced our leadership in China IVIG market. Now, moving on to our operations. In the second quarter, we were also able to effectively control costs through greater operation efficiency. Despite the downward pressure on our gross margin from increasing plasma collection costs, our operating margin reached a new high of 50.9% during the quarter. Also, during the second quarter, we began processing the sourced plasma and the plasma paste that we purchased from a third party, Xinjiang Deyuan. As we announced earlier this year, we received a special pool from the CFDA to purchase us up to approximately 143 tons of source plasma and plasma pastes from Xinjiang Deyuan. As of June 30, 2013, nearly half of this plasma and pastes has been put into production at our Guizhou facility. A small portion of the finished products made from these purchased raw materials will be gradually delivered to the market later this year, where the majority will be sold in 2016, and beyond. The purchase of the plasma offers us a unique opportunity to significantly improve the production utilization rate of our Guizhou facility, and better meets the growing demand for plasma products in China. Finally, I would like to briefly mention our follow-on offering, which we successfully completed in June, in which we offered 3,450,000 shares of common stock, including 805,000 primary shares. With the completion of the offering, we added new strong institutional investors to our shareholder base, further improved our shareholder structure, and increased the liquidity of our stock. We have used the proceeds of the offering to repay a US-denominated loan to mitigate our foreign currency risk, and released the RMB deposit used to secure the loan, which will enable us to pursue potential growth opportunities. We are pleased that we maintain our full-year financial forecast. However, we expect our year-over-year third-quarter sales growth rate to be lower than the first two quarters of 2015, primarily due to a relatively high volume sold in the third quarter of 2014, after receiving the first batch approval in July at the upgraded Guizhou facility. Our year-over-year fourth-quarter sales growth rate is expected to increase over the third quarter, as we benefit from the sales of products made from our purchase of the plasma. Looking ahead, we remain committed to executing our strategic growth plan to further expand our market share and deepen our penetration into new markets as we continue to enhance sustainable, long-term shareholder value. That concludes my part. I will now turn the call over to Ming Yin, our Senior Vice President, to review second-quarter financial results. Ming, please go ahead.

[Ming Yin:]

Thank you, David, and hello, everyone. We're pleased to announce that we achieved a robust growth in both sales and net income during the second quarter of 2015. Now let me walk you through the key P&L items to provide more details on how we achieved this growth. During the second quarter of 2015, total sales increased by 31.6% year over year to $79.1 million, from $60.1 million in the same quarter of 2014. The increase was primarily attributable to the increase in sales volume of major plasma-based products. As David mentioned, our human albumin and IVIG products remained the two largest sales contributors. The average price for both products increased by approximately 3% as a result of the reduced value-added tax, and our sales strategy to increase market share in Tier 1 cities and new markets. Throughout, human albumin revenue increased to 35.7% of total sales from 34.1% in the same quarter of 2014. Sales volume of human albumin increased by 33.8%, mainly due to sales pushed through to the second quarter after the delayed batch approval from the previous quarter; as well as lower volume sold in the second quarter of 2014, due to the production suspension to upgrade the Guizhou facility. Guizhou Taibang resumed production in March 2014 and shipped its first batch of products for sale in July 2014, after the completion of the government batch approval. IVIG revenue accounted for 43.1% of total sales, as compared to 44% in the same quarter of 2014. The sales volume of IVIG increased by 25.1%, mainly due to the increased sales through distributors in Tier 1 cities and the new markets supported by increased output following the production resumption at [indiscernible]. Gross profit increased by 26.2% year over year to $52 million in the second quarter 2015. Gross margin was 65.8% in the second quarter of this year, compared to 68.5% in the second quarter of 2015/2014. This decrease in gross margin is largely due to the increase in collection phase paid to plasma donors. Total operating expenses for the quarter decreased by 4.9% to $11.7 million due to decrease in the selling and R&D expenses, which were partially, offset by an increase in G&A expenses. Selling expenses decreased by 21.2% to $2.6 million from $3.3 million in the same quarter of 2014. As percentage of total sales, selling expenses were 3.3%, down from 5.5%. Decrease in both absolute amount and the percentage of sales was primarily due to decrease per-unit selling expenses for placenta polypeptide during the quarter. G&A expenses were $8.1 million compared to $7.1 million in the same quarter of 2014. The increase in G&A expenses was mainly due to the increase in share-based compensation expenses. As a percentage of total sales, however, G&A expenses decreased to 10.3% in the second quarter of 2015 from 11.8% in the second quarter of 2014. R&D expenses decreased by 44.4% to $1 million from $1.8 million in the same quarter of 2014. As a percentage of total sales, R&D expenses decreased to 1.3% in the second quarter of 2015 from 3.1% in the same quarter of 2014. This decrease, however, is largely attributable to one-time government grant of $0.9 million we received during the quarter, and recognized as a reduction of R&D expenses. Excluding this impact, R&D expenses remained stable compared to the same period last year. Income from operations increased by 39.4% to $40.3 million from $28.9 million in the second quarter last year. Operating margin increased year over year to 50.9% from 48.1%. Income tax expenses were $6.1 million, representing an effective income tax rate of 15.2%. Net income attributable to the Company increased by 35.5% to $26.7 million, resulting net margin 33.8%. Fully diluted net income per share increased to $0.99 from $0.79 in the second quarter of 2014. Non-GAAP adjusted net income attributable to the Company increased by 39.5% to $28.6 million; $4.06 per diluted share. These non-GAAP measures exclude $1.9 million of non-cash employee share-based compensation expenses. Now let's look at our results for the first half of 2015. Total sales for the first half of the year increased by 28.5% over the prior-year period to $149.4 million. This increase was primarily driven by increases in sales volume of major plasma-based products and placenta polypeptide. As percentage of total sales, sales from human albumin products and IVIG products were 36.9% and 44.8%, respectively, for the six months ended June 30, 2015. Gross profit increased by 22.8% year over year to $97.9 million, resulting in gross margin of 65.5%. Operating income in first half of 2015 increased by 31.8% over the prior year period to $75 million. Net income attributable to the Company increased by 31.3% to $49.9 million for the six months ending June 30, 2015 resulting in net margin of 33.4%. Non-GAAP adjusted net income attributable to the Company increased by 35.1% to $53.5 million, or $1.99 per diluted share. Non-GAAP adjusted net income and diluted earnings per share in the six months ended June 30, 2015 excluded $3.6 million of non-cash employee share-based compensation expenses. Now I will like to turn to the balance sheet and the cash flow items. As of June 30, 2015, the Company had $106.6 million in cash and cash equivalents, primarily consisting of cash on hand and demand deposits; and $72.2 million in time deposits. Net cash provided by operating activities for the six months ended June 30, 2015 was $34.6 million, as compared to $39 million for the same period in 2014. The decrease in net cash provided by operating activities was primarily due to the increase in accounts receivable and inventories, which was partially offset by increases in net income and accounts payable compared to the same period in 2014. Accounts receivable increased by $18.8 million during the first half of 2015, as compared to $7.5 million during the same period of 2014, primarily due to the increased sales to certain top-tier hospitals with relatively long credit terms and extended credit terms granted to the human rabies immunoglobulin distributors. In 2015, in an effort to help penetrate new markets, we granted credit terms of up to six months to certain creditworthy top-tier hospitals. Additionally, we adjusted our sales strategy for human rabies immunoglobulin by granting credit terms of up to six months to certain qualified distributors to assist their bidding efforts with provincial CDP. Inventories increased by $25.3 million, as compared to $6.9 million during the first half of 2014, primarily due to the receipt of a majority of plasma and pastes which we purchased from Xinjiang Deyuan. Accounts payable increased by $10.1 million during the six months ended June 30, 2015, as compared to the decrease of $0.4 million during the same period in 2014, primarily due to balance of payment owed to Xinjiang Deyuan for the purchased plasma and pastes. Net cash used in investing activities for the six months ended June 30, 2015 was $20.1 million, as compared to $3 million for the same period in 2014. During the first half of 2015 and 2014, we paid $20.7 million and $11.5 million, respectively, for the acquisition of property, plant and equipment; intangible assets; and land-use rights for Shandong Taibang and Guizhou Taibang. Net cash provided by the financing activities for the first half of 2015 was $12 million, as compared to the net cash used in the financing activities of $76.2 million for the same period in 2014. The net cash provided by financing activities for the first half of 2015 mainly consisted of proceeds from follow-on offering of $80.6 million in June 2015, and $32 million from the maturity of certain deposits used as a security for short-term bank loan, partially offset by the repayment of bank loans totaling $97.9 million; as well as dividend payment of $3.7 million held in escrow by a trial court in connection with disputes with minority shareholder of Guizhou Taibang. Our working capital as of June 30, 2015 was $303.2 million. And our current ratio was 5.4. Total shareholders' equity was $425.4 million as at June 30, 2105, compared with $275.3 million as of December 31, 2014. Turning to the full-year guidance, we are reiterating our 2015 full-year sales and non-GAAP adjusted net income forecast. Total sales are expected to be in the range of $290 million to $295 million, which representing growth of 19% to 21% over 2014. Full year non-GAAP adjusted net income is expected to be in the range of $95 million to $97 million, excluding the potential adverse impact of foreign currency exchange, which represents growth of 26% to 28% over 2014. This guidance assumes only organic growth, and excludes acquisitions, and necessarily assumes no significant product price changes during 2015. This forecast reflects Company's current and preliminary views, which are subject to change. That concludes our prepared remarks. We'll now take questions. Operator, we're now ready to take some questions.

[Operator:]

And the first question comes from Jack Hu with Deutsche Bank.

[Jack Hu:]

I have three questions. First, for the first half you reached somewhere around 56%, 57% of the profit target. So my question is why don't you increase guidance here? The second question is on operational level, as I'm trying to understand where specifically the growth come from, mainly for the top two products, albumin and IVIG. Can you share with us the number of hospitals you penetrated as of 2Q 2015, and 2Q 2014? Also, I am specifically interested actually which one is the larger driver. Is it deeper penetration in the same hospital, or coverage expansion to more hospitals? My last question is on M&A. With all the cash you have, actually, what kind of M&A opportunity are you looking at, because investors are quite interested? If you can just give us some color what interests you the most, that will be very helpful, which is actually increase your ownership of the assets where you have minority ownership, or acquire another plasma player, or acquire a different plasma center, or just purchase more plasma. Thank you.

[Ming Yin:]

Jack, let me try to answer your question one by one. The first question actually, regarding why we don't reach the guidance, and I think as we discussed, especially David mentioned in the call, although we achieved a very strong performance in the first half of 2015, and, however, we expect our year-over-year third quarter sales growth to be lower than the first two quarters of 2015. Our Guizhou facility showed a relatively high volume of products after first-batch approval in July 2014, which resulting in the higher comparable base. Additionally, the products made from the purchased plasma will not be delivered to the market until later this year. We will have a relatively low volume available for sale in the third quarter. And lastly, our fourth quarter year-over-year sales growth rate expected to increase over the third quarter as we benefit from the sales of purchased plasma. So, at the moment, we're not comfortable maintaining our full-year financial forecast. And regarding your second question for the albumin, you actually asked for the albumin and IVIG, the main products' growth rate, right? Typically, we don't actually disclose that specific information, because there is various reason. Number one, the overall, the imports rate might actually affect the sales volume, as well. So I can give you the general guidance, because for the first half, the albumin and the IVIG, the growth rate will be higher than the second half. So that will be our answer for the major products' growth rate. For the third quarter, for the penetration for the new hospitals, we actually have different models on the different market. For the Tier 1 cities, we actually use the distributors. Overall, we actually have close to 200 hospitals right now open in the last three years. Typically, this year, we penetrating to close to the 80 hospitals in Beijing. And last year, we opened close to 100 hospitals in Shanghai. So that's the Tier 1 cities' strategy. We want to penetrate into the large hospitals across the region. For the regional market, like our Shandong and like the North East, like Hebei Jingzhou, which we actually have a direct sales account, and which this year we have very promising, the data, the growth in those existing hospitals, the volume, the demand, pick up very, very healthy. So that's what we can share. For the last question, as always, we're trying to exploring the different ways to grow the Company to enhance the shareholder value. For example, the recent external plasma purchase from Xinjiang Deyuan is actually the unprecedent deal; never happen in China. And so we make that happen. And last year, we did actually bought out one of the minority shareholder in Guizhou. And so, we're actually working very hard to finding the growth, the alternatives. But, unfortunately, at this moment, there's nothing further we can disclose. So, hopefully, that answers your question, Jack.

[Operator:]

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

[Jessica Li:]

I have a couple of questions. First, on R&D, the Chinese FDA is tightening regulatory controls on trial data; how will this action impact you? Would it be great if you could also give us an update on your pipeline development? Secondly is on Xi'an Huitian; any progress there? Would appreciate if you could give us an update?

[Ming Yin:]

Sure. Yes, we observed the CFDA recently made two announcements; one in the July 22; another one's in the last day of July. So let me try and address those two notices, the impact for the Company. For the first, the notice in the July 22, which the CFDA required the pharma company to do the self-inspection, which is to inspect the clinical data for the drugs applying for the manufacturer approval, and do certain self-inspection report, or withdraw the drug application by August 25, as we understand, there is over 1,600 drugs application by different drug manufacturer were involved. Our hepatitis B immunoglobulin for the intravenous injection was including in the lists. At the moment, we already made a self-inspection plan, and just the self-inspection plan, and began our self-inspection in the clinical hospitals. We expect to finish our self-inspection by August 15, and submit the report before the deadline required by the CFDA. And we don't actually have a very clear visibility when the government will actually approve this product, because recently this announcement by CFDA. For the second notice, we understand that is regarding to re-organize the drug registration work flow, trying to further improve the drug quality and efficacy of the proved procedure. This notice mainly impacts R&D and approval process for generic drugs; that's our understanding. Our drug is actually -- our plasma product is considered as natural drugs, which will be subject to the approval procedure very similar to the new drug. So our view is this regulation does not actually have a material impact to our R&D approval process for the plasma products. However, the regulation, the recent government regulation aims to prioritize the drugs for innovation, or the drug with strong clinical demand, which, we believe, might actually shorten the regulatory approval process related to our future pipeline products which, we believe, has significant market supply and shortage situation. And for our pipeline products, we are very excited to expanding, making progress, making certain positive progress, in expanding our pipeline products. And, hopefully, we can make that announcement in the future, for which the exact product we will be putting in the pipeline. That's my answer for the first question. For the Xi'an Huitian, that company is actually still in the production suspension the mode now because of the GMP. The new plant's pretty much been fully constructed and right now is in validation period; and meaning, we're going to actually validate all the product equipment, make sure the production process will flow [seamlessly]. And our belief is the CFDA might actually, subject to some CFDA for the GMP inspection, maybe early next year. So, hopefully, by middle of next -- 2016, the plant will be back to production.

[Operator:]

And next question comes from Yolanda Hu from Morgan Stanley.

[Yolanda Hu:]

I have three questions. First, I notice that the ASP of albumin and IVIG increased a bit in second quarter. Can you explain the reasons, besides the impact of VAT? Also, can you update us your view on the pricing trend for the second half; any chance to raise ASP of your key products? Maybe you can give us more details on recent upcoming tenders. Would you think the tender policy change may affect the ASP? Second, the sales volume of albumin jumped a lot this quarter. And you mentioned that the sales growth for Q3 would be lower than for the first half. Can you tell us in the industry growth of multi-nationals, also local companies, in Q2, and the trend of imported products you expect in the second half? Last question is on margins. The operating margin reached historical high this quarter, do you think this trend will likely continue? Thank you.

[Ming Yin:]

Okay, let me try and answer your questions one by one. For the first question, yes, during the quarter, both albumin and IVIG price increased approximately 30%, which we put in the findings; which is actually mainly caused by the VAT reduction from 6% to 3%. So, from that perspective, the price remained very stable compared with last year. And regarding our view for the pricing trend for the second half, actually, we don't have a much visibility for whether our major products will actually have a possibility to increase the product -- increase the price. And there is a few reasons for that; because, number one, our sales model. Because, approximately, three-quarters -- 60% of our products sell through the direct sales model to hospitals. Although the price thinning is released, we still have to go through the tendering process in most provinces. Up to now, no province has set up a new tendering process after the price-thinning release. Some provinces are establishing new tendering system, and others are still making drug procurement under the older tendering process. There is uncertainty how each province tendering process will go, and we're not sure in which direction -- to which extent the price might fluctuate. Even over the long run, we remain bullish for the products trend might be in the upside because the shortage situation. But, at the moment, we still don't actually have much information to speculate the price increase over the second half of this year. For the second question regarding the albumin, the importation trend, the first half this year, overall, the albumin growth rate is about 14%. That's our calculation. And imported albumin accounted about 50% of all our supply. Still surprising the domestic producers, the growth rate for the imports slowed, especially in the first quarter, as some multi-national company had some re-licensing issue with CFDA. For example, one of the largest producer in Europe decreased their supply by about 27% for first half 2015, compared to the same quarters last year, 2 quarter last year. The overall growth rate for the imported albumin increased 12% over the first half 2015, versus a growth rate 19% in 2014; and 45% in 2013. In the meantime, during the first half of 2015 the growth rate of the domestic-produced albumin supplier reaching 16%. That's because of most of the domestic producer has finished their GMP upgrade. So that's -- everybody's resumed the production mode, so the domestic produced albumin increased the higher rate than the multi-national company. For the third question regarding the operating margin, whether we can maintain that. There's a couple concerns we believe might negatively affect that rate; is, number one, for this question -- for second quarter, typically, the R&D expenses was much lower than the previous quarter, because we receive a one-time government grant. So, the next few quarter we're not sure we'll be able to reach that; so, in other words, R&D expense will go up to the normal like, 2%. And for the external purchase plasma, as David mentioned in the call earlier, certain products will be delivered to market later this year, meaning from end of third quarter and fourth quarter. The purchased plasma represents 40% to 50% cost higher than our internal collected plasma. From the perspective, our gross margin will be negatively affected, our view, for the first -- for the second half probably around 200 to 300 basis point. So that adds up, will actually negatively affect the operating margin. That's my answer.

[Operator:]

Thank you. And the next question comes from Milo Lu of China Merchants Securities.

[Milo Liu:]

I just wanted to have two small questions. The first one is I just wanted to know would there be a significant utilization rate ramp up after the purchase of the plasma, and the plasma paste from the Xinjiang province? And I just wanted to know if this could be, like, quantified. And also, do you think the Company's expecting one more special grant from the government in the future? This is my first question. And the second, I just wanted to have a little bit of color on the new station in the Hebei province. Thank you.

[Ming Yin:]

Milo, let me try and answer your questions. For the purchase plasma, as we discover in the call, approximately 50% of the purchased plasma has been processed by end of the second quarter. So we are making very positive progress trying to complete the process, all the purchase plasma, by end of this year, before end of this year. So, yes, the purchased plasma represents a significant opportunity for us to improve the facility utilization rate at Guizhou facility. And it's -- because the purchased plasma is 143 tons, plus the paste, as we announced earlier in the early announcement, it represents about 20% of overall the plasma supply. This significant plasma definitely will improve our plasma, the utilization rate in Guizhou. Your second question is regarding the -- I'm sorry, your second question is?

[Milo Liu:]

Actually, I just wanted to know, is there, like, potential grant for [indiscernible]?

[Ming Yin:]

Sure. Yes, because, as we discussed earlier, this approval, the last approval actually was unprecedented CFDA approval; it never happened in China before. And so we need, actually, complete the whole process, make sure all the products meet with the governments' regulation, and trying to search for the -- apply for the future approval. At the moment, there is no guarantee such approval will be approved in the future. For the third question, yes, the two stations approved in for the last year, we're actually making some sterling progress as of the first half this year. And for the one station located in the Xinglong County, we already identified suitable location to build a station. And the station is under construction now; hopefully, we can make the station online before end of this year. For the other station located in the Daming County, we are still trying to work closely with government to find the suitable location to build a station. I guess, you might ask why take us that long? I think it's worthwhile to explain that, because the Hebei province actually had no such approval for last 10 years. That's why the government are very stringent and cautious on every step. So they want to involve in every step, so every step we need actually work with government to get their approval before we can proceed. So that's why take us the more time than we originally expected. Milo, that's my answer.

[Operator:]

Thank you. And the next question comes from Matthew Prior from Evans & Partners.

[Matthew Prior:]

I have two questions. My first question is around market share. You previously mentioned you've got about 30% market share for IG in Shanghai. I'm just wondering if you could update us as to what you think your current market shares are for albumin and IG. And my second question is just in regards to the previous question on the collection center in the Hebei province. In terms of with the growth you're seeing from the domestic industry compared with the importation industry, do you see progress, or positive change, in government support to enable more collection centers to continue to be built to enable the domestic industry to grow faster and continue to take a larger portion of the market? That's my two questions.

[Ming Yin:]

Regarding the market share, Matthew, I think we don't actually disclose the market share within the Tier 1 cities in the quarter. We probably actually collect data over the -- by end of the year, which probably is more accurate. But overall, I can give you our albumin, the market share overall. We actually had approximately 15% market share by volume, as compared to 13% in last year. This 15% represents only the domestic-produced albumin. For IG, definitely, we actually further increased our market share the first half 2015. We increased the market share to 19% from 15% last year, so we make progress, improve the market share. And by the gaining such high volume, we definitely -- the Tier 1 cities is actually the main channel to us to distribute those additional IG. As I disclosed earlier, this year, we actually added close to 60 new hospitals in Beijing. So, basically, the Beijing is actually the new -- the driver for our IVIG consumption, or the IVIG sales, the growth this year. And for the second question, for whether we see any of the government regulations change to promote the station improvement, I think that will be case by case, the decision by the provincial government. Because the Chinese Government, typically, for the plasma collection centers' approval procedure, or the approval authority, is within the provincial government's hand. So, in other words, the different province has a different mentality to welcome or actually support the business. But our view is, overall, the local government's still very cautious to give additional approval for the new centers. So that's the general feeling, at the moment.

[Operator:]

Thank you. And the next question comes from Alex Lu of BlackRock Solutions

[Alex Lu:]

Congratulations on such phenomenal results. I have two questions. The first one relates to the gross margin compression. You just mentioned the gross margin compressed a little bit because of the increasing costs paid to the plasma donors. I just try to figure out the rationale behind that. Why do you need to increase the compensation paid to those guys? And is this industry-wide trend, or you proactively increase the compensation to attract more donors? That is my first question. The second question relates to your new product, Factor VIII. This is a high margin product with great market potential in great shortage. I understand that it grows very fast in your product line, but can you give a more clearer guidance on how, or by what percentage, it could grow in next three years?

[Ming Yin:]

I think the first question, why we raised the fee; actually, it's not only us. Basically, it's a general -- the industry, the general practice. So everybody has raised the compensation to attract more donors through more donation, because this industry is under-supplied, the industry. The raw material is bottlenecked. So basically, every year the inflation, the GDP grows, so basically the compensation to the donors is raised every year. So it's not only us. We're not doing that proactively. And for the second question, unfortunately, we don't actually have that guidance for the Factor VIII growth rate. Because the Factor VIII, I can share you some information; we actually substantially increased our market share in China for Factor VIII. And for some unknown reason, some very reputable players decreased their production this year. We don't know why. Because we knew the raw materials called [indiscernible]. That's the raw material for the production of Factor VIII. It's in the shortage situation as well. So that's why we cannot give you a very close guidance for next few years what the growth rate will be for the Factor VIII. But we can assure you, the market share or the volume will grow year by year.

[Operator:]

And the next question comes from Grace Chau with Credit Suisse.

[Grace Chau:]

I would like to ask two questions on behalf of [Irene Salam]. The first question is the 32% top-line growth, how much is coming from the ASP increase? And how much is coming from the volume growth? The second question is can you compare the volume growth of -- can you compare CBPO volume growth to the industry's growth? And do you have any guidance on the second-half volume growth? Thank you.

[Ming Yin:]

For the first quarter -- for the first question, we put in the announcement that we only have, for the major products, albumin, IVIG, the price increased about 3%, which is due to the VAT impact. So excluding that, the most, the growth, the rate is coming from the volumes; that's very apparent. And for the industry growth, like I said earlier, for the albumin, this year the domestic producers supply the albumin growth 16% in the first-half 2015. But our growth rate is much higher than that, and which was evidencing our sales volume for albumin. And our IVIG growth also outperformed the industry, the average for this year as well. For the second half, we explained earlier, we're trying to maintain the same -- the forecasts which we announced end of March, which will translate into the top-line growth for the major products will be at a lower year-over-year growth rate so as compared to the first half of 2015.

[Grace Chau:]

Okay, thank you. And I would like to have a follow-up question on the new plasma station approvals. Have you observed any policy change on the plasma station approvals? Because I see Hualan was granted by the Xinjiang Government to open the substations for each of the six stations in the Xinjiang province? Do you think is there any chance CBPO can get such favorable grants of opening new stations, or expanding the geographical regions to collect the raw material plasma?

[Ming Yin:]

Yes, okay, I discussed that question already earlier. I can repeat it. That's why I said for the certain province has a different manager to the plasma collection additional license, and Xinjiang is a very typical case. And so far, we haven't seen other province adopt the same approach yet. CBPO is working very hard to try to gain the new additional license, but, unfortunately, we have nothing to share or disclose at the moment. But I'm just trying to indicate, or trying to emphasize, the additional new collection license for the stations is definitely very important to support of the future top-line growth. But just like we did, it's unprecedented in China. To purchase 143 tons external plasma from other company is also a good growth strategy to support our top-line growth. So, actually, we're exploring various alternatives, trying to support our top-line growth. Thank you.

[Operator:]

Thank you. And the next question is from Isabel Buccellati Putnam.

[Isabel Buccellati:]

I'm sorry, I joined the call late, so maybe you have discussed that already. But I have just three questions. One is on the industry growth rate. I understand that you gained a lot of market share, and the market is still growing. I just wanted to understand if you have seen any increased pressure from government to reimburse. Because, because the plasma products are still so new, I had the impression that it's still a positive momentum. But just hearing other healthcare players in China struggling with more pressure from the government, I'm just wondering if you've seen that in your space at all as well. That's my first question. Then, I come back with two others, if I may.

[Ming Yin:]

Actually, Isabel, most of the products actually are now subject to the reimbursement, that's why -- we don't actually have the similar pressure, because most of our products they're under the B-type reimbursement catalog; meaning, it's not a central-drug list, it's not really fully reimbursed by the government. Most of our products actually need the patient, they are on positive pay. So, from that perspective, we're actually not subject to similar pressure.

[Isabel Buccellati:]

Okay, great. The other two questions were I remember that you were thinking about buying out some more minorities; if you had any more progress on that topic. And the second question was it looks to me that the associates have turned into losses, and I was just wondering if I read that correctly, and why that is.

[Ming Yin:]

Yes, so what's your last question? I'm not really -- can you repeat that?

[Isabel Buccellati:]

I think the associates have turned into losses, and I was just wondering if that's correct; and, if so, why that is the case.

[Ming Yin:]

Associates turned into losses, what -- I'm not -- okay, you mean the equity investment in Xi'an Huitian, right?

[Isabel Buccellati:]

Maybe that is the explanation.

[Ming Yin:]

Yes, that's the case. Because that plant, we're putting the [indiscernible] in last year was shutdown already. Because they're building a new plant, so that's why they don't actually have any new products, end products to sell. That's why they're in the shutdown mode. The plant will be back up, hopefully, in the middle of next year, so we can actually get some investment income by end of next year. For the minority shareholders, there's nothing, at the moment that we can disclose, yes.

[Isabel Buccellati:]

Okay. But it's still something which you are thinking about, and you would like to do?

[Ming Yin:]

Yes, we're always trying to increase the shareholders' value by maximizing our shareholder -- our equity stake in the subsidiaries, right. But it is really subject to the valuation and all whether it's accretive to the bottom line, yes.

[Isabel Buccellati:]

Okay. And, sorry, can I just put in another question while I still have you on the line?

[Ming Yin:]

Okay. Actually, we're about the time, the last question, please.

[Isabel Buccellati:]

I was just wondering if you can talk about the sustainability of the low SG&A expenses, because you kept them very nicely under control in the first half. Can we expect that for the second half, as well?

[Ming Yin:]

Yes, we're trying to -- the SG&A expenses, the first half we did very effective to cost control. We're always trying to improve the cost control for those items. So we're trying to maintain very similar rate; that's our goal.

[Isabel Buccellati:]

So rate means in terms of percentage of sales, or it means in terms of absolute terms?

[Ming Yin:]

Well, in terms of a percentage of the total sales.

[Ming Yin:]

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