China Biologic Products Holdings Inc
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Welcome to China Biologic Products Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Mr. Bill Zima at ICR, for opening remarks and introductions. Please go ahead, sir.

[Bill Zima:]

Thank you, operator. Hello, everyone and thank you for joining us on today's call. China Biologic announced its quarterly financial results on November 3, 2015, after the market closed. An earnings release is now available on the Company's website. Today, you'll hear from China Biologic's Chairman and CEO, Mr. David Gao, who will start off the call with a review of recent Company developments, strategies and basic operating results, followed by the Company's Senior Vice President, Mr. Ming Yin, who will address financial results in more details. The CFO, Mr. Ming Yang, is also on the call and will be available during the Q&A session that follows prepared remarks. Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in China Biologic is included in our filings with the Securities and Exchange Commission which we encourage you to review before making any 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 define by all companies, including those in the biopharmaceutical industry. Now, with that said, I'm pleased to present Mr. David Gao, Chairman and CEO of China Biologic Products. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone and welcome to China Biologic's third quarter 2015 conference call. As you saw in our earnings press release, China Biologic delivered healthy results in the third quarter of 2015 that exceeded our expectations, despite a slightly negative impact due to foreign currency translation, as we were able to sell a greater volume of finished products, made from our purchased plasma than we originally anticipated. And we benefited from modestly better product pricing. Total sales for the quarter increased over 14% from the prior year to $79 million, while our adjusted net income increased by 24% to $26 million. Also, during this quarter, we made important strides towards our goal of securing a greater sustainable supply of source of plasma which will support our continued growth over the long term. During the September quarter, human albumin and IVIG continued to be the largest contributors to sales, with human albumin contributing approximately 38.7% of sales and IVIG contributing approximately 41.4%. We also experienced solid performance across the rest of our product portfolio. We're pleased with our results this quarter, due to continued strong demand for our plasma-based products. However, as we discussed on last quarter's call, our growth rate, on a year-over-year basis, during the September quarter was slightly lower than our growth rate during the first half of the year, due to several factors. First, during the third quarter of 2014, our volume sold was relatively high, following the first batch approval from the upgraded Guizhou facility last July. Thus, we have a higher comparison base for this quarter. Second, following the meaningful growth in demand for our products during the first half of this year, our inventory levels were relatively low going into the third quarter. During the first half of the year, we managed to fill all of our customer orders, to maintain and enhance customer relationships, even though we were selling at a faster rate than we were able to replenish our inventory. With that being said, during the third quarter, we were able to successfully position ourselves for sustainable growth over the long term, due to several key operational achievements. To begin, we have now processed all of the 143 tonnes of plasma and pastes purchased from Xinjiang Deyuan in our initial purchase agreement that we were entered into earlier this year. We have rebuilt our inventory levels and finished the products and began delivering the first batch of such products into the market since late September, while the majority of the products are expected to be sold in 2016. As we announced in early September, Guizhou Taibang entered into a new strategic collaboration agreement with Xinjiang Deyuan which will allow us to purchase no less than 500 tonnes of source plasma over the next three years. During the term of the agreement, we will oversee the operation of Xinjiang Deyuan's collection stations. We're expected to begin to deliver the finished products made from purchased source plasma in the second half of 2016. This collaboration serves as an important growth catalyst for China Biologic, as it ensures a stable and growing supply of plasma over the next three years as we continue to expand our own in-house collection capacity. Also in September, we announced receipt of approval of Shandong Provincial Health & Family Planning Commission to build a new branch collection facility in Shandong. And then in October, we obtained the operating permit and began plasma collection in the new facility. We expect that the new facility will reach its full collection capacity within the next three years. As always, we're continuing to work with the relevant authorities in the region suitable for plasma collection to identify opportunities to further expand our network of collection stations. Finally, I'm pleased to announce that we have recently received approval from the CFDA to begin clinical trials on our next generation IVIG products. We expect to be able to complete these clinical trials over the next 24 months, such that we will begin commercial production of our next generation IVIG in our new fractionation facility in Shandong in 2018. I would now like to turn to our full-year financial guidance. As we expect these positive trends to continue in the fourth quarter, we're confident that we will be able to reach the high end of our full-year sales guidance range and deliver net income results above our forecasted range. As we seek to build value for our shareholders, we maintain focused on the importance of building a strong foundation which will support our continual growth for years to come. That concludes my part. I will now turn the call over to Ming Yin, our Senior Vice President, to review the third 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 third 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 third quarter of 2015, total sales excluding foreign currency impact increased by 15.9% in RMB terms. In U.S. dollar terms, total sales increased by 14.4% to $78.8 million from $68.9 million in the same quarter of 2014. The increase was primarily attributable to the increase in sales volume of our major plasma-based products. As David mentioned, our human albumin and IVIG products remain the two largest sales contributors. The sales volume of human albumin and IVIG products increased by 15.7% and 14.6% respectively in the reporting quarter, backed by the increased production volume at Shandong and Guizhou Taibang. Human albumin revenue increased to 38.7% on total sales from 38.3% in the same quarter of 2014. And IVIG revenue accounted for 41.4% of total sales, as compared to 41.7% in the same quarter of 2014. The average price for human albumin products, excluding foreign exchange impact, increased by approximately 1.2% in RMB terms or decreased by approximately 0.2% in U.S. dollar terms in the third quarter of 2015, compared with the same quarter of 2014, The average price for IVIG products, excluding foreign exchange impact, increased by approximately 0.5% in RMB terms or decreased by approximately 0.9% in U.S. dollar terms in the third quarter of 2015, compared with the same quarter of 2014, Cost of sales was $28 million in third quarter of 2015, as compared to $22.4 million in the same quarter of 2014. As a percentage of total sales, cost of sales was 35.5% as compared to 32.4% in the same quarter of 2014. The increase in cost of sales was primarily due to the increased sales volume and plasma collection costs, as well as from the high cost of products made from the purchased plasma. Gross profit increased by 9% year over year to $50.8 million in the third quarter of 2015. Gross margin was 64.5% in the third quarter of this year, compared to 67.6% in the third quarter of 2014. Total operating expenses for the third quarter of 2015 were $15.8 million, as compared to $11.9 million in the same quarter of 2014. The increase in total operating expenses was due to the increase in general and administrative expenses, primarily as a result of higher share based compensation expenses. As a percentage of total sales, total operating expenses accounted for 20% in third quarter of 2015, as compared to 17.3% in the same quarter of 2014. Selling expenses were $2.7 million in the third quarter 2015, as compared to $2.4 million in the same quarter of 2014. As a percentage of total sales, selling expenses remained relatively stable at 3.4% compared with 3.5% in the same quarter of 2014. G&A expenses were $11.5 million, compared to $7.7 million in the same quarter of 2014. As a percentage of total sales, G&A expenses were 14.6% in the third quarter of 2015, compared to 11.2% in the third quarter of 2014. This increase was mainly due to the increase in share-based compensation expenses. R&D expenses in the third quarter 2015 decreased by 11.1% to $1.6 million, from $1.8 million in the same quarter of 2014. As a percentage of total sales, R&D expenses decreased to 2% in the third quarter 2015 from 2.6% in the same quarter of 2014. Income from operations increased by 1.2% to $35 million, from $34.6 million in the third quarter last year. Operating margin was 44.5% in the third quarter 2015, compared to 50.2% in the same quarter of 2014. Income tax expenses in the third quarter 2015 decreased to $6 million from $7 million in the same quarter of 2014, representing effective income tax rate of 16.8%. Net income attributable to the Company increased by 13.9% to $22.9 million in the third quarter 2015, from $20.1 million in the same quarter of 2014. Net margin remained stable at 29%, compared to 29.1% in the same quarter of 2014. Fully diluted net income per share increased to $0.82 in the third quarter of 2015 from $0.76 in the third quarter of 2014. Non-GAAP adjusted net income attributable to the Company increased by 23.6% to $26.2 million or $0.94 per diluted share, from $21.2 million in the same quarter of 2014. Non-GAAP net margin increased to 33.2% from 30.8% in the same quarter of 2014. These non-GAAP measures excluded $3.3 million of non-cash employee share-based compensation expenses. Now let's look at our results for the first nine months of 2015. Total sales for the first nine months of the year, excluding foreign currency impact, increased by 23.6% in RMB terms or 23.2% in U.S. dollar terms, to $228.2 million from the prior year period. The increase in total sales was primarily driven by increasing sales volumes of major products, major plasma-based products and placenta polypeptide. As a percentage of total sales, sales from human albumin products IVIG products were 37.5% and 43.6% respectively for the first nine months ended September 30, 2015. Cost of sales was $79.5 million in the first nine months of 2015, as compared to $59 million in the same period of 2014. Cost of sales as a percentage of total sales was 34.8%, as compared to 31.8% in the same period of 2014. Gross profit for the first nine months of 2015 increased by 17.7%, year over year, to $148.7 million, resulting in a gross margin of 65.2%. Total operating expenses in the first nine months of 2015 were $38.7 million, as compared to $34.8 million in the same period of 2014. As a percentage of total sales, total operating expenses decreased to 17% from 18.8% in the same period of 2014. Operating income in the first nine months of 2015 increased by 20.2% over the prior year period to $110 million, from $91.5 million. Net income attributable to the Company increased by 25.3% to $72.8 million for the nine months ended September 30, 2015. Net margin increased to 31.9% from 31.3% in the same period of 2014. Non-GAAP adjusted net income attributable to the Company increased to $79.7 million or $2.94 per diluted share, from $60.8 million or $2.34 per diluted share in the same period of 2014. Non-GAAP adjusted net income and diluted earnings per share in the nine months ended September 30, 2015, excluded $7 million of non-cash employee share-based compensation expenses. Now I would like to turn to the balance sheet and the cash flow items. As of September 30, 2015, the Company had $142.7 million cash and cash equivalents, primarily consisting of cash on hand and demand deposits and $38.8 million in time deposits. Net cash provided by operating activities for the nine months ended September 30, 2015, was $72.3 million, as compared to $64.1 million for the same period in 2014. The increase in net cash provided by operating activities was primarily attributable to increase in net income, other payables and accrued expenses and decreasing prepayment and other current assets, partially offset by increase in accounts receivable, inventories during the nine months ended September 30, 2015. Accounts receivable increased by $16.2 million during the first nine months of 2015, as compared to $7.5 million during the same period in 2014, primarily due to extended credit terms granted to certain top-tier hospitals and distributors for human rabies immunoglobulin products. Inventories increased by $26.1 million during the first nine months of 2015, as compared to $8.7 million during the first nine months of 2014, primarily attributable to the increase in plasma products, work in process inventory derived from the source plasma, plasma pastes from Xinjiang Deyuan. Other payables and accrued expenses increased $4.2 million during the nine months ended September 30, 2015, as compared to $0.4 million during the same period in 2014, primarily due to the individual income tax payable of $5.5 million withheld for employees and directors in connection with vest restricted shares in the third quarter of 2015. Prepayment and other assets decreased by $0.7 million in the first nine months of 2015, as compared to increase $8.6 million during the same period in 2014. During the first nine months of 2014, Shandong Taibang made a non-recurring payment, totaling $5 million. Net cash used in investing activities for the nine months ended September 30, 2015, was $55.8 million, as compared to $8.3 million for the same period in 2014. During the first nine months of 2015 and 2014, we paid $30.5 million and $16.8 million respectively for acquisition of the property, plant, equipment, intangible assets and land use right for Shandong Taibang and Guizhou Taibang. During the first nine months of 2015, we provided a $28.5 million long-term loan to Xinjiang Deyuan and received $2.5 million in government grants related to plant, property and equipment. Net cash provided by financing activities for the first nine months of 2015 was $49.7 million, as compared to net cash used in financing activities of $124.5 million for the same period in 2014. The net cash provided by financing activities for the first nine months of 2015 mainly consist of proceeds from the follow-on offering of $80.6 million in June 2015; $63.2 million from maturity of certain deposits used as a security for bank loans; and proceeds of $7.2 million from stock option exercise, partially offset by 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 a minority shareholder of Guizhou Taibang. Our working capital as of September 30, 2015, was $297.7 million and our recurring ratio was 5.5. Total shareholders' equity was $449.7 million as of September 30, 2015, compared with $275.3 million as of December 31, 2014. Turning to the full-year guidance, we're reiterating our 2015 full-year sales forecast and raising our non-GAAP adjusted net income forecast. We expect our total sales to be on the high end of the range of $290 million to $295 million, representing a growth of 19% to 21% over 2014. We announced this full-year sales forecast in May when we raised our original guidance, given in March which was, total sales between $287 million and $292 million. On the bottom line, we're raising our full-year non-GAAP adjusted net income guidance, largely due to our better than expected operational efficiency and a more profitable product mix. We now expect our full-year non-GAAP adjusted net income to be in the range of $98 million to $100 million, excluding the potential further adverse impact of foreign currency exchanges which represent a growth 29% to 33% over 2014. This compares to our previous non-GAAP adjusted net income guidance of $95 million to $97 million. This revised guidance is based on an average exchange rate during the reporting quarter of RMB6.244 to $1 which is approximately 1% higher than the exchange rate used in our previous guidance. It does not factor in potential for further negative impact from foreign currency translations. This revised guidance assumes only organic growth and excludes acquisition and necessarily assumes no significant product price changes during 2015. This forecast reflects the Company's current and preliminary views which are subject to change. That concludes our prepared remarks. We will now take questions. Operator, we're now ready to take some questions.

[Operator:]

[Operator Instructions]. The first question comes from Jessica Li, Bank of America Merrill Lynch. Please go ahead.

[Jessica Li:]

I have a couple of questions; first would be on the plasma supply side. I would like to understand a little bit better, for this quarter what was the rate of organic growth for your plasma collection and how much of the growth comes from the utilization of Xinjiang Deyuan's plasma? Also, since I heard that in all the Deyuan's plasma has been processed, in theory, can you potentially just sell the rest of products from Deyuan in fourth quarter? Why do we need to wait until 2016? That's on the supply side. Then secondly, on your new development on the pipeline - development in pipeline, you mentioned the next generation IVIG, so would you please elaborate a little bit more on this product? What's the improvement over the current IVIG and what would be the commercial opportunity? Thank you.

[Ming Yin:]

Thanks, Jessica. Let me try to answer your question from the development pipeline. I assume you're asking the question for the organic growth from our internal plasma. As we mentioned during the call earlier - David mentioned by end of the third quarter, all the prior purchase of 143 tonnes of plasma from the third party has been put into production. But only the partial products are available for sale in the third quarter. By the end of the third quarter, about only 5% of the finished products made from the purchased plasma has been in the market. From that perspective, all the rest of growth is from organic growth, from our internal plasma. The reason why we don't actually be able to sell the remaining, the 95%, in the year because most of the products are actually in the work in process and the products - in the finished products stage, meaning we're ready to submit for the batch approval. That's why we expect only about 30% to 40% of the finished products generated from the purchased plasma will be sold by end of the fourth quarter. The remaining 65% will be sold early next year, once we receive the batch approval. I think you also asked about our internal plasma collection growth during the quarter. I think I can update you. As David said, during the past week annual conference, so basically organic collection growth, especially in our Shandong facility, are very healthy this year. The growth rate is actually - our expectation is actually above 15% organic growth from Shandong and without including any the additional volume generated from the new plasma station we just recently got launched. That's from the supply side; I, hopefully, answered your question. For the new generation of the IVIG, recently we just got the CFDA approval to commence the clinical trials for the new generation of the IVIG. We currently in the process of designing the clinical trial program, including the selecting the suitable indications and hospitals for commencing the clinical trials. Based on our estimation and also the CFDA requirement, the estimate the clinical trial case will be around 300. We will begin the trial early next year, once we complete the design the program. I think it worth mention a little bit about the characteristic of this new generation of IVIG. As we previously announced during our prior CT findings, we're the pioneering manufacturer in China for this new generation IVIG. We have successfully developed a laboratory-scale manufacturing process and the virus inactivation techniques for the new generation of IVIG products, with chromatography, purified and 20 nanometer virus filtration. Compared with the current generation of IVIG, the new generation IVIG has higher purity and also represents the higher safety. Also the new technology can provide high yield. In addition, the new generation does not contain sugar which is pretty much a carbohydrate. So the new generation IVIG can reduce the adverse reaction of the kidneys. As David mentioned earlier, the new generation IVIG, we expect to launch in our new Shandong facility by 2018. Hopefully, this product we can market it with little bit premium pricing situation. Jessica, hopefully I answered your question.

[Operator:]

The next question comes from Yolanda Hu of Morgan Stanley. Please go ahead.

[Yolanda Hu:]

I have three questions. First, can you give us more color on why you raised your bottom line guidance? Basically, I want to understand what's the main drivers here. Is it because of the better price, gross margin or simply more contribution from Deyuan? Also, if excluding the FX impact, what would be the implied growth of your new guidance? Second is a follow-up question regarding plasma from Deyuan. For the second batch of 500 tonnes, how much will be booked next year, by your estimate? What's the potential sales and the earnings contribution? My last question is for David, since many investors still have questions, actually, why you sold some shares recently. We understand it's for tax purpose, but can you share with us a bit more detail? Like why now, why the many and why the price set and should we expect more? Thank you.

[Ming Yin:]

Let me try to answer your first two questions. The reason why we announced - during the announcement we increased the top-line guidance is because, I don't know whether you're aware, in May, when we first signed 143 tonnes plasma purchase agreement with Xinjiang, we did actually increase our top-line guidance back to May. The reason why we did not increase the bottom line is because we concerned about the higher plasma, the moderately higher purchase cost, would actually had some adverse impact to the margin. During the quarter, the reason why we raised the bottom line this time is because, given the reason of favorable pricing trend for our products and the particularly high pricing in certain high premium products, we changed our production plan for the third quarter and also the last quarter in 2015. We're manufacturing more than planned in the high premium, in particular with tetanus. In other words, we plan to sell more tetanus volume than we originally expected which contribute - that's the primary reason that result in the more bottom line, the guidance - or we increase the guidance. Also, there's another reason we increased the guidance this time is because the Xinjiang, the first 143 tonnes plasma we processed already. Originally, we began to sell this first batch of product in the fourth quarter. But we accelerate the process so we'd be able to sell little bit more in the third quarter than we originally expected. To answer your question, the Xinjiang plasma, the cost is a little bit higher. So during the fourth quarter, we expect another 30% to - the 35% to 40% probably will be sold in the next quarter. So the gross margin probably will be impacted because of higher cost by another 200 to 300 base point in the last quarter. The second question regarding the 500 tonnes of plasma, so I can update you. The original agreement we enter with Xinjiang Deyuan, we actually require them to collect the first year 120 tonnes plasma from this August to 2016 August. In other words, a majority part of the plasma will be collected probably during the first half of 2016. With current Chinese Government regulation for 90-day quarantine, the regulation, we expect that only a fraction of the plasma we will be able to process in the second half when we receive the plasma in the second half of 2016. In other words, if we process, because the process time is generally six to nine months from when we collect the plasma, we make the plasma product to get that in the market. So we will reasonably estimate probably 30 to 50 tonnes of plasma generally from 120 tonnes will be available in 2016. So hopefully, that answers your question. So I think the third question I can answer on behalf of David, because I think it's really the common practice in the U.S. they want executives to try to meet the tax obligation by entering into their 10b5-1 plan, so it's common practice. And so the purpose for David to sell a portion of his shares solely for the purpose of paying his U.S. income tax during in connection with the recent investing of his restricted stock and exercise of certain stock option, it is no way to reflection on his outlook for the Company. The amount of the shares David recently sold pursuing this trading plan represents only about 16% of his share ownership in the Company, including the vesting restricts and all the exercised stock option. And David plans to maintain ownership of a majority of his position for the foreseeable future. And I think, regarding how much the price setting and how much to sell, the Company will probably update the market by filing the Form 04 whenever the sale occurred which is not a really SEC requirement to disclose the details of the 10b5-1 trading plan. So that's why we're not trying to selectively disclosing this information during this call. Back to you, Yolanda.

[Yolanda Hu:]

Good. Very helpful.

[Operator:]

The next question comes from Jack Hu of Deutsche Bank. Please go ahead.

[Jack Hu:]

I have four questions here. The first two, actually they are housekeeping questions. And the first one is, Ming, can you maybe remind us what is your target for plasma collection this year and the next year? This is the first question. And the second question is on your pricing side. First, thank you for the clarity; you are kind of dissecting the ASP increase and volume increase in this quarter. So can you maybe just remind us what is the nine-month, year-over-year, ASP increase for albumin and IVIG? I know you just give us 1.2% and 0.5% for the quarter. And also, how should we think of the pricing or think of the magnitude of the increase, going forward? This is the second question on pricing. The last two questions is on the product side, albumin and IVIG, on the broader market side. So when we look at IVIG and the data we're collecting, it seems that multinational achieved a 68% market share as of this quarter, versus a 59% in last year which is really fast recently. So why is this outgrowing domestic so much on the market for albumin? The last question which is on IVIG, I hope you get all the questions earlier, so this again based on the data we're collecting, we found out IVIG sector growth is about 40% in 3Q, versus 24% in the first half. But it seems that we're decelerating. And why and how should we expect this, going forward? Thank you.

[Ming Yin:]

Hopefully, I can remember all your questions. So let me try and answer the first one, the easiest one, the collection target. Basically, I think we never disclose our budget for the collection. But I think, during the previous conversation and also the investment conference we attending, what our objective, we also want to maintain around mid-teens levels collection growth from organic. So I said earlier this year, nine months' results actually exceeds the expectation. It's higher than 15%. So that's my answer to your first question. For the albumin, the nine months' price increase, I think it's very similar to the 3Q in RMB terms, because the impact for the nine months for the foreign translation is smaller than the third quarter. So RMB terms the percentage-wise increase is about 1%. And you're talking about the multinational, why the multinational outgrow the domestic producers. I think we had that discussion during the prior calls, because one of the largest European companies had some relicense issues with the Chinese Government for import the albumin to China or export albumin to China. Recently, we heard the problem has been resolved, so that's why in third quarter 2015 we see the albumin volume was well up, because this inventory was actually waiting for the government approvals. And I think another question regarding the pricing, so the future domestic price increase. I think our view is, because most of the plasma products still subject to the provincial level tendering, even when the government recently lifted the price control. And we still believe that most of the provinces has not completed the new round of the tendering under the new rules. So I can update you; a few provinces recently published a very clear rule pricing, for example like Hainan province. Because albumin price is lower, so we have to give up the tender because we don't think the price is fair. So that is our view is, we probably will actually have a more update during the next call when most of the provinces complete this run of tendering. So we'll have a better sense for the recent government tendering results. But our view is, in short term, for albumin products, we don't believe that we'll have substantial room for increase because, just like you mentioned, there's such huge volume from imports as a substitute to the domestic produced albumin. But the mid or the long term, I don't know whether the global import level will be sustainable because, as we understand, the multinational company already allocates all the albumin to China already. And they're in a bind to try to create or to manufacture the actual amount of albumin. Because if the global supplier - our understanding is the global plasma market decide by the IVIG demand. In other words, IVIG demands will dictate how much the plasma collection will be. So from that perspective, I don't know whether the multinational company will feel rational to continue this kind of staggering amount of albumin growth to China, because that will probably create very large inventories for IG, they need to find a market to sell. So that's our answer to our second question. So third question, I think I answered your three questions already, right? Yes, the last question, Jack, I think you're right, you're absolutely right. Actually, our data shows the first nine months, the national average IVIG growth rate is about 35%. It's not 40%. So compared with the previous reported quarter, our IVIG sales volume growth in the first, second and third quarters, the growth rate is 57%, 28% and 15% respectively. The main reason for this growth slowdown in this reporting quarter, because we had a relatively high comparison base in the third quarter of 2014, when we opened the first tier city market and also following the first batch approval from the suspended Guizhou production facility in April. So most of the products generally from Guizhou was available for sale in the third quarter last year, so that's why last year we have a very high comparison base. And compared with the last quarter, the IVIG sales volume decreased less than 3% in the third quarter, compared with the second quarter. The decrease is because there's two reasons. Number one, we used up previous reserve pastes in the first half 2015. The second reason, we switched the production of regular IVIG to tetanus immunoglobulin products which we see there's premium pricing opportunities. Because you might know that regular IVIG and tetanus immunoglobulin is exclusive; we can only produce one product each time. So if we maintained the tetanus sales volume in the third quarter 2015, the same volume as last year, our IVIG sales growth in the third quarter probably will be equal to the last quarter. So that's my answer to your question, Jack.

[Operator:]

The next question comes from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Just a quick question, just a housekeeping one. Share-based compensation picked up a little bit in this quarter. How should we think about that, going forward, please?

[Ming Yin:]

What I think I can update you is, for the fourth quarter 2015, the share-based compensation will be a little bit higher than the third quarter, about $4 million, because that calculation is linked to the stock price. This year, the stock price went up so that's why we have higher share-based compensation expenses. So for the full year, all we can update you is about $11 million, because the value is pretty much determined at the grant day. So the grant day share value will be the value for the entire - the restricted grant date. So going forward, I think each year the Board's actually going to evaluate the executive performance and will actually make a - call in the grant. So I don't know the volume for next year.

[Operator:]

The next question comes from Jack Hu of Deutsche Bank. Please go ahead.

[Jack Hu:]

Actually, I do have a follow-up. We noticed the AR base increased quite a bit in this quarter and also this year. Can you maybe explain why and how should we think of this going forward? Thanks.

[Ming Yin:]

Sure, Jack, I think this might be one of the important questions most of concern. Yes, the accounts receivable at the end of September was about $34 million, but I can make some clarity on such a high balance. Around 90% of those AR balance still within the credit terms, so we don't see, actually, the possibility to write off those or the uncollectability for those accounts receivable, firstly. And also, you're right, the balance increased about 77% compared with the $19.4 million at the end of last year. But if you compare with the second quarter, the end of the second quarter, actually our accounts receivable balance decreased by $4 million or 10%, from $38.3 million at June 30. And also, the decrease is because we received $3 million from the hospitals and we collected from the distributors about another $1 million. And if you're trying to actually look at it, the AR turnover days I think would be more logic to look at this increase. So last year, if we calculate last year the average, the accounts receivable turnover days is actually about 34 days in 2014. So if we use this balance, divided by 40, the sales volume, divided by the 34 days, in theory, we should get about $29 million accounts receivable. So the difference between $29 million and $34 million is $5 million. So the $5 million actually increase, they're not. So if we're looking to how we're actually getting to an actual $5 million difference is because, firstly, just like we mentioned and David mentioned earlier, we want to promote our human rabies products directly with CDCs which they generally have long-term credit terms. And that's why we, this year, have some special promotions because, for CDCs, we try and open the new account with CDCs. So most of the AR balance increase is related to the new sales channel directly with CDC which is current agent. And also, another reason is actually this year we do open certain top-tier hospitals and because those top-tier hospitals generally requires large accountable payment terms; for example, some huge hospital in China grew like 12 months. But because our plasma products is in the assured position, so we do actually enjoy a little bit of bargaining power. We do negotiate to nine months credit terms because with that we incur additional couple of million, the accounts receivable, due to the new top-tier hospital, the long credit terms.

[Operator:]

The next question comes from Isabel Buccellati of Putnam. Please go ahead.

[Isabel Buccellati:]

I've got two questions. One is a bit more big picture and I was wondering if you could update us where we're in the supplier shortage situation in the country, because the latest data which I could find was that, basically, the demand was something like 8,000 tonnes versus supply of 5,000 tonnes. But I think this data is quite old and I guess demand has continued to grow, but you have been continuing to add capacity. I'm just wondering if you have any more updated figures, how the supplier demand balance has evolved and if this has closed at all. So that's my first question.

[Ming Yin:]

You're right, the first 8,000 data is a little bit obsolete because it's not from us, it's from the government, from the Ministry of Health, so we don't know how they calculate that number. But I think the information we have for the last year, the albumin, including the imported volumes, overall the plasma supply, equivalent plasma supply is already over - it's close to 12,000 metric tonnes. So it's way over 8,000 metric tonnes but we still see there is a supply shortage from that perspective. I think you are right, that 8,000 tonnes of plasma is not really accurate, the estimate or the benchmark, to gauge the supplier demand gap.

[Isabel Buccellati:]

So basically, do you think the supply/demand balance has on the margin closed or widened, because you can make the argument that demand still so high growth that it could widen. But then, on the other hand, I don't quite understand, you've been increasing capacity and your competitors as well, but then a lot of it seems to be also that you are buying in from somebody else. So basically, it might be that the industry as a whole has not expanded capacity as much as you have?

[Ming Yin:]

Yes, I think that question is a very good question, but I think it's you might notice that the first number I give you, the 10,000 or 12,000 tonnes of equivalent plasma is including the majorities from imported albumin. On the other product, except the albumin, the Chinese Government does allow imports. So from that perspective, if you look at it the China collection volume about 5,000 metric tonnes, so equivalent they only product about 5,000 metric tonnes IVIG and other plasma products. So if we use albumin as a gauge to say what's the supply and demand, IVIG only one half, because IVIG does not actually have imports. All the products made from the domestic plasma, so the IVIG - overall, the current collection 5,000 tonnes, so if we can generate all the IVIG for the market, so it's still one-half of the overall plasma if we put into the imported albumin equivalent to the overall 10,000 metric tonnes of plasma. So we still actually see the growth potential for the products like IVIG and all the factor A and high premium products, because you'll notice this quarter we reported that tetanus immunoglobulin price increase about 55% on average. Why is that? Because still severe shortage. It's not because now we see the shortage, the shortage has been pretty much consistent shortage in the last few years because recently, the government released the price control and because of the government trying to - because the hospital has more willingness to why the hospital want to procure this product at a high price. In the past, when the government set a very low price, the manufacturer like us, we have no willingness to produce the tetanus immunoglobulin, because alternatively we could product IVIG generating more profit. Right now, the doctor because in the past when the tetanus immunoglobulin as a short supply, the doctor look for alternative treatment, they use the tetanus, the immunoglobulin generally from the horse plasma, as an alternative treatment from the human plasma. So the side effect from that - called the tetanus antioxidant is very high. There's lots of allergy that occurs when people use the products. And also the effectiveness for the alternative treatments is very low, compared with human derived tetanus immunoglobulin. So when the government lift the price control, the hospitals willing to pay a higher price in certain region and in certain hospital, because of supply and demand situation is - the gap is quite large.

[Isabel Buccellati:]

Okay. And my second question was, if you could help a bit to frame the opportunity for the 500 extra tonnes from the new supplier agreement? As you've grown so much and with the new supply I'm kind of lost at how much this is relative to your own base, so I thought it is basically adding maybe 15% per year, is that roughly a right number? And is it correct that you think it will have the same net margins as your current business because it will be lower gross margin but you benefit from your infrastructure use? Or is basically, should all four, basically, should be not margin dilutive on the bottom line?

[Ming Yin:]

I think I try to answer a question from another angle because the 500 tonnes supply agreement with Xinjiang company, we have a three-year term. So the first year is 120 tonnes, second year 180 tonnes and third year is 200 tonnes. I think from that perspective, so annual contribution to the sales performance will be various because the tonnage will be different each year. And also I can share with you, before we purchase this plasma our Guizhou capacity utilization rate is about only 40%. So I think with this plasma purchase from Xinjiang, our Guizhou facility will be substantially increasing the planned utilization rate. And because of comparable moderate high purchase cost with our internal plasma, we do see some margin pressure compared with process our own plasma. And we believe, because of a substantial improve our utilization rate in the Guizhou plant, we do believe we don't need to encourage additional the SG&A for processing of this plasma. So we believe that the net margin generated from those purchased plasma will be very comparable with our own internal plasma.

[Isabel Buccellati:]

But can you just give an - I really appreciate this, a breakdown of the tonnes, how many tonnes a year, but can you give us a feel how much you are fractionated this year or you're thinking of fractionated this year?

[Ming Yin:]

No, we haven't fractionated this year, because the contract was signed in August and they're going to start from scratch from this August to next 2016 August to collect the first 120 tonnes. They're going to ship us in larger volume, so once they collect certain volume. So we haven't received the first batch yet.

[Isabel Buccellati:]

No, I understand that, but how much - if you look at the base effect of your business this year, just to understand how meaningful it is relative to your current business?

[Ming Yin:]

Well, I think it will substantially increase our plant utilization rate.

[David Gao:]

We already detailed this in the guidance. So we already talk about this in our guidance. By the way, just to keep a reminder, so that actually without this purchase the plasma, basically we'll have our own plasma inventories right now. So we're processing our own plasma inventory.

[Operator:]

The next question comes from Grace Chau of Credit Suisse. Please go ahead.

[Grace Chau:]

I just have one very simple question on the supply side. When do you expect the newly approved plasma in Shandong Province to commence plasma collection? And what is the expected peak volume? And I suppose most investors are normally concerned about how you ramp up the volume after you used up the plasma purchased from Xinjiang Deyuan. And is there any plan to obtain more plasma stations in the future? Thank you.

[Ming Yin:]

Grace, I'm afraid I don't actually quite understand your question. Your question is regarding the new plasma collection station in Shandong, right?

[Grace Chau:]

Yes. If you maybe expect it to commence plasma collection.

[Ming Yin:]

You mean the new branch station we just opened?

[Grace Chau:]

Yes.

[Ming Yin:]

Yes, we actually just opened that station recently. Actually, we already during the call we mentioned, it takes at least three years to ramp up to the design volume. So we actually have a design team to help the new center to reach out the audience for the potential donors. That's our priority, so we're actually are doing lots of promotion at the moment to reach out the possible donors.

[Grace Chau:]

And I just wondered, is there any plan to further increase your plasma collection after you've used up the plasma purchased from Xinjiang Deyuan?

[Ming Yin:]

Yes, because like David mentioned, this purchased plasma is only the complementary growth strategy for us for the next couple of years. But our main focus is to still actually develop our own plasma station in suitable regions. For example, in Shandong and in Guizhou, we're still looking for the new stations - to build up the new stations.

[Operator:]

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

[David Gao:]

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

[Operator:]

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