China Biologic Products Holdings Inc
Q3 2013 Earnings Call Transcript

Published: 10 Nov 2013

[Operator:]

Welcome to the China Biologic Products Third Quarter 2013 Earnings Conference Call. For the first part of this call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Bill Zima of ICR for opening remarks and introduction. 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 Tuesday, November 5th after the market closed and earnings release is now available on the company's website. Today you will hear from China Biologic’s Chairman and CEO, Mr. David Gao, who will start off the call with a review of the recent company’s developments, strategies and basic operating results, followed by the company's Vice President, Mr. Ming Yin, who will address financial results in more details. The CFO, Mr. Ming Yang is also available 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 statements. 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 could be no assurance that those expectations will prove to be correct. Information about the risks associated with 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 do not assumes 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 completely explained and reconciled to the most comparable measures reported under Generally Accepted Accounting Principles in the company's earnings release and filings with the SEC. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure and that non-GAAP measures are not uniformly defined by all companies including those in the biopharma industry. With that said, now I am pleased to present Mr. David Gao, Chairman and CEO of China Biologics. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone. And welcome to China Biologic’s third quarter 2013 conference call. We are pleased with our solid financial performance and some operational execution during the quarter. Particularly in comparison with the third quarter last year, it was a strong quarter as well. Total sales in the third quarter of 2013 were US$33.2 million, roughly the same level as last year and our non-GAAP adjusted net income attributable to the company increased 5.8% to US$15.5 million for the quarter. Market demand for plasma-based products in China remained strong. This benefits our business yet is also contributed to our increase in albumin imports beside slightly negative impact to our product pricing. They attribute much of our solid performance during the quarter to our Shandong facility, which experienced 21% sales growth this quarter compared to the same period last year. As anticipated, our Guizhou facility suspended production since June 1st. The financial impact associated with our Guizhou facility remains in-line with our internal forecast and our total sales for the first nine months of this year continue to grow as planned. As of the end of the third quarter 2013, we had achieved over 80% of our full year revenue projection and we’re close to reaching our original full year net income target, which prompts us to reach our full year net income growth protection today. During the third quarter, we maintained strong operating margin at above 43%, a 5% increase from last year. Primarily due to a more profitable product mix, efficient cost control measures that reduced selling and G&A expenses, as well as improved plasma utilization efficiency following the launch of our Factor VIII products. For the third quarter of 2013 sales of Factor VIII contributed approximately 2.7% of total sales and we expect a sales contribution to gradually increase in the quarters ahead. In Shandong, we have several encouraging updates to our operations in this region. First, our new plasma station in Cao County continued to improve productivity and become more self sufficient. This is reflective of our efforts to expand our donor base in the plasma material output. Second, after receiving SFDA approval last year, have identified sufficient patients in recent months to initiate Phase III clinical trials for Human Fibrinogen; a products primarily used to treat congenital fibrinogen deficiency and acquired fibrinogen deficiency. The clinical trials usually take one to two years and we expect commercial production to start in 2015. Third, in July, Shandong Taibang received SFDA manufacturing approval for a new 300 IU vial dosage for Factor VIII. This addition to our product portfolio reflects our ongoing commitment of improving our product offering in general and advancing hemophilia therapy treatment in particular. We expect to commence commercial production in the following months. In Guizhou, we received SFDA manufacturing approval for Human Prothrombin Complex Concentrate, PCC, at the end of July and expected to obtain GMP certification and start commercial production when our Guizhou facility resumes production in 2014. Finally, we were pleased to close the share repurchase transaction in the third quarter, under which we repurchased approximately 1.48 million shares of our common stock, representing approximately 5.49% of the total common stock outstanding as of August 2, 2013, from one of our individual shareholders. We believe this share repurchase has improved our shareholder structure, enhances shareholder value and can benefit other existing shareholders of the company by improving our EPS performance. They are confident that our opportunities in China plasma-based biopharma industrial remain as strong as ever for CBPO. We are encouraged by our latest operational developments and growth initiatives which can expand our market position and drive sales into profits for our share holders. At this point, I would like to turn the call over to Ming Yin our Vice President to review third quarter financial results. Ming, please.

[Ming Yin:]

Thank you, David, and hello everyone. I welcome you all to our third quarter earnings call. Let me first review the key P&L items for the third quarter 2013. Total sales in third quarter 2013 were $53.2 million. As a percentage of total sales, Human Albumin product revenue accounted for 49.7% while IVIG revenue accounted for 32.3%. Sales volume of Human Albumin products increased slightly by 2.7%, primarily due to increased sales volume of Shandong Taibang, partially offset by reduced production volume as a results of planned production suspension of Guizhou Taibang. The shipments of the two batches for albumin products at Shandong Taibang are originally scheduled in second quarter of 2013 but were delayed due to the delayed inspection by National Institute for Food and Drug Control. As a result, these products were shipped and sales of those products were recognized in third quarter, 2013. Sales volume of IVIG products decreased by 27.2% mainly due to reduced substantial volume as a result of the planned production suspension at Guizhou Taibang. Sales of Factor VIII kept ramping up, contributing about 2.7% of total sales. Gross profit decreased slightly to $36 million from $36.2 million in the same quarter of 2012. Gross margin was 67.7% compared to 68.1% in the same quarter 2012. The slight decrease in gross margin was mainly due to the increased cost of plasma paid to donors in 2013 as compared to 2012. During the third quarter, 2013, selling expenses decreased 28% to $2.6 million or to 4.8% of the total sales. The decrease was primarily due to increasingly stringent cost control on selling expenses since the second half of 2012. G&A expenses decreased 20.5% to $9.2 million in third quarter 2013, mainly due to the decrease of the payroll expenses in Guizhou Taibang as a result of the production suspension. In addition, we incurred amortization expenses related to the Guizhou Taibang acquisition in the third quarter of 2012 that had been fully amortized by the end of 2012 and consequently did not result in any further expenses in the third quarter of 2013. G&A expenses, as percentage of total sales, was 17.3% compared to 21.8% in third quarter 2012. R&D expenses were $1.1 million in the third quarter 2013 representing an increase of 65.3% from $637,000 in the same quarter of 2012. As a percentage of total sales, R&D expenses for third quarter 2013 and 2012 were 2.0% and 1.2%, respectively. The increase in R&D expenses was mainly due to certain technical support services, the company engaged to improve production yields on certain hyper-immune products during the third quarter 2013. Operating income was $23.2 million, representing an increase of 13.4 % over third quarter of 2012. Operating margin increased to 43.6% from 38.4%. Net income attributable to the company increased by 7.9% to $14.7 million compared to $13.6 million in the prior year period resulting in 200 base point improvement in net margin to 27.6% compared to 25.6% in the last year’s third quarter period. Fully diluted net income per share was $0.53 compared to $0.50 for the same period last year. Non-GAAP adjusted net income attributable to company was $15.5 million or $0.56 per diluted share, an increase compared to $14.10 million and $0.54 respectively in the prior year period. Non-GAAP adjusted net income and diluted earnings per share excluded $0.1 million of non-cash employee share-based compensation expenses. For the first nine months of 2013, total sales increased 6.6% to $160.8 million. As a percentage of total sales, sales from Human Albumin products and IVIG products accounted for 43% and 39.8% respectively. Among total sales, $8 million or 5% came from sales of placenta polypeptide products. Gross profit increased 8.6% to $110.9 million, gross margin was 69%, operating income was $74.5 million, representing an increase of 23% year-over-year. And net income attributable to company was $45.8 million, net margin was 28.5%. Non-GAAP adjusted net income attributable to company was $49.4 million or $1.77 per diluted share. Now, I would like turn to the balance sheet and cash flow items. We ended third quarter of 2013 with approximately $131.5 million in cash and cash equivalents, primarily in form of cash on hand and demand deposits. Accounts receivable was $22.4 million representing a 100% annual increase as compared to the accounts receivable balance at the year end of 2012 which was caused by the increased shipments to our hospital clients as these clients stock up their inventory in the second half of September in preparation of the long national holiday in October. Our accounts receivable turnover in days remained stable in third quarter 2013 compared with 2012. Inventory increased to $83.7 million as of September 30, 2013 from $75.7 million in December 31, 2012, reflecting a higher amount of raw plasma we collected and from higher amount of products we stocked up. For the nine months ended September 30 2013, net cash provided by operating activity was $58.5 million as compared to $64.8 million for the same period in 2012. The decrease was mainly due to increasing inventory of the accounts receivable. The increase in inventory mainly reflect the company's efforts to maintain higher product inventory levels to ensure consistent delivery service to hospital clients during the planned shutdown at Guizhou Taibang. The increase in accounts receivable was largely due to hospital clients, increase in their inventory levels in anticipation of long national holiday that took place in October. Net cash used in investing activities was $17.5 million compared to $22.1 million, primarily due to purchase of property, plant and equipment. The investing activities for nine months end in September 30, 2013 mainly consist of construction of plasma station in Cao County, new plasma facility for company's new product Factor VIII and office building for Shandong Taibang and production facility upgrade for placenta polypeptide products and plasma based products in Guizhou Taibang. Net cash used in financing activities was $42.6 million compared to net cash provided by financing activity of $0.2 million for the same period of 2012. Net cash using financing activities for nine months ended September 30, 2013 mainly consists of payment of $29.6 million for share repurchase and dividend of $10.9 million paid by the company subsidiaries to the non-controlling interest shareholders. Our working capital on September 30, 2013 was $494 million and our current ratio was 4.8. Total shareholders equity was $294.7 million as of September 30, 2013, compared with $257.4 million as of December 31, 2012. And now to our full year guidance, for the full year 2013, we expect to meet higher end of our total sales forecast range of $195 million to $205 million. Based on strong margin performance in third quarter and favorable although -- remainder of the year, we are raising our full year non-GAAP adjusted net income estimate to the range of $58 million to $60 million, representing a 13% to 16% increase from the estimate provided last quarter. That concludes our prepared remarks. We will now take questions. Operator, we’re now ready to take some questions.

[Operator:]

Thank you. (Operator Instructions) Our first question is from Yi Chen with Aegis Captial. Go ahead please.

[Yi Chen:]

Hi. Thank you for taking my questions. First, could you give us more color on the increase in human albumin import volume and how should we look at the negative impact on pricing going forward?

[David Gao:]

Good morning, Yi. And for albumin, we remain cautious stand on product pricing during the first 10-month data showing more than 45% the year-over-year growth of the import albumin quantity. We will continue to monitor market trends relate to albumin import volume and adjust our pricing and the product shipments accordingly to any changes in the market. And because you know we are in a highly competitive environment. The overall market conditions will be subject to dynamics of various factors, including the imported albumin growth you mentioned and the G&P recertification progress of all the domestic competitors and overall, source plasma collection volume grows. And due to the nature of this business it is difficult to quantify each of the above mention the factors and how this can directly impact with plasma product in the market. So, it’s very difficult to predict the pricing trend in the -- in the future quarters at this moment.

[Yi Chen:]

Okay. Second, how will the initiation of Phase III trial for human fibrinogen affect the R&D costs?

[David Gao:]

As we indicated in the 10-Q finding, we increased our R&D expending due to various projects, including our engagement of external research agent, trying helping us improve production yields on certain hyper-immune products and hopefully we can get from a good use improvement in the year of 2014. And additionally, we increased R&D spending to other various projects including the --including the Human Fibrinogen in our clinical trials. Since we just identify sufficient patient, so we will start the clinical trials very soon but as David mentioned a while going, this clinical trial usually take a year and the two -- one year to two years. So, the overall cost will be allocated to be pretty even in the future quarters. And that going into the first quarter and 2014, we expect the R&D expenses as a percentage of total sales to stay at the historical range about 2% to 3% as we have conducted a research test before on other new product -- new pipeline products.

[Yi Chen:]

Okay, lastly, what will be SG&A cost look like in the coming quarters, is there any impact from the GSK China bribery case at all?

[David Gao:]

That’s -- well let me try to answer the first question, SG&A. This quarter -- for the past quarter actually, we experienced a very low SG&A, the expenses due to the several factors. Number one, payroll expenses were reduced, due to the Guizhou production suspension. And number two, we also experienced selling expenses management during the second half of the 2012. And going forward, the payroll expenses were revert back to normal levels after Guizhou facility resume production. For selling expenses, we just received the manufacture approval for the Prothrombin complex or the PCC product and we planned to initiate the new product launches and they carry out third and promotional and the marketing initiatives within our domestic market to enhance our presence. And additionally, one of our international competitor, just launch their recombinant Factor VIII in China. So in order for us to stay in our competitive position, we plan to increase our marketing efforts for our product Factor VIII. For the incident that you mentioned, for one of the international -- I mean the pharmaceutical company and I think the impact to our company should be very minimal. I can refer to one of the research report was published in China, as one of the Chinese food elements published a report just today, I believe this morning and in his report mentioned in the Q3, the China pharma sector the -- actually the repo effects of the GSK or the instant start to show up -- more impacts to the wide spread of our pharma sectors. But in his report, interestingly enough, he mentioned specifically part of the products because not us, because he covers the China Asia stock, he mentioned one our competitors in listing A stock in A shares and he highly recommend that stock because he clearly -- the plasma manufacturer in China have very low selling expenses. So, in his field, the chance for the impact for the anticorruption or anti-bribery effects should not happen in the plasma industry. Should have very, very little impact to our industry, because you can see we only have less than 5% the selling expenses compared to the average party’s 30 to 40% of the selling expenses range. So, hopefully, I answer your question, Yi.

[Yi Chen:]

Yes. Thank you very much.

[David Gao:]

Thank you.

[Operator:]

(Operator Instruction) Your next question is from [Yeung Chow] with Victory. Go ahead, please.

[Unidentified Analyst:]

Hi. Just very quick question, when do you expect production to come back in the Guizhou Taibang?

[David Gao:]

As we indicated in our prior press release, we implemented the alternative strategy to upgrade the Guizhou facility by June this year. And our assessment is that we -- our initial assessment, we experienced six to nine months production suspension in 2013. And the upgrade progress remains on track, our internal estimate and we expect the Guizhou facility to resume production in first half 2014. And our goal is trying to make it happen as early as possible, but as you are might aware there is a long queue in China, especially biologic companies where lots of companies were waiting for the SFDA to do our GMP recertification, so that’s probably uncertain to us on our timing to back to the production.

[Unidentified Analyst:]

Okay. So, I guess that uncertainty can, because it seems like -- obviously the topline has been from the suspension. And then let’s just say -- but this suspension can go on longer than nine months, if the certification process gets delayed further, right?

[David Gao:]

Well, because when we announced this year, the financial impact with Guizhou facility remains in our internal forecast. And then just as you mentioned, our total sales or topline for the first nine months this year continues to grow as plan. So from this year, we are already in consideration for the impact. But we probably will have the better visibility in next couple months, because we will have a better visibility on whether there is a delay in the government, the revalidation GMP revalidation process. I mean, how many company will be in the queue. So, I guess at that time we’ll be probably in a better position to provide a clear timeline.

[Unidentified Analyst:]

Okay. Yeah. Thank you.

[David Gao:]

Thanks.

[Operator:]

(Operator Instruction) Showing no further questions in the queue, this concludes our questions-and-answer session. I would like to turn the conference back over to management for closing remarks.

[David Gao:]

Okay. Thank you for your participation and ongoing support for China Biologic. We look forward to updating you on our business in the coming weeks ahead. Have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. Please disconnect your lines.