China Biologic Products Holdings Inc
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Bill Zima:]

Hello, everyone and thank you for joining us on today’s call. China Biologic announced its quarterly financial results on November 5 after the market closed. An earnings release is now available on the company’s website. Today you will hear from China Biologic’s Chairman and CEO, Mr. David Gao, who will start off the call with a review of recent company developments, strategies and basic operating results, followed by the company’s Senior Vice President, Mr. Ming Yin, who will address financial results in more details. The company’s Chief Financial Officer, Mr. Ming Yang is also on the call and will be available during the Q&A session that follows prepared remarks. Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in China Biologic is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. The company will also discuss non-GAAP measures, which are more thoroughly explained and reconciled to the most comparable measures reported under Generally Accepted Accounting Principles in the company’s earnings release and filings with the SEC. Be 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 2014 conference call. We are very pleased to report strong financial results for the third quarter, with sales and net income both reaching 30% growth year-over-year and operating income increasing by 49%. Our incremental revenue growth and operating margin improvement were largely attributable to increased sales of IVIG and the placenta polypeptide products. During the third quarter, marked demand for plasma products remained strong and the successful implementation of our sales strategy allowed us to continue to capitalize on the substantial opportunities in Tier 1 cities for IVIG products. So, IVIG sales in China’s three top tier cities namely Beijing, Shanghai and Guangzhou contributed to over 30% of this quarter’s IVIG growth. Furthermore, added production capacity for placenta polypeptide allowed us to expand sales volume, while we also managed to reduce selling expenses by utilizing internal resources to promote these products. During the third quarter, we experienced a solid performance across our entire product portfolio. As a percentage of total sales, revenue from human albumin and IVIG products were 38.3% and 41.7% respectively. In anticipation of our favorable market environment on our increased sales capability this year, we reserved a large volume of our 2013 IVIG inventories to be sold throughout 2014 as an inventory for human albumin gradual increase at our Guizhou facility and inventories for IVIG stabilized. We expect the sales contribution from these two products to fluctuate on a percentage basis in the fourth quarter. Our placenta polypeptide product was our third best revenue performer in the quarter. It’s contributed 11.3% to all the total sales in the third quarter and experienced a 193% increase in sales volume over the prior year period. On operational level, selling expenses decreased by 7.7% to $2.4 million or 3.5% of total sales from 4.8% in the prior year period. Primarily, due to the decrease per unit selling expenses of placenta polypeptide of at Guizhou Taibang ceased outsourcing the promotional service for these products. G&A expenses decreased by 16.3% to $7.7 million or 11.2% of total sales from 17.3% in the third quarter of 2013. Altogether, operating profit margin increased by 660 basis points to 50.2% which led to an increase of net margin to 29.1%. In recent months there have been several important developments to our operations in the product portfolio. Our two main production facilities are once again fully operational and as a result we are able to gradually increase our production and the inventory levels. Our Guizhou Taibang facility received its GMP certificate earlier than expected, which has resulted in added production capacity at this facility. In early September, we acquired additional 19.84% equity stake in Guizhou Taibang, which increased our adjusted equity interest in Guizhou Taibang from 56.4% to 76.2%. This transaction has significantly enhanced our control of Guizhou Taibang’s long-term strategy and development. In October, Shandong Taibang received approval from the China Food and Drug Administration for the commercial manufacturing of human PCC. We expect that this new product to further improve our plasma utilization efficiency and contribute to our 2015 financial performance. On October 31, Shandong Taibang received approval from the Hebei Province – Provincial Health and Family Planning Commission to build two new plasma collection stations in Hebei province. This approval is the first issued by the Hebei provincial government since plasma collection was privatized in China in 2006. Hebei, with a combined population of approximately 71 million, is underdeveloped province for plasma collection as there are currently three stations only. We intend to acquire the requisite land use rights and obtain the construction permits as soon as it completes the site selection process, and we will try to complete construction, staff recruitment and government inspection and certification process within approximately 12 months thereafter. The new collection stations may commence operations only after passing the government inspection and certification process and obtaining the collection licenses. And we expect these two stations to reach their designed annual collection capacities in approximately three years after obtaining the collection licenses. Looking to the fourth quarter and into 2015, we remain confident in our sales team’s ability to continue to stabilize product pricing. Their performance has already exceeded our estimates set forth at the beginning of this year. Our ability to scale plasma collection and leverage our direct sales model positions us well to meet the rising demand for plasma-based products in China and strengthen our market leadership. Based on these latest developments, we are pleased to raise our financial forecast today. I will now turn the call over to Ming Yin, our Senior Vice President to review third quarter financial results. Ming, please go ahead.

[Ming Yin:]

Thank you, David and hello everyone. Now let me walk you through key P&L items for the third quarter of 2014. Total sales were $68.9 million, representing an increase of 29.5% from the same quarter of 2013, primarily attributable to sales volume increase in IVIG and placenta polypeptide. During the quarter, the average price for both albumin and IVIG products remained stable as a result of combined effect of approximately 3% of sales price premium due to a VAT rate decrease effectively from July 1, 2014 and discounts given to distributors in Tier 1 cities and new markets during the reporting quarter. As a percentage of total sales, human albumin accounted for 38.3%, while IVIG accounted for 41.7%. Sales volume of human albumin products remained stable as a result of combined effect of increased sales volume at Guizhou Taibang after product resumption in March 2014 and decreased sales volume at Shandong Taibang due to delayed shipments of certain batches of products awaiting government approval. In third quarter of 2014, the sales volume of IVIG products increased significantly by 67.3% mainly due to increased sales through distributors in Tier 1 cities and new markets supported by increased output from Guizhou Taibang after production resumption. In addition, the rise in occurrence of Hand-Foot-and-Mouth Disease also contributed to the increase in sales volume of IVIG during the reporting quarter. As a percentage of total sales, revenue from placenta polypeptide was 11.3% in the third quarter of 2014 as compared to 5.2% in the same quarter of 2013. The sales increase was generally in line with 193% volume increase due to the expanded production of placenta polypeptide at Guizhou Taibang. Our gross profit was up by 29.4% reaching $46.6 million in third quarter of 2014. Gross margin remained relatively stable at 67.6% compared to 67.7% in the prior year period. For the third quarter of 2014, selling expenses decreased by 7.7% to $2.4 million or 3.5% of total sales primarily due to decreased per unit selling expenses of placenta polypeptide during the reporting quarter. G&A expenses decreased by 16.3% to $7.7 million or 11.2% of total sales mainly due to a decrease in legal expenses and amortization expense of intangible assets. R&D expenses were $1.8 million in third quarter 2014 compared to $1.1 million in same quarter of 2013. As a percentage of total sales, R&D expenses account for 2.6%. Operating income was $34.6 million, an increase of 49.1% from third quarter 2013. Operating margin increased to 40.2% from 43.6%. Net income attributable to company increased by 36.7% to $20.1 million resulting in net margin of 29.1%. Fully diluted net income per share was $0.76 as compared to $0.53 in the third quarter of 2013. Non-GAAP adjusted net income attributable to company was $21.2 million or $0.81 per diluted share. Non-GAAP adjusted net income and diluted earnings per share excluded $1.2 million of non-cash employee share-based compensation expenses. For the first nine months of 2014, total sales were $185.3 million, an increase of 15.2% from the same period of 2013. As a percentage of total sales, sales from human albumin products and IVIG products were 38.1% and 40.9% respectively. Gross profit increased by 13.9% to $126.3 million resulting gross margin of 68.2%. Operating income was $91.5 million, an increase of 22.8% from same period of 2013. Net income attributable to company increased by 26.9% to $58.1 million 31% of total revenue for the first nine months of 2014. Non-GAAP adjusted net income attributable to the company was $60.8 million or $2.34 per diluted share. Non-GAAP adjusted net income and diluted earnings per share in first nine months of 2014 excluded $2.7 million of non-cash employee share based compensation expenses. Now, I would like to turn to balance sheet and cash flow items. We ended third quarter of 2014 with approximately $74.6 million in cash and cash equivalents. Restricted deposits was $103.7 million as of September 30, 2014, compared to a $30.5 million as of December 31, 2013. Net cash provided by operating activities for nine months ended September 30, 2014 was $64.1 million, as compared to $58.5 million for the same period of 2013. The increase in net cash provided by operating activities was primarily due to the impact from changing net income and accounts receivable, partially offset by impact from changes in prepayment and other assets and inventory during this period. Accounts receivable increased by $7.5 million, which was in line with sales increase during the first nine months of 2014, as compared to $10.08 million during the same period of 2013. The prepayment and other assets increased by $8.6 million during the first nine months of 2014, as compared to $0.7 million during the same period of 2013, primary due to an advance payment totaling $5 million made by Guizhou Taibang to certain employees on behalf of real estate developer under a employee housing project, development project during the first nine months of 2014. Inventories increased by $8.7 million during nine months ended September 30, 2014, as compared to $5.9 million during the same period in 2013. This increase was primarily due to an increase in raw materials as a result of continued supply of plasma from plasma stations at Guizhou Taibang pending its production suspension from June 2013 to March 2014, and increasing working in process at its production resumption in March 2014. Net cash used in investing activities for first nine months of 2014 was $8.3 million compared to $17.5 million in prior year period. During the first nine months of 2014 and 2013, the company paid $16.8 million and $18.2 million respectively for the acquisition of property, plant and equipment, intangible assets and land use right for Shandong Taibang and Guizhou Taibang. On the other hand during the first nine months of 2014, the company received a refund of deposit of $1.6 million from local government due to the decrease in size of parcel of the granted to the company in Guizhou and had a time deposit of $6.6 million mature. Net cash using financing activities for the first nine months of 2014 was $124.5 million compared to $42.6 million in the prior year period. Net cash using financing activities for the first nine months of 2014 mainly consist of payment of $86.8 million for acquisition on non-controlling interest in Guizhou Taibang. And a payment of $70 million for share repurchase, partially offset by proceeds from $33.2 million from a follow-on offering of the company’s common stock. Net cash used in fining activities for the first nine months of 2013 mainly consist of payment of $29.6 million for share repurchase and a dividend of $10.9 million paid by our subsidiary to the non-controlling interest shareholders. And now I will hand the call back to our Chairman and CEO for financial forecast. David, please.

[David Gao:]

Thank you, Ming. We are now adjusting our previously issued estimates for the full year of 2014 as well as underlying assumptions. And now expect that the revenue to increase from $230 million to $240 million to $240 million to $245 million, 18% to 20% increase over the prior year. And the non-GAAP adjusted net income to increase from $67 million to $69 million to $76 million to $78 million, excluding the impact of a potential one-time bad debt provision of approximately $5 million of which approximately $3.5 million is attributable to the company to be made in connection with our employee housing development project in Shandong. Other factors contributing to improved revenue and the non-GAAP adjusted net income outlook for the full year of 2014 including Guizhou Taibang’s earlier than expected resumption of production, a favorable VAT rate reduction effective from July 1, 2014, earnings accretion from the company’s increased ownership stake in Guizhou Taibang and more favorable product pricing on select products partially attributable to the company successful implementation of a direct sales model. Even after taking into account the impact of the potential bad debt provision to our fourth quarter results we are pleased that to raise our full year revenue and net income forecast. The revised outlook assumes no significant adverse product pricing changes during the remainder of 2014 and reflects the company’s current and preliminary views which are subject to change. As always we will keep monitoring the market and keep our investors updated. That concludes our prepared remarks. We will now open up the call for Q&A.

[Operator:]

Thank you. Our first question comes from Bin Li with Morgan Stanley. Please go ahead.

[Bin Li:]

Hi. Thanks for taking my questions. Congratulations for strong quarter and also receiving approvals of two new stations. So my questions will be on these two topics. First, perhaps on the numbers so this quarter sales was very strong, it’s coming from flattish albumin growth and also very strong IVIG which has to do as you said at least to some extent has to do with inventory fluctuation. So my question is can you explain what is the inventory norm level right now versus a historical norm and how should we think about inventory changes going forward that will impact sales in this quarter and perhaps even beyond this quarter, I mean fourth quarter or beyond fourth quarter into 2015? That’s my first question.

[Ming Yin:]

Bin, this is Ming, I guess this question will be very difficult to answer because basically this year and also last year we do actually some the production in suspension at Guizhou. So basically we – actually do occur some abnormal inventory level typically at raw material – raw plasma is dropping our raw material in the inventory. So basically last year we only have like a first – we only have first six months operation in Guizhou. So basically last year’s inventory level was partially affected by the Guizhou raw plasma collect which could not be actually processed. So last year’s inventory level was impacted by Guizhou and as David mentioned earlier basically because we actually started – initiated the Tier 1 cities strategy typically IVIG in 2013. So basically anticipating the demand growth in the Tier 1 cities while we are penetrating into those cities so we do actually reserve a substantial or a larger than the normal IVIG level the inventory level in our inventory at the end of 2013, so this quarter so basically during the year of 2014, so when we actually implemented the Tier 1 cities strategy. So, it does show we actually had a pretty positive plan. So basically our IVIG substantially which volume growth in the third quarter like 67% primarily because we did actually reserve a large inventory in the last year and for going forward because we do expect the raw materials of both company will gradually come down, because Guizhou have a production resumption in second quarter this year. So, we do believe that raw material inventory level will gradually come down. And also as David mentioned, we will keep our focus on the Tier 1 cities, the strategy typically in IVIG. So, we do believe that our work-in-process is one of the item in inventory also will gradually goes down when we – in 2015. So, basically I believe 2015 it probably by end of 2015 or the middle of 2015, the inventory will be a normalized level, because 2014 the inventory level would be largely affected by the production suspension. Hopefully that answers your question.

[Bin Li:]

Yes. Well, that’s the interesting – it’s mainly – I think I guess you are mainly talking about the inventory of raw materials, but what about any inventories of your finished products in the channel? Do you have any – did you see any inventory or increase inventory in the channel?

[Ming Yin:]

You mean in the market right, in the channel right?

[Bin Li:]

In the market, yes, yes.

[Ming Yin:]

Yes. So, basically as we actually, the recent – let me give you some the recent numbers so I think that probably can address your questions. So, basically sure answer is we don’t actually have really updated the channel the inventory level but we can tell you is the latest the Chinese Pharmaceutical Association data on both albumin and IVIG. So basically on the albumin side, this based on the simple hospitals around like 900 big hospital across the country it shows those simple hospitals consumption growth rate is 16% year-over-year for the first nine months so which actually it’s faster than the supply growth rate. So, for albumin growth rate the – for the first nine months we do see overall albumin supply rate about 6%, so basically out of that 6%, domestically 5 albumin production remains flat. So, importers shows like a 14% of growth. So, from the albumin side, so basically the supply actually is still under growth of the demand. So from the CPA’s data, for IVIG it shows the same thing. So basically the overall the albumin – the IVIG supply this year first nine months because IVIG cannot be imported so the domestic front have like high single-digit growth as the supply. But on the demand side because based on our experience with the hospitals, we do see a very strong demand and our hospitals basically which is the main reason in the first – in third quarter we have almost zero, the inventory at our side which contributed 600% of volume growth, basically is the demand from the hospitals when we actually started promoting the IVIG. So, I guess that we can only cover our – the numerical data, that’s the information we have.

[Bin Li:]

Okay, that’s a good color. And actually that leads to my next question which is on the pricing and you said, David said in his remarks when he provided the outlook, he thinks the price going forward would be stable. Can you reveal what was the price year-to-date for both albumin and IVIG in relation to the fact you said for both products the supply is still under demand, and so that’s the second part of my question. I guess the last part of my question is really on your view for the recent news on NDRC, I am referring to NDRC, it’s thinking about to lift the price control of plasma product. What do you think about the implication for plasma industry and for yourself?

[Ming Yin:]

Yes. So, basically I guess – I will focus on our pricing because the dynamics for albumin is it could change very dramatically because usually the one-third of the volume of the imported –the quantities. For the first eight months, so basically the import shows only like single-digit growth but for the month of September itself so basically has dramatic amount of imported coming to China. So, by far, we actually see the – there is certain price pressure on their albumin on the distributor level. And just want to actually make clear, actually we do actually maintain (indiscernible) stable pricing because most of our sales and our direct sales to hospitals which are very – which are less price sensitive than distributors. And so on the distributor level we do see like around like 5% to 8% price decline compared with last year but that’s on the distributor level but for the…

[Bin Li:]

And this is for September, sorry, this is for, yes, this is for September right, you’re talking about?

[Ming Yin:]

For current pricing, but our pricing remains just like as we remain very stable because channel is the direct sales channel. And for IVIG, so I guess this year we do see a little bit of encouraging sign because our efforts for the (indiscernible) strategy do played out pretty well because but on the other side we do actually incur some discounts because the Tier 1 cities does not allow the company directly sells to the hospital so we needed to engage these third party distributor to wrapping to selling to the Tier 1 cities. So, from – so just quick call we probably needed to get with the distributor like the 5% margin compared with our direct sales channel pricing at a price. But again we do think that’s a long-term on the strategy wise I think that’s something we need to sacrifice because it will actually provide us a very large the growth potential in volumes by opening those Tier 1 cities. And for your question for NDRC, so I guess that’s what we do aware because we recently just learned from recent news all that and you actually my release certain drug pricing control. So, among which mainly related to some non-insurance covered and or the now reimbursed to plasma products because we are not actually could not face the news from the NDRC official website or other government sourcing so we could not speculate on any implementation scope or timing at the moment. And because of price adjustment is the public policy decision made by the government. So, here we are not in the position to speculate the – in this respect, but we do believe if the NDRC will release – remove the price control it will be a beneficial to the patients and also to the manufacturers like us because in the past few years most – since 2012 most of our growth for IVIG will be – will only come from the volume growth. So if the government could actually let the supplier and demand to decide the pricing so we do actually – we could actually enjoy certain amount of growth from pricing because IVIG is still a very undersupply in mature market in China.

[Bin Li:]

Yes. And if I could just go back to the question, the comment you made on the distribution price for September is seeing about 5% to 8% decline. Can you remind us what is your price gap – what’s the price gap between your price and the distributors’ price. So, we understand the question whether it is a further if the distribution price – distributors’ price is coming down further whether there will – you still had some room?

[Ming Yin:]

Yes. So basically I would say, because based on our numerous knowledge our pricing could be 10% higher than distributor to certain distributor, the difference will be caused by different brands.

[Bin Li:]

10% higher, okay. And what is the – for the greater market price?

[Ming Yin:]

Yes, that’s I think that price at least what we recently learned still over 400, 450 something like that. Still like $100 higher than the government selling price.

[Bin Li:]

So, it’s still about 30% above your price, 25% to 30%?

[Ming Yin:]

Yes, so but that price because we cannot sell-through those markets, right. But that’s just…

[Bin Li:]

Yes, I understand. And, sorry I – if I could ask last question, so I am going to go back to the queue. So in terms of your – the approval for two new stations, you just received in Hebei province, can you talk about the potential for these – potential collection volume from those two new stations and what’s the timeline and perhaps the CapEx, things like that?

[Ming Yin:]

So, basically the – I guess it’s a more important, we are talking about why we chose Hebei province, I think that’s probably more important for investor, because Hebei province is very close to Shandong. So, basically even offers from the economic and advantages in transportation of raw plasma. So and also as David mentioned, the Hebei province is like 71 million population which rated as the sixth largest in trends of population in China, which only have like a three plasma collection stations in the province. And, so we believe that Hebei is under development province for plasma collection and also it’s a very attractive location for us to give the plasma collection. And so forth the CapEx that we actually disclosed in our press release, so basically the two stations will be – the total CapEx will be around RMB40 million to RMB50 million on the combined base. So, we just originally got approval which is last Friday. So we will immediately start (plasma) collection. So, we will do the – we will acquire land and we will find a location and we will start the construction. And in the meantime we will recruit staff for the station because, in the station the – probably the difficult part is to find the large amount of nurses, because the Chinese regulation requires one nurse can only take care of two plasma (indiscernible) machines. So, meaning if we 30 collection machines, we need to at least find 15 registered nurses. So, it’s very – it’s not a easy job. So and also we will actually talk to the local government to give us some incentive to build a center because like we will actually take – we will estimate probably at least 12 months to give the tenders. And after that, as David mentioned earlier, in typical our experience for a new center to ramp up to their design and actual capacity, it should take about three years. So from that perspective by 2018, we believe the two stations will contribute the combined base to increase our deflection based of 10% to 15%. So I don’t know whether that answered your question Bin.

[Bin Li:]

Yes, just maybe one more follow-up. Does your Shandong facility, production facility, have to permit to process the plasma from Hebei?

[Ming Yin:]

Yes.

[Bin Li:]

Okay, got it.

[Operator:]

Thank you. The next question comes from Jessica Li with Jefferies. Please go ahead.

[Jessica Li:]

Thank you for taking my questions. Good evening. Congratulations again on a great quarter. I have a couple of questions. First of all, could you please provide a bit more details on the bad debt situation? And secondly on your PCC, your upcoming new product opportunity, can you give us an update on the regulatory status for PCC? When can you get the GMP certificate? Also, how should we better understand the commercial potential of this product? And given your early success with IVIG by using direct sales, would you consider also using the same marketing strategy to promote PCC once it’s available to the market? Thank you.

[Ming Yin:]

Jessie, this is Ming, so I guess your first question is relating to the – our potential bad debt provision, right?

[Jessica Li:]

Right. Right.

[Ming Yin:]

And – yes, I guess as we disclosed in the 10-Q’s, so I’m just trying to give you brief description or the color on the background for this – the project or the nature of the potential provision, because this is actually the employee housing project that was initiated by the management of Shandong Taibang back in 2009, as the company want to retain payments by providing assistance to our employees with housing need for their culture for their first homes. Under this employee housing project, the developer – acquitted developer to deliver residential units to the employee participant by the end of 2011 and the employee participant paid the developer deposit equal to 80% of their purchase price of their residential units. The company assisted with their deposit payments, Shandong Taibang provided with them with an advance up to 50% of purchase price of residential units. This advance will be repaid by scheduled deduction from employee participant’s payroll in the past. And, however, after developer failed to deliver the residential unit by end of 2011, has contemned under the housing project, it had taken certain remedial actions trying to deliver the alternative residential units to be build on different parts of land of the delayed schedule. The remedy actions were delayed due to various factors, which there was no evidence indicate the developer will become available to perform their obligation under employee housing project, until we recently learned by their financial problem just recently. So after we learned that, so basically we have been choosing first, because it’s involved more than 100 of our employee, so we do believe it’s very critical to keep the employees morale, because we are not being impact by this – failure of developer. So we do actually made advance payment to the employees equal to the deposit that employee participant paid to developer and refund them a deduction previously made with their salaries. And also we repaid them with a good interest. And also we are in the process trying to the sign another, what we disclosed in the 10-Q is we’re trying to sign a proposed supplement agreement with employees. Under that proposed supplemental agreements, the employee participants will agree to transfer and assign to Shandong Taibang (indiscernible) under employee housing project, including the advice to proceed with legal action against and recover damage from the real estate developer. And in return Shandong Taibang will believe to wage its right claim advance payment and refund deduction previously made by their salaries under the projects, our payment agreement. And we already initiated the process where we initiated legal action against developer and also in the meantime we are trying to have all the employees signed the proposed supplemental agreement with the company, and we will actually make – we will take a legal action against the developer and we will actually make a better judgment, when the court will start hearing the case, hopefully by end of the year and we will have a better visibility on the recoverability of this advance payment. So if the real estate developer do not actually have some financial position, we may actually have to do a full amount of provision, which as David mentioned like $5 million provision, which will hit our P&L, impact to our P&L will be US$3.5 million. And for the PCC question, so basically as we disclosed in our 10-Q, so we already got a manufacturing approval recently. And we are still awaiting the CFDA’s approval for the production plan for the GMP license. And so we – while we – hopefully we can get the GMP certificate by end of this month or early December, so we can commence on commercial production afterwards. And so for PCC’s, the market dynamics, I will actually just give you a little bit description, because there is only two producers in China currently that were producing PCC, and the last year, the total products available to market were only approximately 260,000 vials. And according to the latest Chinese Pharmaceutical Association Research Data and among 300 sample hospitals involved in using PCC, the growth rate for PCC usage for the first six months was approximately 30% of growth. And most of this growth is driven by the increase awareness of PCC treatment use. And as we disclosed, PCC has many application and is mainly used for treatment for the variety of syndrome basically related to the Factor II, VII and IX and X deficiency even on single deficiency or combined deficiency base. So the indication like hemophilia B, excessive anticoagulant and vitamin K deficiency related disease. So according to our market research, because we are actually recently trying to only initiating the marketing strategy for PCC and launching the PCC, we did a bit research for this how to launch this product. So our understanding is that most hospitals in China right now because of short supply of PCC, so they have to use fresh plasma as a replacement in the clinicals – in the medical fields. Because the fresh plasma has higher contamination risk compared to PCC, because our production has virus inactivation process and also we have 19 days – 90 days quarantine for plasma (indiscernible) and so basically we believe PCC, even the doctors we surveyed told us they prefer PCC, but the problem is they don’t actually have a PCC supply. And basically – based on our initial assessment for PCC demand, potential is at least 3 to 5 times bigger than the current market supply. And so we believe to reach potential market demand it do requires significant market investment to educate doctors in identifying suitable indications or surgical imputations. And we do remain very confident with prospect for PCC. And 2015 will be our first year of production, so we do expect that PCC will actually deliver some contribution to our both top line, bottom line, but as you might aware the first year production, we may take some time do the manufacturing process ramp up period in improving our manufacturing process to reach the designed production yield. And so from that perspective, we believe that PCC’s sales contribution will be very similar to our first year Factor VIII’s production launch at last year. So hopefully that answered your question, Jessie.

[Jessica Li:]

Great. Thank you so much.

[Ming Yin:]

Thank you.

[Operator:]

Thank you. The next question comes from Yi Chen with Aegis Capital. Please go ahead.

[Yi Chen:]

Hi, thank you for taking my questions. My first question is, can you comment on the revenue on IVIG for the coming quarters compared to the third quarter?

[Ming Yin:]

Okay. So I guess and it will be worthwhile for me to reiterate why third quarter results for IVIG or growth IVIG was in substantial amount, so then will be – could be some indicator for the fourth quarter. So let me step back trying to address the rationale why we do in Tier 1 cities for IVIG. And as I’ve talked a bit earlier the latest CPA, Chinese Pharmaceutical Association data, the albumin consumption rose to 16%, but the Tier 1 cities consumption we believe over one-third of consumption in Tier 1 cities, and even we think that Tier 1 cities first 10% of serving hospital used about 70% of albumin. So from that perspective, we believe that Tier 1 cities represent most of albumin usage. And also data just could suggest, approximately 75% of supply on the survey, the hospital in Tier 1 cities used imported albumin. So that demonstrates the dip in imported albumin supplies mainly in Tier 1 cities. So we believe on the other side there is significant IVIG supply in the Tier 1 cities, because manufacturer cannot supply the import IVIG. So that’s why we believe Tier 1 cities provide larger untapped market for IVIG demand based on the competition. So in 2013, we unfolded our Tier 1 city IVIG sales strategy by working with most of reputable distributor to identify target hospitals, most in Tier 1 cities like Beijing, Shanghai, Guangdong, because they don’t allow the direct sales, so we do engage third-party distributors. So in order for us to compete with existing brand in Tier 1 cities, so we need not only provide stable (indiscernible) supply on quality, but also we need to provide a more in-depth physician training alternatives, such as seminar, conference, and in-hospital trainings on various indications for IVIG treatment. Like our competitors, we provided more value-added service, which is the main reason, why Tier 1 city hospitals accept our brand as a replacement to other brands. So the – for this quarter, so basically in 2014, our strategy implemented (indiscernible) very successful base, so we do increase close to 140 new hospitals in the past two years in the Tier 1 cities. So on an aggregate base, we held over approximate 20 conference-seminars over those hospitals. So, as David mentioned, this quarter’s IVIG performance, basically we are trying to replace the existing brand’s presence in Tier 1 cities. So last year and the year around we do a reasonable large volume of managing inventory for this year, typically for the third quarter, and so that’s why another statistic is our Tier 1 cities IVIG supply during the quarter over the same year last year increased over to 100%. So basically this quarter we pretty much utilized most of the last quarter results inventory. So for the remaining quarter so our view is basically we don’t actually have that much inventory for IVIG first of all. Second of all, you might aware IVIG is a primary treatment for the hand, foot and mouth disease and which usually operates in the spring and summer time. So demand for IVIG for treatment of hand, foot and mouth disease could be soft in the winter. And just the quick statistic also explain why third quarter our IVIG related hand, foot and mouth disease increased as well, because during the first nine months there was a total of 2.3 million cases of hand, foot, and mouth disease, which represent like over 65% increase as compared to the total reported disease, current number in 2013. So which is – that’s another reason that contributed strong quarter for our IVIG sales. And so we do expect the IVIG in Tier 1 cities for fourth quarter will remain strong momentum, but again because our supply or inventory level will be – actually we could not actually keep up with the same demand growth, so for the fourth quarter we do believe IVIG sales contribution probably will decline as compared to the third quarter.

[Yi Chen:]

Thank you.

[Ming Yin:]

So hopefully, that answers your question?

[Yi Chen:]

Yes.

[Ming Yin:]

Yes.

[Yi Chen:]

Yes thank you. Just a follow-up. So what other expectations should we have from your Tier 1 city marketing strategy besides IVIG?

[Ming Yin:]

I think because – the reason why we do IVIG is, because as you compare with global companies sales revenue contributor, IVIG is always largest single product, contributed more than 40% of the revenue, which albumin is means like below 20%. But in China, IVIG market is still really immature, which we believe has a large room to grow, because in China right now as we understand the primary use to treat as actual disease help with infections, but in the western countries IVIG is primarily used for the chronical treatment, and we do believe by dipping our Tier cities penetration will actually increase the demand for the IVIG potential, which we believe in future will make a lot of sense for us for future growth. But on the other hand, because our Tier 1 cities penetration strategy will actually help us launching the new product of Factor VIII PCC, because we utilized the established channel or distributors, where we’ll actually capitalize the brand names strategic value, so basically we tell them this is a brand as Taibang and which will easily help us to have our new products to get in to those existing channels. So I think basically our review is IVIG and new products for the initial stage.

[Yi Chen:]

Okay. Thank you.

[Ming Yin:]

You’re welcome.

[Operator:]

Thank you. We have time for just one more question. That question is from Bin Li with Morgan Stanley. Please go ahead.

[Bin Li:]

Thanks for taking my follow-up questions. So my question is on the margins – on the gross margins, so this quarter the margin is stable, but when we look at the mix of the gross profit, it has changed a lot vis-à-vis last quarter. How should we understand why the gross margin is stable, but your revenue mix is somewhat different? And I guess the other way to ask this question is, what is your gross margin for the top three products from you and how should we forecast the gross margin going forward given that mix is bound to change because of IVIG, because of new product launch et cetera?

[Ming Yin:]

Okay, that question, may be I’ll try to answer, so basically – the product mix change, so basically is our constant strategy trying to increase margin, which counter the donor fee increase, because basically we need to increase the donor fee, which is industry practice to deliver the plasma collection growth. And also to counter growth of donor fees, so basically we need actually constantly to find high margin products to counter the effect of margin erosion cost by the donor fee increase. So this year, you can see our release immunoglobulin and Factor VIII, and placenta polypeptide concentration change, because especially placenta polypeptide products, the percentage from 5% to 11%. And also just to give you a quick update on rabies immunoglobulin, so gratefully – for rabies, so basically our market share this year increased from last year 10% to 17% in China, so we are the second largest in China. So because last year we do anticipate big this year, there is – the market could be short supply of rabies immunoglobulin, that’s why last year when we do middle of the year planning, so we basically do start to vaccinate the donor to get a specific rabies immunoglobulin – rabies plasma. So that’s why this year we do actually have large rabies supply. And so going forward, so we are going to consider to further refine our product mix by basically the products we need offering the product mix in according to the supply and demand situation, because this year – because we do believe there are some numerous manufacturing starting to produce albumin – rabies immunoglobulin, so next year we thought we are going to change to different products, unfortunately we cannot disclose which product we are going to switch to, because for the competitive reason, we don’t want our competitor know exactly what we are planning to produce and that’s just for the – so our goal is to maintain the gross margin and as we have at least for 2014 like 6% to 8%. And for what you mentioned specific product margin, I think for the same reason, none of our competitors disclosed that information. I think the reason why we don’t disclose is because each manufacturer do actually have a different cost allocation methodology. So by looking at or examining these single product gross margin could be a misleading, because the reason why is different, for example our Guizhou facility which we actually remodeled facility, so basically we have a large production depreciation, will go to (indiscernible) production cost, which can effect each product’s margin by another year compared with last year, because it was under old facilities. So basically what I’m trying to say is if you look at overall gross margin probably more meaningful, because the individual gross margin could be actually artificially influenced by the cost allocation percentage. For example, if we allocate 100% plasma cost to human albumin, so which could actually put albumin gross margin under 40%-30%, so IVIG margin could be 100%, so which doesn’t reflect the true picture, right. So we constantly change the cost allocation in according to our production plant. So hopefully that answers your question Bin?

[Bin Li:]

Yes. Yes. Thanks. If I could just squeeze in one more question, I’m sorry. You have raised your profit guidance – non-cap profit guidance by about US$9 million, how much is that contributed to the fact that you bought back 20% stake of your Guizhou division?

[Ming Yin:]

Sorry, Bin, can you actually repeat your question.

[Bin Li:]

Well, you purchased 20% stake, minority interest for your Guizhou division, right? And that’s earnings accretion – or that’s earnings accretive to your bottom line. And – but I’m just trying to understand, you raised your profit guidance by $9 million versus previous guidance, right? And of that $9 million, how much is coming from the fact that accretion from acquisition of the minority interest?

[Ming Yin:]

Yes, I think it’s a good question, because we only have – we closed the transaction in September, right? So basically this impact for the full year guidance will be around four months September and the last quarter, right. So, I think just quick the estimate will be one quarter of that or like a one quarter like $2 million or something could be result of earnings accretion, but that could be subject to change, but our initial assessments (indiscernible).

[Bin Li:]

Sorry, you said the $2 million right, $2 million for the four months?

[Ming Yin:]

For the year, yes this year, we only…

[Bin Li:]

$2 million for the year, okay. For the year, okay. Got it, okay.

[Ming Yin:]

Yes, but this year full year four months impact, yes.

[Bin Li:]

Thank you very much.

[Operator:]

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

[David Gao:]

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