China Biologic Products Holdings Inc
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Hello and welcome to the China Biologic Products Inc. Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. Now I'd like to turn the conference over to Bill Zima. Mr. Zima, please go ahead

[Bill Zima:]

Thank you, Operator. Hello, everyone and thank you for joining us on today’s call. China Biologic announced its quarterly and full-year financial results on March 4, after the market closed. An earnings release is now available on the company’s website. Today you will hear from China Biologic’s Chairman and CEO, Mr. David Gao, who will start off the call with a review of recent company developments, strategies, and basic operating results, followed by the company’s Senior Vice President, Mr. Ming Yin, who will address financial results in more detail. Chief Financial Officer, Mr. Ming Yang is also on the call and will be available during the Q&A session that follows 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 the Company’s 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 of the GAAP measure, and that 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 Biologic Products. David, please go ahead.

[David Gao:]

Thank you, Bill. Hello, everyone and welcome to China Biologic’s fourth quarter and fiscal year 2014 conference call. 2014 was our year of opportunity and strong growth for our company. We achieved a number of significant operational and capital market developments. We completed 2014 record total sales of US$243.3 million, representing year-over-year growth of 19.6% in line with our risk guidance from last quarter. Non-GAAP adjusted net income attributable to company was US$75.6 million including the impact of our US$3.6 million bad debt provision. This represents an annual increase of 28.1% exceeding the high-end of our prior estimate. Our healthy financial growth was supported by strong market demand, stable product pricing, increase the production capacity of the renewal of GMP certification at our Guizhou facility, stringent cost control measures, the optimization of our product portfolio mix, and the successful implementation of our sales strategy in Tier-1 cities. During the fourth quarter of 2014, we received government approval to build two new plasma collection centers in Hebei Province, which I expect to increase our raw material supply and total collection capacity by approximately 10% to 15% after the initial ramp-up period. For the full-year, we experienced a double-digit increase in our plasma collection module for the third consecutive year, primarily through organic growth at our existing centers. We believe we have adequate raw material supply to support our capacity expansion efforts in the coming year. On the production front, in the fourth quarter of 2014, we received GMP certification at our Guizhou Taibang facility, allowing us to resume full scale commercial production in late March for all of our approved plasma products, which was one quarter earlier than our original estimation. In addition, we received approval for the commercial manufacturing of human PCC at our Shandong Taibang facility in the third quarter, and obtained GMP certification for our new coagulation factor facility in the fourth quarter. This accomplishments allow us to increase our overall protection capacity to meet the growing demand in the Chinese market. During 2014, human albumin and IVIG products remained the company's largest two sales contributors accounting for 39.3% and 40.4% of total sales respectively. The average price for both products remained relatively stable, as a result of the combined efforts of the higher government-imposed retail price ceiling, reduced value added tax rate, and discounts given to distributors operating in Tier-1 cities, and new marketing in 2014. We are very particularly proud of the successful implementation of our IVIG sales strategy in selected Tier-1 cities. On a combined basis, we have successfully penetrated into 180 large hospitals in Beijing, Shanghai, and Guangdong, which resulted in approximately 260% growth in Tier-1 markets as compared to 2013. We believe the market potential for IVIG remains substantial, and we anticipate the growth momentum for IVIG to continue in 2015. Consequently, we intend to further our penetration into other AAA hospitals with Tier-1 cities. Our placenta polypeptide products contributed US$24 million for the full-year, accounting for 9.9% of total sales in 2014 as compared to 6% in 2013, due to higher volume from the extent of the production capacity in Guizhou Taibang. The implementation of our in-house sales strategy for placenta polypeptide helped improve our operational efficiency by reducing our per unit selling expenses. On non-operational levels, we continue to seek improve our shareholders’ structure and create shareholder value. In early 2014, we repurchased an aggregate 2.5 million shares of common stock for a total consideration of US$70 million. We also completed a follow-on offering in June and reached approximately US$33.2 million in proceeds. In September, we acquired additional 19.8% equity space in Guizhou Taibang, which resulted in the earning accretion as well as super majority ownership, which significantly enhanced the control of Guizhou Taibang’s long-term strategy and development. Looking ahead, with the strength of our product portfolio and the planned growth initiatives, we are confident that 2015 will be another productive year for China Biologics. We intend to further capitalize on the growing demand for our plasma-based and the polypeptide products, and aim to achieve double-digit growth in revenue and profit over 2014. We expect to enhance the production capacity at Guizhou Taibang to help drive our 2015 financial results. We also intend to strengthen our market leadership by further expanding our sales opportunities for existing products, carry on our R&D efforts to improve production yields in the plasma utilization efficiency, and to launch new products to well service the growing market in China. At this point, I will now turn the call over to Ming Yin, our Vice President, to review the full-year financial results in greater detail. Ming, please go ahead.

[Ming Yin:]

Thank you, David, and hello everyone. Before discussing our financial performance for the full-year of 2014, I would like to address a few P&L items for the fourth quarter. Total sales increased by 36.2% or 36.8% excluding the impact of the foreign currency exchange rate changes to US$58 million in the fourth quarter of 2014. Income from operations increased by 57.6% to US$19.7 million. Net income attributable to company increased by 46.6% to US$12.9 million, while non-GAAP adjusted net income attributable to the company was US$14.7million, representing a 53.1% increase from the same period in 2013. Now, let’s move on to the full-year 2014. Total sales increased 19.6% to US$203.3 million. During 2014, human albumin products and IVIG products remain the largest two sales contributors. As percentage of total sales, revenue from human albumin product and IVIG accounted for 39.3% and 40.4% respectively. For the full-year, revenue from placenta polypeptide products accounted for 9.9% of total sales. Gross profit increased by 18.3% reaching US$163.2 million. Gross margin remained relatively stable at 67.1% and 67.8% in 2014 and 2013 respectively. For the full-year of 2014, selling expenses increased slightly by 0.9% to US$10.7 million or 4.4% of total sales down from 5.2% in 2013. The decrease in percentage was primary due to the decrease per unit selling expenses of placenta polypeptide during the year. G&A expenses decreased by 11.1% to US$32.1 million in 2014, mainly due to the decrease in legal expenses and amortization expenses of intangible assets, in connection with the company's acquisition of a major stake in Guizhou Taibang in 2008. R&D expenses were US$2.2 million in 2014. During 2014, the company received one-off government grants totaling US$2.1 million. Excluding this impact, research and development expenses increased by $2.1 million in 2014 from 2013. The increase was primarily due to the expenditure paid for certain clinical trial programs and the engagement of external experts for certain pipeline products. As a percentage of total sales, R&D expenses stood at 1.7% compared to 2.1% in 2013. Operating income was US$111.2 million representing an increase of 28% over the past year. Operating margin increased to 45.7% from 42.7%. Net income attributable to company in 2014 was $70.9 million resulting in net margin of 29.1%. Fully diluted net income per share was $2.71. Non-GAAP adjusted net income attributable to company was $75.6 million or $2.89 per diluted share. Non-GAAP adjusted net income diluted earnings per share excluded US$4.6 million of non-cash or share-based compensation expenses. Now, I would like to turn to address select balance sheet and cash flow items. We ended 2014 with approximately US$80.8 million in cash and cash equivalents. We also recorded US$103.9 million in restricted cash deposits, which is held as collateral against our credit facility, which is used primarily for share repurchase and acquisition of additional equity stake in Guizhou Taibang. The increase in accounts receivable was US$2.2 million in line with our sales expansion efforts in 2014. Accounts receivable total days in 2014 remained 26 days as 2013. Inventories for 2014 and 2013 were $101.3 million and $88.6 million respectively. The increase in inventory was mainly due to the increase in raw materials from the continued supply of plasma by plasma station of Guizhou Taibang during its production suspension for GMP renewal. For 2014, net cash provided by operating activities was $93.5 million. Net cash used in investing activities was $13.4 million primarily due the acquisition of property, plant and equipment at both Shandong and Guizhou Taibang. Net cash used in financing activities was $142.8 million mainly consisted of payment approximately $87 million for acquisition of non-controlling interest in Guizhou Taibang, a dividend payment by our company’s subsidiaries to non-controlling interest shareholders, and a payment of approximately $70 million for share repurchase from individual stockholder, partially offset by proceeds of approximately $33 million from the follow-on offering of the company's common stock. Our working capital on December 31, 2014, was $117.2 million, and our current ratio was 2.3. Total shareholder's equity was $275.3 million as of December 31, 2014, compared with $304 million as of December 31, 2013. We believe that the company has sufficient cash on hand to capitalize on its gross initiatives for 2015 and can continue to produce positive cash inflow from operations. We also plan to maintain a healthy balance sheet going forward. Turning to our 2015 guidance. Excluding the potential adverse impact of foreign currency, the company expects total sales for 2015 to be in the range of $287 million to $292 million which represents growth of 18% to 20% over 2014. And the full-year non-GAAP adjusted net income for 2015 to be in the range of $95 million to $97 million which represents growth of 26% to 28% over 2014. Taking into account the potential impact of foreign currency exchange rate changes, the company's expects sales and non-GAAP adjusted net income to be negatively impacted by approximately 4% to 5%, by applying a current 12-month forward exchange projection of RMB6.41 to $1. This guidance assumes only organic growth and excludes acquisition, and necessarily assumes no significant reverse price or sales volume change during 2015. This guidance reflects the company's current and preliminary views, which are subject to change. That concludes our prepared remarks. We will now take questions.

[Operator:]

And the first question comes from Yolanda Hu with Morgan Stanley.

[Yolanda Hu:]

Thanks for taking my question. Congratulations on a strong quarter. I have a few questions. The first is on the pricing trend of your key products. For albumin, can you tell us your expectation on the imported volume in 2015? We notice that some multinational companies will increase their sales in China aggressively this year, so what's the potential impact on volume and ASP of your albumin?

[Ming Yang:]

Okay. So I think it is we better actually take a step back to review what happened in 2014 on the albumin side. And according to the batch approval data, overall albumin market supply increased 11% as compared to 2013. Domestic albumin production supply increased 1.5% almost flat over the same period in 2013. While imported albumin volume increased 19% accounting for 58% of the total market share. The market share for albumin in China reached approximately $950 million with a CAGR of 30% between 2009 to 2012. But in particular 2014 we estimate the total value of albumin reached RMB9.5 billion or equivalent to US$1.5 billion. This growth was mainly caused by increased volume imported by multinational companies, and in particular, imported albumin in 2014 outgrowing the local albumin supply. For your question on the 2015 albumin supply, we preliminary estimate domestically produced albumin volume to grow probably in the high-single-digits, high rate it might be difficult to estimate the close rate for the multinational levels, there is few reasons. The first reason is because we recently see the data for U.S. collection growth in 2014 is around single-digit, high-single-digit above 9%. And also we noticed there's about 70% of the U.S. collection centers reaching the maturity level suggesting that the U.S. plasma collection growths with certain decline in 2015. While also we see the multinational companies already made the initiatives to open new centers but it might take few years to ramp-up to the collection capacity. And the second reason and we saw the multinational companies the Annual Report and the recent filings, there is few company already start to ship portion of their albumin into other market instead of China, such as Europe and the Middle East. And the third reason is, the reason that we see Chinese CFDA just give an approval to Biotest the -- for the import license to ship to China by end of 2014. And also we see another multinational company, Baxter, start to ship high volume in end of 2014. So because the above mentioned reasons so we do not actually have a clear picture on the 2015 multinational the albumin growth rate. But I think it’s very interesting, I just to want to share a few thoughts on the demand side, because I think it seems a little bit of overwhelming if you only look at the supply side, because we recently just did a -- based on Chinese the batch approval data on the per capita base based on 2014 number. So Chinese per capita consumption for albumin is 0.21 gram per capita as compared to the developed country like U.S. 0.46 gram per capita. So we believe from this reason, it still have lots of China on the albumin side to grow potentially, if U.S. level actually could suggest, the Chinese could actually commentate like a double, the volume, our current volume. And also just one, share some interest point is, why China has such high albumin demand because number one China have higher instance of liver disease is more than 200 million Chinese infected with or carried with Hepatitis B. So basically albumin was used as the only effective the medicine to replace albumin levels in people with albuminia is liver failure. And also it's interesting to mention because Chinese traditional medicine philosophy treat blood component including the albumin as a nutritional source of energy for variety of elements. So from this perspective it's very hard to predict the Chinese demand for albumin. And but for 2015, we are in our model, and we actually project a very similar prices of what we had in 2014, well definitely we increase, we actually given consideration for the intensified competition resulting from high volume from multinationals. So if albumin particularly we actually project a little bit price cut on our model. So hopefully answer your question, Yolanda.

[Yolanda Hu:]

Thank you. Well, because David has been talking about the government's intention to remove the price control, and today's government reports primarily also mentioned in it. So if this work should be announced officially, let's say within the next few months, so do you expect your ASP to increase?

[Ming Yang:]

Well so like just you shared we also learned from certain news all is that and actually, my release, price and controls. And -- but that has not been our official release. So we at the moment, we don’t know what the government will implement, if they actually lift the price control. So we don’t expect the price of plasma products to rise in the near-term that's our preliminary view.

[Yolanda Hu:]

Okay. Yes, okay. So on IVIG, I'm trying to understand. So what's the current proportion of sales through distributors as of total? And also, to which level do you expect the ratio to increase in 2015? Do you think you are like adding more promotions in Tier-1 cities to promote the use of IVIG? And things -- I notice that the robust sales growth of IVIG in 2014 was partially driven by the reserved inventories from 2013. So is the current inventory level back to normal already?

[Ming Yang:]

That's a good question. Actually you’re right. So basically 2014 we do benefit from the 2013 reserve. So for 2015 we will continue to benefit from the opportunities in Tier-1 cities. However our growth rate for IVIG for 2015 probably will be less than the 2014 level, because 2014 we have 27% volume growth and because we have a high inventory. And but we do believe our IVIG proportion as of sales in 2015 will be higher than albumin and which translates high growth, the albumin growth. And your question in 2014 Tier-1 cities alone represents close one quarter of the IVIG, our IVIG sales, so which equivalent to see we have about one quarter of IVIG utilized distributors. Hope it answers your question.

[Yolanda Hu:]

So for -- in that quarter, what's the proportion from distribution income?

[Ming Yang:]

Did you mean the second quarter? You mean the last quarter.

[Yolanda Hu:]

Last quarter, yes.

[Ming Yang:]

Yes, the last quarter actually, we do actually have above 70% IVIG growth compared with same quarter in 2013. So it’s the growth the cells contribution its actually less than 40% because in last quarter of 2014 we have a higher volume of albumin because I don't know whether you remember in the prior disclosure we mentioned in -- third quarter 2014 we do actually have certain albumin delay approved by the government batch approval. So in the 2014 last quarter we catch-up certain the albumin delays.

[Yolanda Hu:]

Okay. So maybe I didn't make it clear. I'm just trying to understand the sales contribution from Tier-1 cities where you leverage the distributors to sell to hospitals. Because from my understanding, ASP from you sell to distributor actually is lower than your direct sales.

[Ming Yang:]

Yes, so I think that's also the very good question because even right now you do notice we probably have certain price discount given to distributors. But the reason why we want to go Tier-1 cities is because we believe the IVIG market, in particular, in China, still are relatively immature, early stage. And also the reason why we want to go Tier-1 cities because we believe the Tier-1 cities represents large growth potential compared with like Tier-2 or Tier-3 cities. That’s why we want to invest at the moment even for certain level of discount to go direct, to go to Tier-1 cities, because in the future when our collection volume increase keep increase and we’re going to have a large production on the IVIG. And so we believe the Tier-1 cities is actually is a place we should actually focus because according to the recent the Chinese Pharmaceutical Association Data the Tier-1 cities alone represent close to 50% -- the China the IVIG market. So I hope that it makes sense to you.

[Yolanda Hu:]

Yes. Thank you. Sorry. My last question is on the gross margin, because the gross margin declined a lot due to the rising donation fees. But by how much percent do expect these costs to increase every year on average? And how much do you think this could be offset by the new product launch on the gross margin level for this year? And also maybe some color on 2016.

[Ming Yang:]

Yes, so I mean I believe you mentioned the gross margin decline in the first quarter. So basically we already clearly disclosed that the Q4 gross margin erosion was primarily due to number one, the increased plasma collection cost. And number two, there is -- there are certain higher than euro production cost resulting from certain recurring charges. So in the first quarter in particular, we was ramping up the new product PCT trial production. We do incur certain production inefficiencies which result in some non-recurring production charges. And in 2015, we believe the gross margin were actually -- will be higher than the fourth quarter of 2014, and but due to the increased collection cost, we do believe there is probably potentially 100 basis points to 200 basis points the negative impact to our 2015 gross margin. And your question for the collection fee increase is on the average the -- well what we calculate is the increased collection fee in 2015 particularly resulting about 7% on the consolidate base, because we -- our different station in different region have a different collection fees start with a scale. So overall, we have about a 7% increase resulting from the plasma cost. And because collection cost is about 80% of our cost so that’s why the 7% make a lot of impact. For 2015 and going forward, we want to actually take more stringent policy to ensure a moderate increase in plasma collection fee increase, which could be translating to a slower rate than the historically or what we had in the past couple of years. So we probably modeling 3% to 5% the fee increase on an annual base. Hopefully that answer your question Yolanda.

[Yolanda Hu:]

Yes. Thank you very much. That's very helpful.

[Operator:]

And the next question comes from Mila Lu with BOCOM.

[Mila Lu:]

Hi, everyone can you hear me. Hello?

[David Gao:]

Yes I can hear you.

[Mila Lu:]

Actually, all my questions have been asked by Yolanda, so I don't have any further questions. Thanks.

[Operator:]

Thank you. Then the next question comes from Christie Ju with Jefferies.

[Christie Ju:]

Hi, David, congratulations for a very strong result. I just have a couple of follow-up questions. I think Yolanda asked quite a few here. The first one is more kind of bigger picture we are seeing; the Chinese Government are making significant progress in healthcare, expand healthcare coverage, and healthcare reform; so the growth obviously in China with the aging population, the overall healthcare coverage expansion. What do you think will have the impact for your market in particular, either on a supply of plasma side, or in terms of demand going forward? The second question is more on the -- obviously, we see a lot of anti-corruption effort, corruption across China. Is there any changes for the sales and marketing industry, in your sector in particular, or have you seen any changes in terms of patent for the product? And the last question is regarding the competitor we are seeing, including Shanghai RASS, are very active in M&A and in consolidation, and what kind of outlook you would foresee going forward. This is still a very highly lucrative market in terms of competition for M&A.

[Ming Yang:]

Okay. So let me try and answer your question one-by-one. The first question I believe it’s a more like a macro-related. It is truly the Chinese Government trying to increase the healthcare, the expenditure, trying to get more people covered. And we recently hear the government might actually do, even trying to cover some orphan disease, we believe if that's the case for instance like our product factor VIII, which already being positively impact because the government -- the public decision to increase the coverage, because before 2013, if I don't remember wrong, this product in most of reach because number one, even this is category A under National Reimbursement Catalog. This is, should be like an equivalent to EDL because of a shortage issue, most of the patient suffer from Hemophilia, who actually have no access to the products. And because the government want to get the people covered because well number one, the people who currently suffer from Hemophilia because this lifelong treatment and requires significant the expenditure for like consuming for the factor VIII on the lifelong base. So without the government assistance or without any reimbursement or the healthcare the system there is no way for the average the Chinese people to afford and because the government, the increase, trying to increase the coverage starting from Shandong Province and right now, we do see for the inpatient -- the patient, in hospital -- for the patient who actually being diagnosed to suffer from factor VIII in Shandong particularly can get approximately to their annual consumption to about 80% of what their annual consumption for factor VIII, so which is very encouraging sign for the Hemophilia market for the factor VIII market. And so just use that example so also or like IVIG is most of the category B product so meaning basically its most of the auto pocket for the most of indications. So in this case and because the -- our plasma products is very unique, in most of the indication is known replacement and also the even the government does not cover, but patient have to use it because it's a lifesaving drug. So we believe if the government trying to implement a more broader coverage, even for part and part product, we believe it will be very beneficial for the whole industry to grow because if that's the case we'll further spur the demand for plasma the plasma-derived proteins. So that's my answer for your question one. For the second question, you’re regarding – you’re asking for the -- the anti-corruption. So basically I don’t know whether you noticed that plasma industry is very like a niche industry under the healthcare. So basically if you look at our sales model or our like selling expenses percentage of the total sales is like under 5%. From that perspective you can see, so number one, we don’t actually have -- we’re not actually in the government radar screen for any of those, crack it down, right because compared with chemical drugs with 40% selling expense we’re not even on their radar screen. Number two, the industry itself is in the shortage position, so there is no reason for any like corruption for the hospital -- for to purchase our products. So from those two perspective we think we’re actually are very safe from that perspective. So we don’t actually feel any eminent risk for being cracked down by the government.

[Christie Ju:]

Okay understand.

[Ming Yang:]

Yes, so your first two questions, I’m sorry, can you remind me your third question?

[Christie Ju:]

Yes. It was regarding consolidation, Shanghai RASS, and industry outlook for the acquisition M&A opportunities?

[David Gao:]

I have -- you all actually have a very interesting question because basically, well definitely pursuing M&A is also our important growth strategy. But we believe we do actually have a large internal growth, which we could actually utilize in the new few years. So from that perspective we don’t want to comment on the other companies practice on M&A or the valuation. But for our perspective the valuation is not justifiable. So we think it’s too high, number one. Number two, definitely there's only a few company at the moment will be subject to defer their acquisition because the industry is very consolidated. So from our perspective we do believe -- we do actually have lots of untapped internal growth potential, we can actually utilize in future. And also but also didn’t get me wrong we do actually observe we don’t -- we also monitoring the market if there is a right target and a right valuation we definitely will consider.

[Operator:]

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

[Matthew Prior:]

Good evening guys. David, if I can just ask, given the strong growth that you're seeing in IG, and your comments about the demand side of the equation, I appreciate they're obviously a category B product, but can you talk about what the product is used for in the Tier-1 cities? And do you find that you are having to educate hospitals and physicians about the product or that the demand is already there; it's just a question of access?

[Ming Yang:]

So Matt, I think let me try to answer your questions. So basically what we believe at the Tier-1 cities, number one in China, Tier-1 cities represents the most advanced the hospitals right the AAA hospital with the best doctors. And so for most of those IG indications such as PID primary immune deficiency or CIDP or those newer related disease and the most of those patient who suffered those disease will be referred from Tier-2, Tier-3 cities hospital to Tier-1 cities to get treated. So first and so we believe in Tier-1 cities, number one, there is market for this product. And the reason why the other company doesn’t pursue this opportunity is because before 2012 one NDRC set a national IVIG price, same price for all cities, used to be the Tier-1 cities have lower price compared with Tier-2 and Tier-3 cities that's why nobody wants to go out to Tier-1 cities. After 2012, the one the NDRC set a similar price. So we first day observed that's a growth alternative that's why we act very quickly to form our team trying to penetrate in Tier-1 cities. And because what we’re trying to do is we’re trying to find the right indication for the right hospital and the right doctors, number one, that's our initial selection. We do actually have a quite a few selection criteria for which hospital we should go to and which basically -- we’re driven by indications. And also we -- what we do is when we do as marketing activities we do bring the -- like each indication we do actually do find the key opinion leaders, in this indication to try to do our seminar conference, trying to educate the doctors, when we target those hospitals. And we also, we want to make sure, we are the exclusive supplier, and we constantly bring the -- those experts in those indications trying to teach them how the western country use IVIG, and in which way to reuse, because believe or not even city like Beijing those like Tier-1, top hospitals some doctors do actually have a very, very limited understanding for IVIG's, the benefits, how to use it because in the past there's no supply that's why they -- they don’t know how to use it because if they learn how to use it there's no supplier that's their dilemma. So right now that's what we do we’re trying to target hospital, when we do the -- select the hospital we do the educations and we find as very, very encouraging because like David said, a year ago, the earlier -- we actually last year on a combined base we’re penetrating to 180 on the combined base hospitals, big hospitals in Beijing, Shanghai, and Guangdong. And in Guangdong alone we were -- all believe our market share is, are the largest brand in Guangdong even there is multiple brand selling in Guangdong. In Shanghai also we believe we have close to 30% market share alone. So in Beijing we just started so we believe it’s a very encouraging because like I said earlier it’s all those indications suitable for IVIG well it’s most likely to get treated in Tier-1 cities hospitals.

[Matthew Prior:]

That's excellent. Thank you. That's a great answer. That's what I was looking for. My second question and my last question is really just around the collection center licenses that you obtained in 2014. Given the experience that you had in obtaining those licenses in the Hebei Province, and given the government's desire to see more growth domestically in the industry, do you think if you were to pursue more licenses in the end of 2015 or 2016 that you'd be able to obtain them easier and bring those collection centers on line faster?

[Ming Yang:]

Yes, for Hebei Province, the two centers actually were actually actively doing the site selection at the moment and our go is trying to bring the two stations both online by end of this year, that's our goal. And for the new stations and the other province, because it’s still very the government -- the control on the new plasmas the approval is very stringent and actually different, by the different province and we do actually very active pursue the new alternatives, but because this is subject to the government approval so we cannot actually we hope to have a new station that's what if we can say yes.

[Operator:]

Thank you. And the next question comes from Errol Redman with Redman Capital.

[Errol Redman:]

Could you help us understand the effects of Guizhou on your income statement in the fourth quarter in terms of revenues and net income? Did it add about 10 to 12 percentage points to revenue and slightly more in terms of net income?

[Ming Yang:]

I'm sorry can you repeat your question?

[Errol Redman:]

I wanted to know approximately how much Guizhou added to the income statement in the fourth quarter in terms of revenues and net income.

[Ming Yang:]

I'm afraid I just don’t quite understand what you are trying to what you mean Guizhou?

[Errol Redman:]

The operations came on in the fourth quarter they were not adding to --

[Ming Yang:]

Okay, okay, okay. Yes, yes, yes. So actually it’s a very good question because well its basically our Guizhou facility has certain delay, because basically it’s launched the new plant in April. So it did not actually have a full-year production and you’re right and actually the basically the Guizhou facility do actually catch-up in the last quarter. So I think let me put this way, in the last quarter, so Guizhou contributed quite close to our top-line and also the bottom-line. But because of the scale of Guizhou operation it’s a smaller than Shandong. So basically it carries less weight. So hopefully that answer your question because we did not disclose separately in --

[Errol Redman:]

Within a broad range, would it be 5 percentage points to 10 percentage points?

[Ming Yang:]

Yes, its actually higher than 10 percentage points, the growth rate.

[Errol Redman:]

Okay. My second question relates to the allocation of your cash flow for future periods. What do you think are your major priorities at this time?

[David Gao:]

That's a very challenging question. As we said, yes, we have $88 million cash, free cash and also we do actually have quite a large size of restricted cash which is kind of, as a collateral for the loans, so which could be offset each other. And as we actually put in our 10-K I don’t know whether you have a opportunity to read, we’re actually trying to field our new facility in Shandong and because we believe in by 2018 and also because what we have actually keep the double-digit growth on the plasma collection, in order for us to meet the plasma collection growth and we -- our current capacity will be out of capacity but 2018 if we keep growing like this. So that’s why we are already planning to build our new factor VIII facility in the same city where our Shandong facility is located. And we hopefully do like seamless transition between our old facility and the new facility that’s our goal. So the new facility we’re trying to do 1 million to 1.2 million liters fractionation plant, which will be the largest as far as we knew the plant in China. And so that plant itself requires a significant amount of our cash investment in the period from 2015 to 2017 and so that will be our top priority for our operation or for our CapEx.

[Errol Redman:]

I understand that. Going forward, the Guizhou contribution to revenues and net income was sizeable, and that won't be like-to-like periods until the fourth quarter of 2015. So for the first three quarters of calendar 2015, you'll be benefiting from that add on. And in view of that, it makes your guidance unusually conservative. Many managements play the game of beat and raise in terms of offering guidance. It seems to me that you're doing the same thing at this time. I don't want you to answer that necessarily, but would I be right in getting the inference that your guidance is unusually conservative, given the fact that you'll be getting at least 10 percentage points of revenue growth from the new production facility?

[Ming Yin:]

Yes, your understanding is right but what I'm trying to comment is right on the -- our additional growth from Guizhou, but not necessarily your comments are right or trying to do the game. Let me explain to you what happened, Guizhou facility we launched in the May -- in the April 2014, but you probably you didn’t aware in Guizhou facility itself the Chinese Regulation, the Guizhou only have a two plasma collection stations right. So in other words they have very, very, the majority of our growth all the weight is in Shandong, even though Guizhou contributed more, but due to the government regulation it does not account for -- we cannot like procure external for plasma, we cannot ship the plasma to Guizhou. The Guizhou can only process their own collective plasma. So basically, what I mean and also -- we already are putting the guidance or we are the behind the guidance our collection volume is like, is mid-teen or around mid-teen percent of the growth. Right? And which translates, should in theory translate its equivalent, the growth rate in the top-line. So because we are very -- what we're trying to say -- that’s a business reality. We want to actually have the high growth on the top-line at the moment but unfortunately that's -- we're actually limited by the resource, by the --

[David Gao:]

Okay. Sorry, so Mr. Redman, it’s David. So actually just want to let you know that my philosophy is our company philosophy, so you can look at the over last two or three years of a track record obviously, you’re right we are trying to beat our estimations and guidance. And typically over last two years, we're trying to revise our guidance and to raise our guidance in the Q3. But I knew it, so my philosophy is our philosophy. I don’t want to scratch out and so we always want to kind of under promise and over deliver when hopefully this would appreciate by our investors. So that is my answer.

[Errol Redman:]

Perfect. Given your philosophy, would it not make sense -- and your comments about some of your competitors' stocks being overpriced, and given the fact that our stock sells at a substantial multiple in relation to most stocks, would it make a sense in your opinion to have another offering and warehouse capital at this time?

[David Gao:]

No, let me answer the number one, so we don’t feel that so far so our cash. So even though with the new facilities is sufficient. So we have a very strong cash flow. Basically if you look how to be a high growth company like us, it’s not very many companies have such a strong cash flow. So our cash flow for internal growth, we are going to be sufficient. So another thing is we always feel comfortable if our performance is ahead, our stock performance. So I would not comment on other companies. So if there is some companies that their stock performance is ahead of their business performance but again we are on our own business so that our own philosophy we are responsible for our investors, so we will do what they feel that is the right thing to do.

[Errol Redman:]

Your answers are very helpful. Thank you.

[Operator:]

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

[Isabel Buccellati:]

Yes, hi, I've got three questions. One is just feeding on to the cash and CapEx. Can you may be help us to quantify how much CapEx you need this year and basically how much the whole program, 2015 to 2017 will need so that we can get a sense for the cash drain? And also, following on to this, I remember historically you've always said that acquisitions in this space are expensive but you would see opportunities in may be buying out more minorities. Is that still an option, or do you think you have still cash to do that? And is there anything moving forward in that sense? And the second question is on IVIG. I remember that you said, basically, you can not only sell your own products, but there might be opportunities that you can source from others who don't have the license. Is this opportunity included in your guidance, or is that an upside?

[David Gao:]

No, sorry, so let me answer, here. It’s David, Isabel. And so no none of this opportunities are included in our guidance because any thing we don’t want to comment on this opportunities because that is anything in the forward-looking statements, we don’t want to do it. So what our budget, typically our guidance is what we have today, okay. I don’t want to speculate anything is still not uncertain, is still uncertain.

[Isabel Buccellati:]

Okay. And on the CapEx?

[Ming Yang:]

Yes, the CapEx because we're still actually in the evaluation study, feasibility study period for the new plant. Like I said, we’re trying to do 1 million to 1.2 million liters. So basically, we're actually trying to do like equipments like procurements or like bidding process. We just started the process. So our preliminary view the new plant is up, could actually be in the range of US$122 million to US$150 million, US$160 million for the whole project but that’s only the preliminary view. For 2015, because most of those products we, if we want, even want the plant by 2018, we still want to do, we still need to do, like we're trying to, yes, we want to do, its multiple years project but we still need to do the procurements for the equipment in 2015. That’s why this year -- it could be a capital intensive year but our preliminary view this year the CapEx could be up to US$100 million. So most of -- in other words most of the project could be spent in this year.

[Isabel Buccellati:]

Okay. So basically that will kind of limit opportunities to do something with the minorities, I guess, in the near-term?

[Ming Yang:]

No, not necessarily, because we actually have a very, very good credit facility in China. If there is a right opportunity arise, the funding, the acquisition never will be a problem for us because we have a large untapped, the bank, the loan facility if we need it.

[David Gao:]

Yes, for most, on the large not really a loan right now. We need to learn how to loan from the bank.

[Isabel Buccellati:]

And can I just ask you something on the polypeptides? Is I mean -- is that still a big market to be developed? You've seen nice growth, but is that trend expected to continue, or did you have a catch-up which will slow down now?

[David Gao:]

Let me tell you this, Isabel, so actually we have to manage the growth, let me tell you so you just can understand. The market seems like is much bigger, than what we can supply, so it’s still the same thing, the supply market. So but again, we want to very carefully manage the growth, so hopefully you understand.

[Isabel Buccellati:]

Yes.

[Ming Yang:]

Yes so there is a just I'm trying to get on top of David's comment just give the picture of what polypep products because last year we have almost like doubled the position from 2013, it's because we have a new capacity, we expand the capacity which was approved by the FDA by beginning of 2014 that’s why we have large production capacity. But what David mentioned we have a -- we need to mange because definitely, I don’t know whether you’re aware the placental, the raw material is also actually in the storage position. So in other words it's kind of like a plasma. So this year the growth weren’t like 2014 because we don’t actually have enough, we already have the new capacity but the raw material is a problem.

[Operator:]

Thank you. And the last question comes from [indiscernible] with DK Partners.

[Unidentified Analyst:]

Hi David, hi Ming. Thanks very much for taking the time. Just a couple of questions from me please. So firstly on IVIG. Can you just give us a little bit more color in terms of how we should think about the underlying market growth this year? In 2014, I think you mentioned that you had outbursts of hand, foot, and mouth disease. So how should we think about the underlying volume growth for this year?

[David Gao:]

Well before we talk about the -- the projection, I think it’s worthwhile to share with you the overall market growth for IVIG in 2014. So like I said earlier the albumin production in China, in order, according to batch proven data they only like 1.5%, they have in total volume in China, but IVIG on the other hand has more than 15%, close to 15% on national level growth. So that’s very encouraging, number one. And our growth I said earlier, our Tier-1 cities already actually creates the growth potential. But our growth will typically be limited by the plasma or the intermediate phase, like Phase 2 for the production of the IVIG. So 2014 we have about 27% volume growth because we have large volume reserve, in 2013. What we anticipate in 2014 when we're penetrating the GEO asset, we need a large quantity to switch the existing brands. So hopefully 2015, I can’t share the exact number but I already indicated earlier our IVIG growth will be higher than albumin and so it’s -- but the rate will be definitely lower than 2014 so that’s my answer.

[Unidentified Analyst:]

Okay. And just second question, in terms of the Hebei facilities, I believe that these facilities take few years to ramp up but how much of the costs from these facilities are coming in this year?

[David Gao:]

Well as we ramp up and build a new plant all those, the CapEx all the expenditure expended will be in the construction progress until we launch the plant. So basically those investments will not hit the P&L until when we launch the plant.

[Unidentified Analyst:]

Okay. And what's the update on the construction or the progress of these facilities?

[Ming Yang:]

We're -- I just said it earlier we're still in the feasibility study period. So right now, we just, commenced the enquiry to do the product enquiry -- I mean the equipment enquiry on all those major equipments so wanted to do tenders. So basically we're in that process and also for where we wanted acquire additional men use right, for build, the plant. So we're in the mid of that as well. So it will move very quickly.

[David Gao:]

But again so we plan actually our target is really to get the facility new facility up and running the full operational by 2018. Okay. So we want to get the actually to get certified and the companies by end of 2017. So that is I just gave you kind of a expected timeframe.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

[David Gao:]

Okay. I’m sorry so because probably some of you probably hear some disturbance here. It’s the fireworks. And today is a special day actually in China. It’s not to greet our Company, but it’s really a celebrate of the Chinese. They call it the Lantern Festival. Anyway, so that is a little bit disturbance, so anyway I’m sorry for that and but with that thank you for your participation and ongoing support for China Biologic. Have a good day.