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Executives

Stephanie Carrington – The Ruth Group

Weidong Yin – Chief Executive Officer

Helen Yang – Investor Relations Manager

Danny Chung – Chief Financial Officer

Analysts

Chris Lui – Morgan Stanley

John Gregory – SJ Strategic Investments

Yi Chen – Aegis Capital

Sinovac Biotech Ltd. (SVA) Q3 2012 Earnings Call November 15, 2012 8:00 AM ET

Operator

Greetings, and welcome to the Sinovac Biotech Ltd. Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions)

It is now my pleasure to introduce your host, Stephanie Carrington, of The Ruth Group. Thank you Ms. Carrington, you may begin.

Stephanie Carrington

Thank you operator. Good-day everyone. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words or phrases such as will, expects, anticipates, future, intends, plans, believes, estimates and similar statements.

These statements that are not historical facts, including statements about Sinovac's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Sinovac does not undertake any obligation to update any forward-looking statement, except as required under applicable laws.

On the call today from management we have Dr. Weidong Yin, CEO; Mr. Danny Chung, Sinovac’s Chief Financial Officer; Ms. Helen Yang, Investor Relations Manager; and Ms. Chris Lee, Investor Relations.

I will now turn the line over to Helen Yang. Go ahead Helen.

Helen Yang

Thank you Stephanie and hello everyone. Thank you for joining us on this conference call. On behalf of our CEO, Mr. Yin, I will provide an update on the business, and Mr. Danny Chung, our CFO, will provide a financial review afterwards.

Let me start by providing with you an update across the all the commercial [lines] of our business. We are pleased to see our continuous solid growth in the third quarter of 2012 for our hepatitis vaccine in the private pay market, which increased 31.2% compared with the same period last year. The withdrawal of the key competitive hepatitis vaccine, due to the new [pharma policy] adopted in China has provided us more opportunities to expand our presence in the private pay market.

And in the last quarter, we [reached] market awareness of Healive with celebration of the tenth anniversary of Healive, which benefited the sales of Healive in the private pay market. And as the only product in the Chinese market, our Healive sales in the private market keep growing in the third quarter, with 6.6% year-over-year. However, our total sales in the third quarter went down from the prior year, mainly due to a lower public market sales of Healive.

In the third quarter of 2011, we recorded a sales revenue from the Jiangsu province governmental tender. Although we recently obtained several public tender awards, including the tenders from Gansu Province, City of Beijing and Shanghai that we announced earlier, and Jiangsu, a newly awarded tender. Revenues will be recorded upon future delivery of the vaccines.

We expect the sales of Healive in the public market to pick up in the coming quarter as we continue to executing the plan to improve our capabilities and expand our presence in the public market. And also in the third quarter of 2012, our Anflu sales decreased by 16% compared to last year. The reason is that the production of seasonal flu vaccines commenced later this year versus the recent historical trends in the previous year across the seasonal flu industry, given that flu manufacturers received a reference tender later than previous years.

These delayed Sinovac's manufacturing and sales of the flu vaccines in this season. We also want to highlight that Sinovac was awarded a Government tender to supply seasonal flu vaccines to the People’s Republic of Mongolia in September as well. Turning to our development pipeline, we are committed to advancing our vaccine candidates, which are key milestones by which to measure the company's future growth.

As you know, our EV71 vaccine Phase III trial is progressing on schedule. The hand, foot and mouth disease HFMD surveillance case surveillance is ongoing, and documentation collection, data input, data review, and quality control on the database are well measured underway, and progressing on schedule.

Currently, we remain in close communication with the relevant authorities and experts on the expected schedule for trial conclusion and data unblinding, and we will share that information when appropriate. In parallel, the construction of the dedicated EV71 vaccine production plant has been completed, and the internal validation of production process is under way, which are moving forward simultaneously to the EV71 clinical trial.

The GMP certification application for this production plant will be submitted in line with our progress made with the Phase III trial. Our ultimate goal is to launch the vaccine shortly after obtaining the product license in China without any delay. We are also pleased that we have received GMP certification from the China State Food and Drug Administration for the company’s dedicated mumps vaccine production plant at Sinovac Dalian facility.

We recently commenced the commercial production for our mumps vaccine and aim to launch the product to Chinese market in the coming months. On the corporate side, we want to highlight that our 2012 annual general meeting of shareholders was held on August 22, 2012. During the meeting, four proposals including the 2012 share incentive plan were approved. The fifth proposal, to amend the bylaws did not receive the requisite vote.

Now I would like to turn over the call to Danny to review our financial results. Danny.

Danny Chung

Thank you, Helen. Good morning everyone. It is a good opportunity to try to review the financial statement and highlights with you. Our hepatitis vaccines sales in private pay market rose 31.2% in the quarter. Total sales decreased 7% to $14.3 million compared to $15.4 million in the same quarter of 2011.

The decrease in total third quarter 2012 sales were primarily due to decreased Healive sales to the public market and reduced Anflu sales that started later this year. This was partially offset by the increase of both Healive and Bilive sales in the private pay market. Overall, the company ended the quarter with a net total sales decrease of $1.1 million, or 7% decrease compared to the same quarter of last year.

Core vaccines sales for the nine months period ended September end increased 6% to $29.6 million, compared to $28 million in the same period of 2011. Despite a 29% increase in Bilive sales, total sales decreased 17% to $29.6 million, compared to $35.7 million in the same period of last year. The decrease was mainly affected by non-core government stockpiling of the pandemic flu H5N1 vaccine sales of $7.7 million in the 2011 period, as there were no government stockpiling sales in the current fiscal year to date till the end of September. Please refer to note 1 in our release for the sales analysis for the nine months period ended September 30, 2012.

Gross margin in the third quarter of 2012 was 52.6%, compared to 56.8% in the same period of last year. The lower quarterly gross margin was mainly due to the increased provision for expired H1N1 inventory costs and overhead allocated to cost of goods sold arising from seasonal excess capacity. After depreciation of land use rights, amortization of licenses and permits, the gross margin was 52.4% and 56.5% for the third quarter of 2012 and 2011, respectively.

Selling, general and administrative expenses as a percentage of third quarter 2012 sales were 54.9%, compared to 49.8% for the same quarter of the prior year. The increase in the year-over-year quarterly SG&A expenses was mainly due to the ongoing preparation costs for the GMP upgrade and the Changping site validation.

Research and development expenses for the third quarter were $3.8 million, a $1.4 million increase over the same period in 2011, mainly due to the ongoing EV71 clinical trial development.

The increase in depreciation of property, plant and equipment and amortization of licenses and permits for the third quarter of 2012 was mainly due to the assets at Changping site that were in use in the quarter.

As of September 30, 2012, cash and cash equivalents totaled $82.0 million, compared to $104.3 million as of December last year. The company utilized $1.1 million and $6.5 million of its cash resources in the third quarter and nine months period, respectively, to contribute to its ongoing clinical trial for its proprietary EV71 vaccine. The company intends to provide the trial with approximately an additional $3.4 million during the remaining quarter of the year and $1.5 million in 2013.

During the quarter and the first nine months period, $3.7 million and $8.7 million, respectively, were spent for the ongoing capital needs of the Changping site development, which were in part covered by the credit line arrangements already in place. Capital expenditure payments to complete the Changping site, which are in part covered by the credit line arrangements, are estimated up to $7.0 million in the remaining quarter of 2012 and $8.7 million in 2013. The cash position and credit line facilities with local commercial banks provide the company with the resources to commercialize the EV71 vaccine being developed for HFMD diseases. The company is in the position to drive the future growth of the businesses with a combination of commercialized vaccines and vaccine candidates.

The above concludes management prepared remarks. Operator, we will now take questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Chris Lui of Morgan Stanley. Please proceed with your question.

Chris Lui – Morgan Stanley

Hi, this is Chris on behalf of [Fin]. Can you tell us about your selling cost as a percentage of sales, we see that lower compared to previous quarters, can you give us an idea if that will happen the same for fourth quarter and onwards? Thank you.

Danny Chung

Well, I think the selling cost, we have a small reduction in quarter three, but as we're going to pick up the sales in quarter four, we are going to see the expenses will go back to a normalized level.

Chris Lui – Morgan Stanley

What would the normalized level be?

Danny Chung

That will be in the same line in the last year I would say, last year, quarter four.

Chris Lui – Morgan Stanley

Okay, thank you.

Operator

(Operator instructions) Our next question comes from the line of John Gregory of SJ Strategic Investments. Please proceed with your question.

John Gregory – SJ Strategic Investments

Thank you. Assuming that the EV71 vaccine is approved next year, does the company have any estimates on how much they think it will add to the overall revenues for the company? Could it actually be more than -- and increase the revenues by more than double?

[Foreign Language]

Helen Yang

We would expect the commercialization of EV71 will help the company to drive up the growth of our top line, but whether it will be doubled, or the scale of the increase actually is not -- we currently didn’t make it to the public at the moment. But we still see the market potential of EV71, if we are only talking about in China; we are targeting about 18 million children between 6 months to 5 years old. So we would expect that these will help the company to drive up our growth.

John Gregory – SJ Strategic Investments

Okay.

Operator

Thank you. Our next question comes from the line of Yi Chen of Aegis Capital. Please proceed with your question.

Yi Chen – Aegis Capital

Hi, thank you for taking my question. First of all, when do you expect to report the Phase III data from EV71 trial?

[Foreign Language]

Helen Yang

Because based on the protocol of the Phase III trial, we would expect to end the trial in January next year, 2013, and after that we need to work on the data, analyze it, about the data collected from the trial. So, we would expect to announce the results in the first half next year.

Yi Chen – Aegis Capital

Thank you. My second question is do you provide any guidance in terms of revenue for fiscal year 2012, and total net income for fiscal year 2012?

Danny Chung

Currently, we do not provide any guidance on the sales figures for the total fiscal year.

Yi Chen – Aegis Capital

All right, thank you. Last question, do you -- for the cost of revenue, do you expect the total fiscal year 2012 cost of sales to be roughly at the same level, in terms of percentage of sales, compared to 2011?

Danny Chung

First of all, you know, last year we too had some government stockpile sales in last year, 2011. So in that case that is not going to happen just like last year. So in that case there will be some deviation arising from this act.

Yi Chen – Aegis Capital

Right, but I'm talking about cost of revenue. Will that be at the same level?

Danny Chung

Well, that will be the -- because of the order, not going to be like last year. So in that case, the cost to sales level will be different, compared to last year.

Yi Chen – Aegis Capital

Okay, thank you.

Operator

(Operator instructions) We do have an additional question from the line of John Gregory of SJ Strategic Investments. Please proceed with your question.

John Gregory – SJ Strategic Investments

Yes, one last question. The EV71 vaccine, is it the company's plan, after approval, to market the product throughout Asia? HFMD obviously is a serious situation throughout Asia, so is it targeting just China, or is it also going to be marketed in places like Cambodia, Vietnam, and places like that?

[Foreign Language]

Helen Yang

(Inaudible), actually, it is a very good question. We have also been aware about the reported cases in an country like Vietnam and Cambodia. And in order to be able to participate into the global sales, the design of our [studies] is in line with the international center. And also our company has contacted with different regulatory organizations in different countries that the regulatory approval for other countries can only be studied after the vaccine being approved in China.

So, we are aiming to commercialize the vaccine in China first, and we may consider about other opportunities outside of China.

John Gregory – SJ Strategic Investments

Okay, thank you.

Helen Yang

Sure.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Helen Yang

We would like to take this opportunity to thank you for our shareholders and potential investors who are caring about Sinovac, and we thank you for your support always and our call today. Thank you very much.

Danny Chung

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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