3SBio Inc. Q3 2008 Earnings Call Transcript

3SBio Inc. (SSRX)

Q3 2008 Earnings Call

November 11, 2008 8:00 am ET

Executives

Jing Lou - Chief Executive Officer

David Chen - Chief Operating Officer

Yingfei Wei - Chief Scientific Officer

Kevin Teo - Director of Finance

Analysts

Hongbo Lu - Piper Jaffray

Katherine Lu - Oppenheimer

Kim Lee - Pacific Growth Equities

Jeb Besser - Manchester Management

Angiene Malcazie - Monarch Capital

Presentation

Operator

Welcome to the 3SBio Preliminary third quarter 2008 results conference call. Before I turn the call over to your host I would like to remind you that statements in this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based upon 3SBio management’s current expectations and actual results could differ materially. Among the factors that could cause 3SBio’s actual results to differ from what the company currently anticipates; may include competition from other domestic and foreign pharmaceutical companies; the excepted market growth for pharmaceutical products in China; market acceptance of 3SBio products; expected hospital or patient demand for our products; the completion of 3SBio’s on concurrent clinical trials and trends; receipts and timing of regulatory approvals for 3SBio’s new products and uses; 3SBio’s ability to expand its production, sales and distribution network and other aspects of these operations; its ability to affect and fully protect it’s intellectual property; changes in the healthcare industry in China including changes in the healthcare policies and regulations of the PRC Government and changes in the healthcare insurance sector in the PRC and fluctuations in general economic and business conditions in China.

For additional information on these and other factors that may affect the 3SBio’s financial results, please refer to the company’s filings with the Securities and Exchange Commission at www.sec.gov. 3SBio undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this conference call. Following management’s opening comments; you may have the opportunity to ask questions.

I would now like to turn the call over to Dr. Jing Lou. Sir, you may go ahead.

Jing Lou

Thank you operator and thanks everyone for joining us on our third quarter 2008 results conference call. Joining me today are David Chen, Chief Operating Officer; Dr. Yingfei Wei, our Chief Scientific Officer; Kevin Teo, Director of Finance and; Bo Tan, 3SBio’s newly engaged consultant.

We’ll proceed through our remarks; we will refer to our results presentation, which can be downloaded from our website at www.3sbio.com in the Investor Section under Financial Reports. Those few slides provide basic overview information on the company and at the ESA marketing China for any of our New York followers. Bio’s slides pertaining to our results begin on slide eight.

This quarter we further expanded our top line as we delivered another solid operational performance. Our core EPIAO and TPIAO products expanded their market leadership and increased the penetration within the oncology and nephrology market. They also made steady progress on our pipeline development plan and reached several key milestones, the important components of our future growth.

Let me begin with some highlights from the quarter. Our total net revenue growth was 21.6% year-over-year to $10 million underpinned by the continuing strong performance of EPIAO and TPIAO. Revenue for the first nine months of 2008 have grown 36.2%, $27 million over the same period 2007. Kevin will provide you the full review of our financial performance in just a few minutes.

Looking at the slide nine, EPIAO continued to serve as our primary revenue contributor and further expanded its provision as the number one EPO product in China. We continue to penetrate the oncology and nephrology markets. EPIAO revenues for the quarter were up 17.5% to $6.2 million and up more than 26% to $17 million year-to-date.

Let’s turn to slide 10 and 11; our EPIAO market share in terms of value and volume has consistently outperformed the market, a 42% market share in terms of value as per the latest available analyst data. Our accelerated growth in the EPIAO not only reflects the continued market support, our strong brand name and high quality product, but also a test to our strategy to focus on the oncology and nephrology markets.

Moving to slide 12, revenues for TPIAO increased to more than 39% in the third quarter to $2.9 million. We are pleased with the continued market acceptance of TPIAO and the strong growth presence we are seeing, as this product now accounts for approximately 29% of quarterly revenues compared to 23% in the third quarter 2007. Year-to-date TPIAO net revenues have increased significantly and we are up 63.0% to $7.5 million.

Looking forward we are confident with the continued growth prospects of TPIAO. In the Thrombocytopenia market segment given the significant unmet needs, our market development efforts and resources continue building the TPIAO brand and the ongoing market explicitly of this innovative class-one product in China.

Finally, we continue to see strong growth in our in-licensed Iron Sucrose Supplement, with revenues of $300,000, a 56.1% increase over the third quarter of 2007. We believe there is a strong market potential for this product and we are encouraged by its performance thus far. The full breakdown of our sales by product can be found on slide 13.

In terms of the market condition, despite the economic downturn, we believe the healthcare industry is more resilient than most and the demand for our products will continue to increase steadily in the coming quarters, a very unfortunate provision to continue to leverage the rapidly growing healthcare industry in China to fuel our future growth.

Thank you and David will now update you some of our key initiatives. David.

David Chen

Thank you, Dr. Lou. Last quarter, I updated you on our key strategic and operational objectives. I’m very pleased to report that this quarter will make record progress toward those objectives and remain on track with our growth plan.

In late September, we filed for SFDA approval of our 36000 IU dosage formulation of EPIAO. Treatment of anemia associated with the chemotherapy in cancer patients. Once proved, this high dose EPIAO is expected to be the only one of its kind in the marketplace in China. We believe that once-a-week dosing regiment will offer a distinctive competitive advantage in oncology market and be a catalyst for our future growth.

Just yesterday, we announced out we have also filed NuLeusin for approval with the SFDA. NuLeusin is our genetically modified IL-2 power to provide a new immunotherapy regiment for oncologist, to treat patients with late stage metastatic renal cell carcinoma. Our Phase III trial study demonstrated NuLesuin to be an effective treatment for this patient population with the improved safety and tolerability. On proven NuLesuin will help us further increase our presence in high growth oncology marketplace.

In addition we remain on track with our SFDA submission of TPIAO/ITP by the end of 2008, that’s the objective that we have set at the beginning of the year. I’m very proud of our operational progress this quarter and believe the submission of these products to the SFDA is not only a major milestone for 3SBio to ensure new product launches in the next few years, but also a testimony to our ability to execute on our growth strategy and plan. We look forward to updating you in the near future on other strategic and operational initiatives.

With that, I will now turn the call over to Kevin to review our financial performance in the third quarter of 2008. Kevin.

Kevin Teo

Thank you, David. Let now walk you through the overview of our financial highlights for the third quarter ended September 30, 2008. Summary of our results can be found on slide 18 to 21 of our presentation.

Total net revenues for the quarter reached $10 million, a 21.6% increase over the third quarter 2007, driven by a 17.5% year-over-year increase in revenues from EPIAO product. For the first nine months of 2008, total revenues increased 6.2% to $27 million. Gross profit increased 21.4% year-over-year to $9.2 million for the third quarter of 2008. Total operating expenses were $6.1 million for the quarter, up 21.4% year-over-year.

R&D expenses increased 10% to $0.6 million, while sales distribution and marketing expenses increased 13% to $4.3 million. G&A cost totaling $1.2 million increased by 74.5% year-over-year.

Despite the commitments in operating expenses, our operating income increased 21.4% from the third quarter of 2007 to $3.1 million. Operating margins for the third quarter 2008 was 30.4%. For first nine months 2008, operating margin was 27.3%. After recognition of a one-time impairment loss of approximately $2.8 million, net income was approximately $0.3 million and our net income for income per ADS was US$0.01.

As of September 30, 2008, our cash and cash equivalent was $99.5 million. For the first nine months of 2008, net cash provided by operating activities was approximately $6.4 million. Our balance sheet remains solid with strong cash position to support our future developments. That concludes our financial review of the third quarter.

With that, I would like to turn the call back to Dr. Lou.

Jing Lou

Thank you, Kevin. As discussed, we delivered another solid quarter of operational performance and are faced with robust growth prospects. We believe our market leadership, strong brand name recognition and advantageous cost profile position us well to capitalize on the rapidly growing oncology and nephrology markets.

As such, we remain confident in our ability to continue our track record of strong performance and reaffirming our full-year guidance in the range of $34 million to $35 million. Thank you for your time and we’re happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Hongbo Lu - Piper Jaffray.

Hongbo Lu – Piper Jaffray

I have a two quick questions; first of all, the growth margin improved 20 basis point, which is not much, but still very impressive given where you are already. So Lou, can you comment on the EPIAO pricing for the quarter and also what kind of growth margin should we look for the full-year, that’s one question.

Second question is for David; for the NuLeusin, what kind of market potential you are looking at for the product? Can you give some color in terms of the kind of sales for other products on the market that you are looking to replace? Thank you.

David Chen

Dr. Lou, why don’t you take the price and I will take the second question.

Jing Lou

Okay, the price as you know that are building in our expectation that every year we’ll be 5% down, but this year we don’t see the price going down, actually in certain areas we saw price going up. For example in Shanghai after beating, our price was raised above RMB 20 per dose.

David Chen

This is David here. Yes, the growth is driven by the volume increase; price is being very stable for this year. To your second question on NuLeusin, currently our effort and focus is certainly on getting the SFDA approval and certainly it were in processes really looking out of the forecast. If you look at the general market potential of NuLeusin roughly probably 14,000 renal cell cancer patients in China, in terms of incidents. Roughly 10% to 15% of these patients are in the stage III before late stage patients.

Currently available products in China, somewhere next from Bayer and [Sutin] from Pfizer, they are all available; however through our discussion with physicians with KOLs in the past month, all the physicians actually believe there’s a space, there’s a position of immunotherapy product like NuLeusin in the space in terms of treating those patients and certainly data shows that and so we are looking at that patient population in terms of our featured marketing effort.

Kevin Teo

And just adding to your margin question about the whole year I think it should be inline in our top line growth. We just gave out the full year guidance of total $34 million to $35 million. We certainly will see in the next year of some operating leverage.

Operator

Your next question comes from Katherine Lu - Oppenheimer.

Katherine Lu - Oppenheimer

Actually my questions are in three areas; first I think the results came in slightly different than we expected, but in a positive way. So, I just want to confirm with you that the one-time write-down was $2.8 million versus the prior announcement of $2.7 million which could translate roughly $0.13 to the EPS. So, another way to put it, your adjusted EPS would be $0.14 excluding this charge, is that correct?

Kevin Teo

Yes it is. It is due to the money translation rate and also a rounding of some $2.75 million.

Katherine Lu - Oppenheimer

And another thing as I saw a line item called other cost of roughly RMB1.1 million; what does that include?

Kevin Teo

That’s actually some of the exchange rate in one of the period where the RMB actually is weakening against the U.S. dollar and say conversion of some of the U.S. dollar.

Katherine Lu - Oppenheimer

And second, your SG&A as a percentage of sales came down significantly in 3Q versus the first two quarters of the year. So, how should we be thinking about the fourth quarter; is this quarter’s SG&A as a percentage of sales due to the seasonality of the strong sales or is that some thing that we can think about as a good run rate going forward?

Jing Lou

No, fourth quarter usually there is a compensated conference.

Katherine Lu - Oppenheimer

So, maybe we should expect margin to go back inline with the first and second quarter?

Jing Lou

We also look at the full-year average.

Katherine Lu - Oppenheimer

And finally just on the same question that I asked in the last conference call. So, you delivered a very strong revenue result this quarter, beat street consensus by 7%. The aggregated revenue for the first nine months totaled $27 million, while you reaffirmed your full-year guidance of $34 to $35? Which is the high-end guidance would imply 4Q sales of $8 million, which will put 4Q sales below 1Q, which is the seasonally weakest? So, I think it kind of breaks your historical seasonality trend? Is there anything particularly you’re worrying about in 4Q or you’re just trying to be conservative?

David Chen

I think this question can really be tied with your first question in terms of expenses in this quarter versus certainly our revenue outlook for the next quarter. I think overall, we manage our business on a yearly basis, while we try very hard in terms of manage on a quarterly basis. So, still keeping our regular practice, we think we are very confident in terms of delivering the top line of $34 million to $35 million at the end of this year.

Both in terms of revenue for the next quarter as well as marketing expenses and SG&A expenses, I just wanted to make a few points. Number one, we’re an innovation driven high growth company, while we’re continuing to invest in building our infrastructure, our sales and marketing activities, as well as advancing our pipeline, we’re still able to maintain roughly a 90% of the gross margin as well as around 25% of our operating margins. We believe this is a very unique differentiating factor of 3SBio, compared with many other companies.

Certainly, I understand in the meantime we need to understand the importance of managing the costs and we certainly have a few initiatives underway targeting to further increase our operating leverage for the next year. So, I just want to make sure that we’re on the same page in terms of we are very confident in delivering our full annual guidance of $34 million to $35 million. This quarter, we delivered another solid top line growth and certainly we are fairly confident to finish up the whole year with our guidance.

Operator

Your next question comes from Kim Lee - Pacific Growth Equities.

Kim Lee – Pacific Growth Equities

A couple of questions; should we expect the R&D and sales and marketing expenses, which are slightly higher than previous quarters; should we use that as a base going forward for Q4?

Kevin Teo

I think both for the full-year, inline with the 25% to 30% it will be in our operating margin going forward.

Kim Lee – Pacific Growth Equities

And can you give us an update on the business development front?

Kevin Teo

Yes, certainly; again our core strategy in terms of looking for M&A and business development opportunities, we are aggressively evaluating the assets right now and certainly when the time comes we will be in a position to report.

Our strategy remains unchanged, we are still looking at under current assets in oncology and the nephrology space both in terms of therapeutics, both in terms of managing the CKD in which we can effectively leverage our sales and marketing infrastructure. Certainly, in China we are looking for smaller companies, mid-size companies that have a good revenue and we will be able to create synergy for the company.

Operator

(Operator Instructions) Your next question comes from [Angiene Malcazie] - Monarch Capital.

Angiene Malcazie - Monarch Capital

Very impressive results; following up a question that I think I had and a number of people had last time; have you given anymore thought to being more aggressive on your stock buyback. I notice for example another company in your space since you reported a $50 million buyback and they reported several days ago. You have over $5 of share in cash; I realize that you are going to use part of that to build a plant, but that give you ample liquidity to repurchase shares and what you have to believe is a very attractive price. I’m just surprised that you’re not being more aggressive in buying back share. I wonder, if you can comment on that?

David Chen

This is David here. I think during the third quarter, we did repurchase about 217,000 ADS, average prices of, I think some $9.17.

Angiene Malcazie - Monarch Capital

Well if you love it at $9, you ought to really love it at $6.

David Chen

For about $2 million and currently we believe shares are undervalued at current level; however given the macro environment we are looking at and certainly we try to assume a balanced need in terms of in preserved strong balance sheet position for future business development opportunities and we are aggressively looking at undervalued assets or other assets either in the states or in China to continue to grow the company for the long-term.

Our interest is aligned. I mean 22% of shares of course it held by the management and our interest is inline to in terms of share price. Now matter how we try to balance and how to leverage that, it’s preserved the strong balance sheet position to grow the company in the long-term versus some short-term boost to our earnings per share. I mean this is our management view in terms of managing the balance sheet.

Operator

(Operator Instructions) Your final question comes from Jeb Besser - Manchester Management.

Jeb Besser - Manchester Management

I just want to echo what the last caller just said. Your operating results are fantastic. I mean given that this was a quarter with the Olympics and all the macro headwinds, you guys are executing fantastically and there is nothing that scares me more than you guys making a $40 million or $50 million investment with your cash.

You don’t know as well as your own business, which looks like its prospects for next year grade versus just buying your own stock back. I don’t care, if you issue it again at 12, just as long as you recognize the value and it’s like your toeing the water a little bit, but if you fully exhausted the $20 million buyback. I don’t think I’ll be complaining as a significant shareholder? Thanks.

Kevin Teo

Yes, we are certainly carefully monitoring the conditions right now and certainly evaluating options going forward.

Operator

Thank you this concludes the question-and-answer session. I would now turn the call back over to Dr. Jing Lou for his closing remarks.

Jing Lou

Thank you again for joining us today everyone and we look forward to updating you on our progress in the near-future. Thank you, operator.

Operator

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.

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