Simcere Pharmaceutical's CEO Discusses Q4 2012 Results - Earnings Call Transcript

 |  About: Simcere Pharmaceutical Group (SCR)
by: SA Transcripts


Hello, everyone and thank you for standing by for Simcere’s fourth quarter and full year 2012 earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Dr. Jie Liu D'Elia, Simcere’s Vice President of Business Development and Investor Relations.

Dr. Jie Liu D'Elia

Thank you and welcome to Simcere Pharmaceutical Group’s fourth quarter and full year 2012 earnings call. Our fourth quarter and full year 2012 results were released earlier today and are available on the Company's website, as well as on our web news wire services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our website at Joining today's call are Mr. Jinsheng Ren, our Chairman; Mr. Hongquan Liu, our Executive Director and Chief Executive Officer; and Mr. Yushan Wan, our acting Chief Financial Officer.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Simcere does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

I will now turn the call over to Simcere's CEO, Mr. Hongquan Liu.

Hongquan Liu

Good morning everyone and welcome to Simcere’s fourth quarter 2012 earnings call. In the fourth quarter of 2012, market conditions remain challenging. Our total revenue was RMB540 million compared to RMB511 million for the same period in 2011, representing an increase of 5.7%.

Sales of Simcere’s major products increased in the fourth quarter of 2012. Sales of Edaravone were RMB184 million, an increase of 7.1% compared to the same period in 2011 and sales of Endu were RMB77.56 million, an increase of 18.6% versus the same period in 2011.

We are pleased that sales of Biqi showed recovery growth. In the fourth quarter of 2012, Biqi sales were RMB19.62 million, representing an increase of 66.5% compared to the same period in 2011. And sales of our oncology products were impacted by pricing pressure. As a result, revenues from these products decreased on a year-over-year basis in the fourth quarter of 2012.

Zailin and Yintaiqing faced increasingly intense competition and we saw a decrease in the tender price in many regions versus last year. That led to a decrease in sales of 5% and 14% for Zailin and Yintaiqing respectively compared to the same period in 2011. In order to maintain pricing in our key markets, we decided not to participate in bidding in certain provinces. Impacted by the government’s restriction on use of antibiotics, hospital listing of Anxin remained challenging. In the fourth quarter of 2012, sales of Anxin were RMB10.79 million, largely in line with the same period of 2011.

We continued to increase our promotional efforts for Iremod, and the listing of Iremod in hospitals is going as planned. We continue to work on the reimbursement side at the borrowing mark and if we achieve entry to the national RDL, we expect to see accelerated growth of this product. We were very pleased to see sales marketing and distribution expenses decreased from 56.2% in 2011 to 52.7% in the fourth quarter of 2012 and G&A expenses decreased from 14.8% in the same period of 2011 to 13.8% in the fourth quarter of 2012. In the future, we will continue to improve cost efficiency in these areas.

Biologics and antibodies will remain a key area for our company going forward. We will continue to invest in developments of biologics antibodies and our internal biologics pipeline is making significant progress. In line with this, we’ve recently made a strategic decision to exit our minority stake in Shanghai Celgen.

Our vaccine manufacturer, Jiangsu Vaxtec received GMP certification from the SFDA and we are currently preparing to begin production. As we’ll only be producing a single product, we expect that Vaxtec will continue to incur operating loss in the next several years.

Finally, in accordance with recent local government policies, two of Simcere’s factories will be required to relocate to suburban areas outside of the main urban area. Management is currently working on plans for the relocations and we will share details of this with you when available.

In the future we will continue to face challenging market conditions, including pricing pressure from the government and the tendering process. This pricing pressure will persist in the foreseeable future. However, there are a few opportunities from the rapidly growing pharmaceutical market in China. In order to deliver sustainable, healthy and steady growth, we will continue to optimize our product portfolio, improve academic selling capabilities, accelerate the hospital listing and market access and control costs.

Thank you very much and with that, I’ll turn the call over to our acting CFO, Mr. Wan. I will join you again during the Q&A session.

Yushan Wan

Thank you, Mr. Liu. Now I will give you the financial overview for the fourth quarter 2012. The total revenue for the fourth quarter of 2012 was RMB540 million compared to RMB511 million for the same period in 2011.

Gross margin for the fourth quarter of 2012 was 81.1%, compared to 82.3% for the same period in 2011. The decline in gross margin was primarily due to an operating cost of RMB7.9 million for Jiangsu Vaxtec as it is preparing to begin production of the GMP injection.

Sales and marketing G&A expenses and R&D expenses for the fourth quarter of 2012 were RMB490 million compared to RMB434 for the same period of 2011. As a percentage of total sales, these three expense line items decreased to 77.6% for the fourth quarter of 2012 from 84.9% for the same period in 2011.

Impairment of intangible assets, goodwill and assets held for sale for the fourth quarter of 2012 was RMB97.2 million, including RMB 70.1 million for the write-down of intangible assets related to R&D programs and RMB 25.3 million for goodwill impairment. This impairment of intangible assets and goodwill was primarily due to the fact that following further analysis of our vaccine products and our developments, we lowered our expectation for future sales and profitability.

Loss from operations for the fourth quarter of 2012 was RMB78.2 million compared to income from operations of RMB1.6 million for the same period in 2011. Loss from operations was primarily attributable to a non-cash impairment charge of RMB97.2 million. Excluding this one-off impairment charge and other operating income, the net operating income for the fourth quarter was RMB19.09 million, compared to a loss of RMB13.39 million in the same period of 2011, representing an increase of RMB32.48 million.

Interest expense for the fourth quarter of 2012 was RMB13.9 million, an increase of 25.9% from RMB11.03 million in the same period in 2011. This increase was primarily due to higher financing costs as a result of increased interest rate. This is a sequential decline compared with interest expense of RMB15.5 million in the third quarter of 2012. We will continue to reduce interest expenses by adjusting our commercial policies and improving cash collection.

Income tax benefit for the fourth quarter of 2012 was RMB11.9 million, compared to income tax benefit of RMB41.9 million for the same period in 2011. The income tax benefit for the quarter was related to the write-down of RMB70.1 million of intangible assets at Jiangsu Quanyi in the fourth quarter. The write-down resulted in a decreased deferred tax liability and consequently increased income tax benefit by RMB17.5 million. Income tax benefit in the fourth quarter of 2012 was lower than that in the same period of 2011. This was due to the improved financial results in one of the company’s subsidiaries during 2011, resulting in the reversal of valuation allowances previously made against the deferred tax assets of this subsidiary amounting to RMB32.3 million in the fourth quarter of 2011.

Invested income was RMB6.06 million for the fourth quarter of 2012, including an investment loss of RMB2.39 million from Shanghai Celgen and an investment income of RMB8.84 million from the Simcere MSD joint venture.

Net loss attributable to Simcere for the fourth quarter of 2012 was RMB20.8 million, compared to net income attributable to Simcere of RMB42.8 million for the same period in 2011. The net loss, as mentioned previously was due to the non-cash impairment charge of RMB97.2 million.

As of December 31, 2012 the company had cash, cash equivalents and restricted cash of RMB201.6 million, compared to RMB262.6 million as of December 31, 2011.

As of December 31, 2012, accounts receivable were RMB413 million, a decrease from RMB462 million as of December 31, 2011. Accounts receivable ageing within 91 days to180 days decreased by RMB25.16 million and accounts receivable ageing within 181 days to 365 days decreased by RMB20.29 million.

Basic and diluted net loss per American Depository Share for the fourth quarter of 2012 were RMB0.40 and RMB 0.39, respectively. Basic and diluted earnings per ADS for the full year of 2012 were RMB1.06 and RMB1.06 respectively. One ADS represents two ordinary shares of the Company.

Thank you for your attention. I would like now to open the call for questions.

Question-And-Answer Session


(Operator Instructions). Your first question comes from the line of [Yu Li] of Goldman Sachs. Please go ahead.

Yu Li – Goldman Sachs

This is Li with Goldman Sachs. I have a question on the financials. Could you give us some housekeeping guidance on the 2013 income tax rate and the minority interest? Because we believe it’s quite material for 2012 and going forward will the income tax come to normal where we have no one-time impact or not? And also for minority interest, could you give us more details on the 49 million in 4Q, because it basically affects the forecast for the future period. Thank you.

Yushan Wan

Thank you very much for your question. The income tax rate in 2013 based on our current knowledge and excluding the one-time charges should be 15%. In the fourth quarter of 2012, our minority interest income is RMB4 million and 8,806. That includes a minority interest of RMB3.8 million from our investments and then also the rest comes from the loss from back tax. In 2013, the estimated minority interest income is expected to be negative again.


Our next question comes from the line of Ingrid Yin from Oppenheimer. Please go ahead.

Ingrid Yin – Oppenheimer

My first question is on Endu and Edaravone and we saw both drugs sales have shown good growth in Q4 compared with previous quarters. I’m wondering, what are the measures that Simcere took in Q4 to achieve that and how should we think about these two key products in 2013? We also see the Biqi 66% growth. It’s an impressive recovery. Can you explain and should we expect that to continue? Lastly, for Iremod, and if you could provide some expected timeline when it will get on the NDRL that would be great. Thank you.

Hongquan Liu

Thank you very much for your question. For Endu, we did see a moderate growth in sales in 2012 fourth quarter. This is primarily due to the lower sales in the fourth quarter of 2011. Of course the increase in selling capabilities of our sales force is also a contributing factor. In 2013, for Endu, we will continue to – we will focus more on the sub-market segment, in particular the lung squamous-cell carcinoma market. We continue to expect a moderate steady growth of Endu in 2013. In 2013, we will continue to focus on our key markets in key provinces. Also we hope to enter into the national reimbursement drug list when our government adjusts the NRDL. For Edaravone, actually the full year sales of the Edaravone continue to decline, although the sales in the fourth quarter increased. The increase that you saw in the fourth quarter this year compared to the fourth quarter of 2011 is because the sales in 2011 were very low because we lost the tenders in the Fujian province. Of course we hope Edaravone will perform better in 2013.

As you probably know, in 2012 we entered the RDL – provincial RDL in some provinces. So looking forward in 2013, because of the entry into provincial RDL, we expect the continued challenges, especially increased pricing pressure. Of course we hope to offset the price cuts through increased sales of Edaravone. Also we hope to remove restrictions of the RDL’s in the second tier hospitals. For Biqi, although we saw very significant increase of 66.5% in the fourth quarter 2012, the full year sales actually only increased by 5%. So we continue to expect Biqi sales to hold steady in 2013.


Our next question comes from the line of Li Bin from Morgan Stanley. Please go ahead.

Yolanda Chen – Morgan Stanley

Actually this is Yolanda filling in for Li. I have a question on the impairment charge rate to Quanyi. Can you give us some color on how you calculate the loss? And you mentioned you lowered your expectations. And can you tell us the difference here? Thank you.

Hongquan Liu

Thank you for your question. This impairment charge was due to the write-down and actually a reassessment of the vaccine programs that are currently under development. The write-down reflects our lowered expectation for these R&D vaccine programs because our expectation for sales and profitability was lowered. And then this then caused the write-down. The difference between the valuation of these assets based on our lowered expectation and the previous value, the difference is the impairment charge.


(Operator Instructions). Our next question comes from the line of Richard Yeh from Citigroup. Please go ahead.

Ziyi Chen – Citigroup

This is Ziyi Chen reading question on behalf of Richard. We saw some major improvement in SG&A expenses as percentage of sales in 4Q and we tried to understand what were the major reasons for that, how we should look at the SG&A this year? And also, could you elaborate more on the rationale behind the deal of selling the 35% equity interest in Shanghai Celgen? Thank you.

Yushan Wan

Let me address the first question first. Thank you for your question. In 2012 the fourth quarter, the SG&A and the sales and marketing expenses decreased because two reasons. One is increased training of our sales reps which increases their sales sign-ability and productivity. In addition we tightened our controls around SG&A expenses. In 2013 we will continue to strengthen training of our sales reps to increase their productivity and increase cost efficiency.


This concludes our question-and-answer session. I will now hand the call back to Mr. Hongquan Liu for closing remarks.

Dr. Jie Liu D'Elia

Excuse me operator. We’re going to answer the second question from Mr. Ziyi.

Hongquan Liu

Let me address the rationale for us exiting the minority equity stake in Celgen. As you know, we only hold a minority stake in Celgen. As a result, we did not have control of the management team. So for us, we believe it is a good option at this point and good timing to exit our equity stake in the company.


This concludes our question-and-answer session. I will now hand the call back to Mr. Hongquan Liu for closing remarks.

Hongquan Liu

Thank you very much for participating in our fourth quarter 2012 earnings call. It was a great pleasure talking to each of you and I look forward to speaking to you again in the next quarter.


Thank you for your participation in today's conference. You may now disconnect. Good day.

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