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Executives

Bill Zima - IR, ICR Inc.

David Gao - Chairman, President & CEO

Ming Yin - VP

Ming Yang - VP, Finance & Compliance & CFO

Analysts

Yi Chen - Aegis Captial Corp.

China Biologic Products, Inc. (CBPO) Q4 2012 Earnings Call March 14, 2013 8:00 AM ET

Operator

Welcome to China Biologic Products Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. For the first part of this call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Today's conference is being recorded.

At this time, I would like to turn the call over to Mr. Bill Zima of ICR for opening remarks and introduction. Please go ahead sir.

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 Wednesday, March 13th 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 the recent company developments, strategies and basic operating results followed by the company's Vice President Mr. Ming Yin, who will address financial results in more detail. CFO, 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 statements. 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 such 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 investment in China Biologic is included in our filings with the Securities and Exchange Commission which we encourage you to review before making any investment decisions. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market, forward-looking statements as a result of new information or otherwise except as required by law.

The company will also discuss non-GAAP measures which are more completely 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. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to equivalent GAAP measures and that non-GAAP measures are not uniformly defined by all companies including those in the biopharma industry.

So that said, 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. Welcome to China Biologic’s fourth quarter and fiscal year and 2012 conference call. We are pleased to be consistent with strong demand for our products throughout 2012, which allowed us to enjoy favorable price and steady topline annual growth.

Our total sales increased by 20.7% on annual basis, reaching $184.8 million for the full-year, meeting our previous guidance. Our efforts over recent years to expand our sales force and focus on direct sales to hospitals and inoculation centers has bolstered our pricing power and reduced our reliance on distributors.

Our operating margin continued to improve, increasing to 40.3% in 2012, from 21% in 2011. Lower margin level in 2011 was mainly achievable to our impairment loss of $24.8 million. If we exclude income and loss, the operating margin in 2011 would be 37.2%.

Non-GAAP adjusted net income attributable to the company increased 31.5% to $48 million for the year, which is consistent with our previous announced guidance ranging of $46 million to $48 million.

Some of you may recall in September 2012, the NDRC announced regional price ceiling adjustment for 95 oncology, immunology and haematology drug products. The announced price ceilings for IVIG were below the previous market prices that prevailed in some of our regional markets. Our shipment of IVIG products were delayed by approximately one month, because we appealed to 30 local governments for favourable pricing support following the announcement. Encouragingly, Guizhou and the Shandong provincial governments accepted our appeals and approved to lift the tender price ceilings for IVIG products in early November.

In January 2013, the NDRC further adjusted certain drugs effective by reports three of our approved products, human albumin, human rabies, that are immunoglobulin and the human antagonist immunoglobulin have been affected by this latest announcement. The new retail price ceilings for both human albumin and human antagonist immunoglobulin have been raised slightly. So basically prices for various doses of human albumin have increased by approximately 5%, while the regional price ceiling for human rabies immunoglobulin is close to this (inaudible) market price. We (inaudible) for the changes, we believe that strong market demand for our plasma-based products will continue to sustain strong revenue growth and that our overall markings will remain healthy that lead around top sales and increased cost efficiencies by promoting new products like Factor VIII.

In response to the previously announced delays in construction of our new production facility in Guizhou due to slower [expect] of the government approval of land user rights. They implemented our genetic strategy to begin up within our current production facility at Guizhou Taibang.

In June or July 2013 to meet the more stringent GMP standards that to be in [effect] by year end. We anticipate such upgrading to take six to nine months due to which we plan to sustain production in Guizhou. We expect the production to resume in the first half of 2014. Consequently, we have been building up inventory in the past few quarters and adjusting product eight shipments planned for 2013. We have been and will real continue to increase production volume during the first half of 2013.

We are also pleased to announce that at the beginning of the year Shandong Taibang obtains approval from local authorities to establish our new plasma collection station in Qihe County Shandong Province. We expect to obtain operating permits and to commence plasma collection operations by the end of June 2013.

We are reminding writers that the new station’s addition to total plasma collection volume in 2013 will be limited. As (inaudible) the station and because all donated plasma samples have to be preserved for 90 days far safety testing before being put into production.

However, we feel confident that the new plasma station will run part in the next three years potentially enlarging our collection base in Shandong by 10% to 13%.

I'll now turn the call over to Ming Yin, our Vice President to review the full-year financial results. Ming please?

Ming Yin

Thank you, David and hello everyone. Before discussing our financial performance for the full-year of 2012, I would like to address guidance for the first quarter. Our top line and bottom line saw some inconsistency during the first quarter.

Our total sales decreased by 4.6% year-over-year to US$34 million in the quarter due to IVIG products shipment delay in October when the company appealed to regional governments for favorable pricing support.

Subsequently, in late October regional and Shandong Province governments approved to look to obtain the price ceiling for IVIG products. Net income from operations increased 41.5% mainly due to a $3.5 million decrease in selling expenses in the [first] quarter of 2012.

Net income attributable to company increased by 25.3% to $5.8 million. While non-GAAP adjusted net income attributable to the company was $7.3 million representing a 15.6% decrease. The company reported a loss from changing fair value of [warrants] of $3.1 million in the first quarter of 2011.

Now let's move on to the full-year of 2012. Total sales increased 20.7% to $184.8 million during 2012. Human albumin products and IVIG products remained the largest to sales contributors as a percentage of total sales in albumin product revenue accounting for 44.6% while IVIG revenue accounted for [39%].

During the full-year, the Thymopolypeptides products contributed $10.1 million of total sales. Gross profit was up by 17.7% reaching $126 million. Gross margin was 68.2% compared to 69.9% in 2011. In future, we expect increasing compensation reported to be paid to the plasma donors, given the increasing trends of urbanization and the rising income levels in China.

Consequently, future improvements on margins were needed to be derived from increase in product pricing and volumes, product mix, yields and manufacturing efficiency as the reason the NDRC announcements have further limited opportunities for us to increase selling price for IVIG products. We consequently expect to experience gradual decline in gross margin in future quarters.

Yet, we believe our gross margin can still be maintained about [60%] levels. Operating income was $74.5 million. That’s (inaudible) an increase of 131.2% over the past year. Operating margin was 40.3%. Net income attributable to company in 2012 was $45.2 million, turning to net margin of 24.5%.

Fully diluted net income per share was $1.62. Non-GAAP adjusted net income attributable to company was $48 million or $1.79 per diluted share. Non-GAAP adjusted net income and diluted earnings per share excluded an aggregate $1.8 million gain related to change in fair value of [insurance] and liabilities and $4.5 million of non-cash and share-based compensation expenses.

During the full-year of 2012, net expenses decreased to $14.4 million or 7.8% of total sales, a decrease in selling expense as a percentage of sales was primarily due to favorable product pricing and less reliance on distributors as well as (inaudible) more on the drug sales to hospitals.

In addition, we have initiated a further control over the selling expenses since the second half of 2012. G&A expenses increased 8% to $34 million in 2012, mainly due to the higher (inaudible) expenses and employee benefits, as well as legal expenses related to disputes among major Taibang shareholders over additional capital.

G&A expenses as a percentage of total sales declined to 18.4% from 20.6% in 2011. R&D expenses were (inaudible) represent a weak result (inaudible) 8% year-over-year. The decrease was primary due to the completion R&D tax on Factor VIII in early 2012. As a percentage of total sales, R&D expenses grew at 1.6% in 2012. We expect the percentage level to rise back to its historical range 2% to 3% in 2013 as we conduct research and tests on new pipeline products.

Now I would like turn to balance sheet and cash flow items. We ended 2012 with approximately $129.6 million in cash, cash equivalents and short-term investments. Finally, in the form of cash on hand and in deposits, accounts receivable was $11.2 million representing a 33.1% annual decrease, as we speed up the collection of our accounts receivable. Inventory increased by $2.3 million in 2012 to $75.7 million in line with our production expansion in 2012.

For the year end December 31, 2012; net cash provided by operating activity was $71.1 million. Net cash used in investing activities was $26.8 million primary due to purchasing of property, plant, equipment and intangibles and events non-current assets. That cash used in financing activities was $5.1 million compared to $10.1 million in 2011.

Our working capital on December 31, 2012 was $174.1 million and our currency was 4.7, total for shareholders asset was $257.4 million as of December 31, 2012 compared with $179 million as of December 31, 2011. We believe that the company has sufficient cash in our hand and continue positive cash inflow from continuous operation. We plan to maintain our solid balance sheet going forward.

Turning to 2013 guidance, overall despite certain challenges we remain bullish on the outlook for growth and that of China plasma industry generally. Looking to full year of 2013, we expect total sales to be in the range of $195 million to $205 million, we estimate the full year non-GAAP adjusted net income to be in the range of $50 million to $53 million. This estimate assumes production suspension and operator facility and only organic growth and as previously noted does not anticipate any unforced and reverse impact due to future changes in government policy.

This reflects the company’s current and the pulmonary reviews which are subject to change. That concludes our prepared remarks, we will now take questions. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Yi Chen [Aegis Captial Corp].

Yi Chen - Aegis Captial Corp.

My first question is regarding the newly approved tower company in Shandong province, the new plasma collection station do you expect any delay to getting the permit before starting collecting [drug] and also are you currently applying to more plasma collection stations in different provinces. Thank you.

Ming Yang

This is Ming and as we indicated in our press release we try and invest or try to have the plasma station to being operations by end of the first half of this year, and so we are doing our job of the final (inaudible) from government actually is it would be controlled by the government which we don't have a control.

To answer your second question is the (inaudible) plasma station you know in other regions, we are trying to - our answer is developing new plasma station is actually our important growth strategy, and I imagine that we are continuing our efforts in identifying popular regions for establishing plasma stations. The higher the plasma development plasma new station requires government approval at various level which process is not really our control. So as such we believe it’s immature to discuss this as the target for our plasma station [front].

Yi Chen - Aegis Captial Corp.

Okay, to follow-up with your answer, what I can’t understand the Chinese government is pretty slow in approving new plasma collection station. So can you give us any insights on the government thinking and stance approved in new plasma collection stations.

Ming Yang

You know we certainly cannot actually speak on behalf of the government, but all we can share with you is some of the reason the development is the head of minister of house, [Mr. Cheng] who recently reiterated the goal of doubling the plasma supply in February during his visit to the (inaudible) treatment center in Shandong province. Once again that (inaudible) is not from the MOH but you know just like you understand the approval for plasma station actually is at a local garment position. And that's the only thing we can say.

Yi Chen - Aegis Captial Corp.

Okay. To follow-up with plasma collection stations, so for those collection stations that China Biologic is currently operating and is planning to apply for new plasma collection stations. Within those areas are there any collection stations operated by competing companies who also could use plasma based products.

Ming Yang

Can you actually reiterate your question?

Yi Chen - Aegis Captial Corp.

In regions where you are currently you are operating plasma collection stations; are there other collection stations that are being operated by competing companies who also produce plasma based products?

Ming Yang

Well, if you actually specify the regions means province, yes. Actually, we are for instance define the region by the city or the county now. So basically the current Chinese regulations, usually they don’t allow the two very close place to compete each other. The main reason behind is actually the government has a lot of concerns to satisfy the (inaudible) lot donation which is actually the MOH or the local government authority. So they have put in too many competitor for plasma collector in the region that will be in to their plasma or the whole collection in the (inaudible) whole blood collection.

Yi Chen - Aegis Captial Corp.

Okay, so lastly, can you give us an estimate of the capital expenditure for the facility upgrades for Shandong for (inaudible) type during 2013?

Ming Yang

Yeah, that number actually we do not disclose, but I got, - actually the company is trying to spend no more than $50 million on that project, single project. It’s in US dollar, it is [RMB].

Yi Chen - Aegis Captial Corp.

15 million RMB, right?

Operator

(Operator Instructions) There are no further questions (inaudible) over to the management for closing remarks.

David Gao

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

Operator

Ladies and gentlemen this concludes today’s conference call. Thank you all for attending.

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