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Executives

Tom Folinsbee - Director, Investor Relations

Jing Lou - Chief Executive Officer

Bo Tan - Principal Financial and Accounting Officer and CFO

Analysts

Ingrid Yin - Oppenheimer

Yolanda Hu - Morgan Stanley

Yi Chen - Aegis Capital

3SBio Inc. (SSRX) Q4 2012 Results Earnings Call March 19, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the 3SBio Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions)

I must advised that this conference is being recorded today, Tuesday, 19 of March 2013. I would now like to hand the conference over to your first speaker today, Mr. Tom Folinsbee. Please go ahead, sir.

Tom Folinsbee

Hello, everyone, and thank you for joining us for the call. We would like to remind you that this presentation may contain forward-looking statements which involve risks, uncertainties and assumptions.

3SBio’s actual financial condition and operating results may differ materially from these forward-looking statements, please see the Safe Harbor Statement section in the earnings press release for more information.

As the management team proceeds through their remarks they will refer to our fourth quarter results presentation which can be downloaded from website www.3sbio.com in the Investors section under Webcasts. After their opening comments we will open the floor to questions.

I will now turn the call over to 3SBio’s CEO, Dr. Jing Lou. Dr. Lou, please go ahead.

Jing Lou

Thank you, Tom, and hello, everyone. And thank you for joining our fourth quarter 2012 conference call. With me today is Bo Tan, and we will briefly comment on our operating and financial results, and then we’ll take your questions.

We are pleased to report another year of solid growth for 3SBio, achieving net revenues of US$107.5 million, the high-end of our guidance at the start of year. We continue to focus on our core operating strengths of R&D, manufacture, and sales and marketing. While challenging pricing environment in China is likely to continue. We will continue to focus on providing safe and affordable products for patients.

As mentioned previously, construction is underway in Benxi, a facility to manufacture dialysis-related consumables. The new facility is expected to commence operations in 2015-16. And we will help to meet the need in China for safe, affordable dialysis consumables.

Last quarter we started the Phase I trial for NuPIAO, 3SBio's second-generation long lasting EPIAO candidate. And we continue to interact with the SFDA and our partners to move forward with the other pipeline products which you can see on slide 17. Overall, we are satisfied with the progress and look forward to the challenges ahead.

I’ll now turn the call over to Bo Tan, our CFO, who will review our financial results and then we’ll be pleased to answer your questions. Bo?

Bo Tan

Thank you, Dr. Lou, and hello again to everyone on the call. As I go through some financial highlights you can find more details on slides eight through 10, as well as in the press release. I’m also going to use U.S. dollars throughout but you can find the RMB figures in the press release as well. For the year-on-year growth rate calculation, it’s all based on RMB numbers as no currency fluctuation is accounted for in the growth rate calculation.

First, a couple of key items in income statement. Our total net revenue increased by 17.2% to US$26.3 million. The increase was primarily attributable to increase the sales from our core EPIAO and TPIAO products, which increased the year-on-year 6.9% and 30.8%, respectively, in fourth quarter 2012. For the full year 2012, net revenue increased by 23.7% over the full year of 2011 to US$107.5 million.

Gross profit rose by 16.9% to US$23.5 million in the fourth quarter where gross margin decreased to 89.1%, it was 89.4% in fourth quarter 2011. Full year of 2012 gross profit rose by 24% to US$96.2 million where gross margin increased to 89.5% from 89.3% in full year 2011.

The fourth quarter operating expenses increased to 36.1% year-on-year from US$15.7 million to US$21.6 million. As a percentage of sales, operating expenses increased from 70.7% to 82.1%. The fourth quarter R&D costs was US$2.7 million or 10.2% of our net revenue compared to US$2.0 million or 9.1% of the net revenue for the same period in 2011.

Our fourth quarter sales, marketing and distribution expenses for the fourth quarter of 2012 was US$14.6 million or 55.5% of net revenue compared to US$10.5 million or 47.1% of net revenue for the same period in 2011. Fourth quarter general and administrative expenses were US$4.3 million or 16.5% of net revenue, compared to US$3.2 million or 14.6% of net revenue for the same period in 2011.

Overall, the full-year operating expenses increased to 30% year-on-year from US$57.5 million to US$75.5 million. As a percentage of sales, operating expenses increased from 66.8% to 70.3%.

Our operating income for the fourth quarter was US$1.8 million, a 55.9% decrease over the US$4.1 million earned in the same period last year. Our operating margin was 7.0% for the fourth quarter of this year.

The operating income for the full year was US$20.7 million, a 5.9% increase over the US$19.3 million earned in the same period last year. Our operating margin was 19.2% for the full year this year.

Looking at the bottom line, net income for the fourth quarter was US$2.7 million, a 23.3% year-on-year decrease over the same period in 2011. Net income for the full year was US$16.4 million, a 5.7% year-on-year decrease over the same period in 2011.

Turning now to our cash position, 3SBio had a cash, cash equivalents and time deposits of US$143.3 million as of December 31, 2012 compared to US$121.7 million as of December 31, 2011.

Thank you. And now we’d be pleased to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ingrid Yin from Oppenheimer. Please ask your question.

Ingrid Yin - Oppenheimer

Hi. Good evening. Thank you for taking my question. My first question is that about your market share in China. Can you comment on the competitive landscape of EPIAO in China. We know there are a few competitors. You’re obviously still the dominant leader but there are few companies ramping up market share quickly. And also, if you could comment on the increased sales in marketing expense for this quarter. And if that percent of revenue will continue to be of similar level going forward? Thank you.

Bo Tan

Sure, Ingrid, this is Bo here. In terms of the market share, I think based on the MS data, we have so far for the fourth quarter as well as for the whole year 2012, we think our market share for the EPIAO still remain to be stable at slightly above 40%.

So there are different competitors from different directions whether new [inaudible], whether it's new efforts in different tiers of the either hospital or different levels of cities. We continue to remain to be the market leader in the EPIAO market.

In terms of the sales and marketing expenses, if you look at the -- our sales and marketing expenses over the -- on an annual basis, it’s roughly stable compared to the last year’s expense ratio. We would like to achieve certain leverage but if you look at the competitive landscape in the EPIAO market, there are over dozen of domestic and the international players there.

And as you mentioned that several competitors are increasing their efforts in competing in this market. So we need to continue to invest to make sure that we can remain the market leader in this area.

Ingrid Yin - Oppenheimer

Okay. Great. Thank you.

Bo Tan

Thank you.

Operator

Thank you very much. The next question comes from the line of Bin Li from Morgan Stanley. Please ask your question.

Yolanda Hu - Morgan Stanley

Hi. Actually, this is Yolanda on behalf of Bin. I have two questions. One is, I want to know if you can provide us with the updates on the privatization and any time line that you can give us? And the second question is that, we know EPIAO is not on the new essential catalysts. So what’s your outlook on the sales and the pricing of EPIAO in 2013, especially that many [inaudible] will conduct [inaudible] for this year? Thank you.

Jing Lou

Yeah. Hi. I missed your first question. Perhaps, I can address your second question first then maybe you can sort of repeat your first question. In terms of the EPIAO pricing in the future, we think overall, if you look at the China healthcare sort of China pharmaceutical market, we are still in the tendering different provincial level tendering process.

So the overall market sentiment is still trying to be -- but continuously there will be pricing pressure on the pharmaceutical products, whether it’s in the form of provincial level tendering, whether it’s the newly expanded [inaudible] or whether it’s sort of newly mentioned hospital secular tendering [inaudible]. So we continued to feel that there will be additional uncertainty as well as pricing pressure for our as well as for any pharmaceutical products. So, can you let me know what your first question was?

Yolanda Hu - Morgan Stanley

I’m sorry. First question is just is I want to know the updates on privatization and any timeline that you can --

Jing Lou

Privatization?

Yolanda Hu - Morgan Stanley

Yeah. Yeah.

Jing Lou

Sure. Sure. Basically, I would like to ask you or refer you to our press release as well as our SEC filing. We have done a 13E-3 filing. I think week or few weeks ago as well as we have sort of put out press release. We think in a press release, I think [inaudible] expect the going private process has to be completed by the second quarter this year.

Yolanda Hu - Morgan Stanley

Okay. Thank you very much.

Operator

Thank you very much. (Operator Instructions) Our next question comes from the line of Yi Chen from Aegis Capital. Please ask the question.

Yi Chen - Aegis Capital

Hi. Thank you for taking my question. My question is simply, is there any requirements that needs to be fulfilled before the completion of the going private or a merger, or it’s just a simply a matter of time? Thank you.

Jing Lou

Yeah. If you look at our press release as well as our SEC filing, I think we will see if the SEC has additional comments then there would be shareholder votes. And for the Cayman Company, we need to get two thirds of the shareholder’s vote.

Yi Chen - Aegis Capital

Okay. Thank you.

Jing Lou

Yeah.

Operator

Thank you very much. (Operator Instructions) There is no further question from the telephone lines. I will hand the conference back to the presenters. Please go ahead, sir.

Jing Lou

Okay. It looks like there is no more questions. Thank you again for joining today’s call. We look forward to updating you on our progress in near future. Goodbye.

Operator

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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