Simcere Pharmaceutical's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Simcere Pharmaceutical (SCR)

Simcere Pharmaceutical Group (NYSE:SCR)

Q1 2013 Earnings Call

May 9, 2013 08:00 am ET


Jinsheng Ren – Chairman

Hongquan Liu – Executive Director & Chief Executive Officer

Yushan Wan – Acting Chief Financial Officer

Xiaojin Yin – Senior Vice President of Research and Development

Jie Liu D’Elia – Vice President of Business Development and Investor Relations


[Chen Yi] – Citi

Analyst – Morgan Stanley Asia Ltd.

Wei Du – Goldman Sachs


Hello everyone, and thank you for standing by for Simcere’s Q1 2013 Earnings Conference Call. (Operator instructions.) Today’s conference is being recorded. 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.

Jie Liu D’Elia

Thank you, and welcome to Simcere Pharmaceutical Group’s Q1 2013 earnings conference call. Our Q1 2013 results were released earlier today and are available on the company’s website as well as on our web newswire services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our website at

Joining us today 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; and Mr. Xiaojin Yin, our Senior Vice President of R&D.

Before we continue, please note that our 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 statement 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 Q1 2013 earnings call. In Q1 2013, our total revenue was RMB 529 million representing an increase of 8.4% versus the same period in 2012. While pricing pressure continues to be a challenge we were encouraged to see more effective cost control of sales and marketing and G&A expenses as a percentage of revenue alongside improvements to our overall business performance.

Impacted by government pricing restrictions and issues relating to the tendering process, sales of Edaravone in Q1 2013 were RMB 144 million. This represents a decrease of 10.3% versus the same period in 2012 and a decrease of 21.9% compared with Q4 2012. Sales of Sinofuan were RMB 32.64 million, a decrease of 16.9% versus the same period last year, and a decrease of 14.6% compared with Q4 2012.

Sales of our oncology product Endu were RMB 80.23 million in Q1 2013, an increase of 42.4% versus the same period last year and an increase of 3.4% compared with Q4 2012. Our other oncology products also achieved year-over-year growth to varying degrees.

Looking to our generic products, sales of Yintaiqing were RMB 48.46 million, an increase of 46.2% versus the same period in 2012 and basically the same compared with the previous year. Sales of Kechuanning were RMB 17.52 million, up 26.3% compared with the same period in 2012 and 33.4% compared with Q4 2012.

Sales of Zailin were RMB 62.57 million, up 4.2% compared with the same period of last year. In the face of the increasingly competitive market and [tendering] environment we are in the process of reformulating our tendering pricing strategy and exploring new models to promote our generic products in the market.

Even though government restrictions on the use of antibiotics have not changed, our strategy of targeting key regions and key hospitals helped sales of Anxin reach RMB 16.63 million in Q1 2013, an increase of 7.2% compared with the same period last year.

Sales of IREMOD were RMB 8.02 million in Q1 2013, an increase of 71.2% versus the same period of 2012 and an increase of 18.2% compared to Q4 2012. We expect that this product will require ongoing investment in marketing and promotional activities as we seek to further strengthen its marketing positioning, accelerate its entry into hospitals and work towards its entry into the NRDL and provincial reimbursement drug lists.

We were encouraged that (inaudible) expenses as a percentage of total revenue declined during the quarter. As a percentage of total revenue, sales and marketing and distribution expenses decreased to 49.1% for Q1 2013 from 53.1% for the same period in 2012. Similarly, as a percentage of total revenue, G&A expenses decreased to 12.1% for Q1 2013 from 13.3% for the same period in 2012. We will continue to tighten expenses and improve cost efficiency.

Jiangsu Simcere Vaxtec has recently received the GMP certification and begun production of its influenza vaccine product. And in line with the CFDA for new GMP requirements, Simcere’s production facilities at Wuhu, Jilin, Hainan and Nanjing Dongyuan have all received GMP recertification.

Looking to R&D we have filed the NDA application with the CFDA for Bendamustine, a Category III new drug for hematology/oncology. And in accordance with local government policies encouraging companies to relocate to suburbs outside of the main urban areas we will start construction of our new Dongyuan facility in Q2 2013.

In order to explore a new model for developing innovative drugs in China, alongside with the factory relocation and headquarters construction plan we will launch [Pijouwhey], a new initiative to develop an incubator facility for start-up companies developing innovative medicine. We don’t foresee that the execution of these plans will have a significant short-term impact on our business performance.

In Q2 we will continue to gradually optimize our R&D strategy by combining internal development efforts and external hiring opportunities. We will partner out selective early-stage projects from our internal pipeline and license in late-stage programs to complement our existing portfolio. 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 section.

Yushan Wan

Thank you, Mr. Liu. Now let me give you the financial overview for Q1 2013.

For Q1 2013, total revenue was RMB 529 million compared to RMB 488 million for the same period in 2012, an increase of 8.4%. Gross margin for Q1 2013 was 79.2% compared to 82.0% for the same period in 2012. The decrease was primarily due to the percentage decrease in sales of drugs with higher gross margins as well as the cost for preparing for the production of the influenza vaccine product.

Research and development expenses for Q1 2013 totaled RMB 44.93 million which represented a decrease of 7% from RMB 48.00 million for the same period in 2012. The decline was primarily due to a decrease in research and development expenses for Jiangsu Simcere Vaxtec. As a percentage of total revenue, research and development expenses decreased to 8.5% for Q1 2013 from 9.9% for the same period in 2012.

Sales, marketing, and distribution expenses for Q1 2013 were RMB 260 million which represented an increase of 0.3% from RMB 259 million for the same period in 2012. As a percentage of total revenue, sales, marketing, and distribution expenses decreased to 49.1% for Q1 2013 from 53.1% for the same period in 2012.

General and administrative expenses were RMB 64.10 million for Q1 2013, a decrease of 1.6% from RMB 65.08 million for the same period in 2012. As a percentage of total revenue, general and administrative expenses decreased to 12.1% for Q1 2013 from 13.3% for the same period in 2012.

Income from operations was RMB 50.18 million for Q1 2013, representing an increase of 16% from RMB 43.26 million for the same period in 2012. Interest expense for Q1 2013 was RMB 13.10 million, a decrease of 35% from RMB 20.19 million in the same period in 2012. This decline was primarily due to a decrease in interest expenses achieved through adjusting our commercial policies, improving cash collection, and decreased interest on our bank loan.

Investment loss was RMB 11.85 million for Q1 2013, compared to the loss of RMB 2.54 million for the same period in 2012. The investment loss was primarily due to an operational loss by the Simcere MSD joint venture in Q1 2013.

Net income attributable to Simcere was RMB 29.94 million for Q1 2013 compared to RMB 28.60 million for the same period in 2012. Net margin representing net income attributable to Simcere divided by total revenue was 5.7% for Q1 2013 compared to 5.9% for the same period in 2012.

As of March 31, 2013, the company had cash and restricted cash of RMB 333 million and bills receivable of RMB 614 million totaling RMB 947 million. By comparison, as of December 31, 2012, we had cash and restricted cash of RMB 202 million and bills receivable of RMB 680 million totaling RMB 882 million. As of March 31, 2013, accounts receivable were total RMB 420 million, representing an increase of 1.5% from RMB 413 million as of December 31, 2012.

Basic and diluted earnings per American depository share for Q1 2013 were RMB 0.57 and RMB 0.56 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


The question-and-answer session of this conference call will begin in a moment. (Operator instructions.) Your first question comes from Richard Yeh of Citi. Please ask your question.

[Chen Yi] – Citi

Hi, thank you for taking my question. Actually this is [Chen Yi] raising a question on behalf of Richard. The first question I tried to address, there could be multiple drug tenders coming out this year particularly in the second half and what is the company’s view on the upcoming drug tenders? Will there be any potential price erosions or volume-driving effects on Simcere’s products? And also, we saw strong growth in Endu and Yintaiqing. We’re trying to understand why is that and what were the key drivers. Thank you.

Hongquan Liu

Thank you very much for your question. In terms of the tendering process, so as you probably know there are many provincial and regional tender processes going on across the country and the frequency of tenders are going up as well every year – so in addition to every quarter tenders, now the tenders in many provinces are ongoing as we speak. So during this tendering process, because of product competition we expect in general the prices trending downward. However, because our company has gone through this tender process many times we expect most of our products will maintain stable price going forward.

In terms of Endu, so we have seen a 44.4% increase compared to the same period last year, however compared to Q4 of last year the growth rate was only 3.4%. Since the launch of Endu our company has invested very consistently to develop the market, but new products typically require a very long time to reach peak sales. So over the foreseeable future we expect Endu to maintain steady but slow growth. By steady and slow growth, I don’t mean the 44.4%. What I mean is Q1 2012 we had some challenges in our performance so you see this 44.4% increase. However compared to Q4 last year, our growth was only 3.4% and this is the growth rate that we expect quarter-over-quarter moving forward.

For Yintaiqing, you see a very significant growth rate compared to the same period of last year, however compared with Q4 2012 Yintaiqing sales actually declined by 0.3%. So what this really means is our performance in 2012 was disappointing and that even from the last quarter until now we are still trying to maintain the same sales. As you probably know, Yintaiqing has entered the EDL so with more and more tendering processes in the future we believe the growth of Yintaiqing will become more and more challenging. Thank you.


And the next question comes from Bin Li with Morgan Stanley. Please ask the question.

Analyst – Morgan Stanley Asia Ltd.

Hi, thanks for taking my questions. This is (Inaudible) on behalf of Bin. A question on Endu: can you let us know its growth in key regions such as Beijing and Shanghai? And also can you share with us your view on the post-tender price negotiations? Do you think this policy is widely implemented? Will it affect the company’s margin growth for this year or maybe also next year? Thank you.

Hongquan Liu

Thank you very much for your question. Endu is an oncology product and as such Endu is mostly sold in big cities and big hospitals. We see higher demand in big cities and big hospitals than smaller cities and smaller hospitals. In Beijing and Shanghai, our growth has been maintained at approximately 20%.

In terms of the post-tender pricing negotiation, we have seen this being implemented in certain provinces and cities. However, we believe this is the trend so this will have certain impacts on the pricing for pharmaceutical products and we believe this trend is going to continue. Thank you.


Your next question comes from Wei Du from Goldman Sachs. Please ask your question.

Wei Du – Goldman Sachs

There is a product, the trade name is [NDpul] this is manufactured by [Shijakun] Pharmaceutical Company and the chemical name is (Inaudible). This product claims to have similar therapeutic effects as Edaravone and so the question is whether Simcere has seen competition against [NDpul] during promotion?

Hongquan Liu

[NDPul], just as Edaravone is also a neurology product so from the market perspective we do consider it as a competitive product. Actually, so from the clinical perspective different tests have indicated that [NDPul] actually may have synergistic effect as Edaravone, so although [NDPul] is a competitive product at the same time it can be used at the same time with Edaravone to achieve that synergistic effect.

So for (inaudible) or Edaravone, actually the main challenge comes from generic competition, meaning competition from other Edaravone products at other companies. So we have seen very significant pricing competition and pricing pressure. Of course in terms of the pricing for [NDPul] we should ask [Mr. Thai] at [Shijakun] Pharmaceutical. Thank you very much for your knowledge and question around our neurology product.


(Operator instructions.) 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 Q1 2013 earnings call. Please do not hesitate to be in touch with us if you have any further questions. Thank you very much.


Thank you for your participation in today’s conference. You may now disconnect, good day.

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