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Sinovac Biotech Limited (NASDAQ:SVA)

Q2 2009 Earnings Call

August 19, 2009 8:00 am ET

Executives

Amy Glynn – Investor Relations, The Ruth Group

Helen G. Yang – International Business Manager

Vanessa Wu – Senior Financial Manager

Weidong Yin – General Manager of Sinovac Biotech Company Limited. & Chief Executive Officer of Sinovac Biotech Limited

Analysts

[Dan Jaffrey] – Private Investor

[Sam Bent] – Private Investor

Operator

Greetings and welcome to the Sinovac Biotech Limited second quarter 2009 conference call. At this time, all participants are in a listen-only mode, a brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Amy Glynn of The Ruth Group. Thank you, Ms. Glynn, you may begin.

Amy Glynn

Thank you operator. Good day, everyone. Before we begin I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words or phrases such as will, expect, anticipate, future, intends, plans, believes, estimates, and similar statements. Statements that are not historical facts, including statements about Sinovac's beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Sinovac does not undertake any obligation to update any forward-looking statement except as required under applicable laws.

On the call today are Mr. Weidong Yin, CEO; Ms. Nan Wang, Vice President of Business Development and Clinical Research; Helen Yang, International Business Manager; Vanessa Wu, Senior Financial Manager. I will now turn over the call to Helen Yang and Vanessa Wu. Go ahead, Helen.

Helen G. Yang

Thank you, Amy and hello everyone. Thank you for joining us on the conference call. I would like to take this opportunity to update you on our second quarter results, our strategy and our recent corporate developments.

These comments have been prepared in conjunction with Sinovac's Chairman, Mr. Weidong Yin, and Vice President, Ms. Nan Wang. Mr. Yin and Ms. Wang are on the line today and will be able to answer questions. I will translate their comments accordingly.

Following my comments I will then turn the call over to Vanessa Wu, who will discuss the financials in greater detail. During the second quarter of 2009, sales were U.S.$20 million, up 21% from $16.5 million in the second quarter of ’08. In the quarter, Sinovac sold 3.3 million doses of Healive and 315,000 doses of Bilive, compared to 2.7 million doses of Healive and 176,000 doses of Bilive in the second quarter of ’08.

Our gross profit grew 17% year-over-year to U.S.$16.3 million with a gross margin of 81%. Second quarter '09 operating income rose by 52% to U.S.$10.7 million, compared to operating income of $7 million in the prior year. Net income for the second quarter of '09 was $5.8 million or $0.14 per diluted share, up 74% compared to net income of $3.3 million or $0.08 per diluted share in the same period of '08.

Clearly, we are very pleased with our financial results for the quarter importantly our results during the quarter reflect our strategy to focus on increasing our penetration in both the private pay and public market. Our strong revenue growth was largely driven by increased sales of our inactivated Hepatitis A vaccine, Healive to the public market, as we worked to fulfill the previously announced purchase order received from MOH in late April. This order was for approximately $12.8 million worth of Healive vaccine or 2.41 million doses for a vaccination program that was part of the pro-government larger scale effort to improve public health.

In the second quarter, we fulfill and recorded revenue for approximately 89% of that order. Going forward, we expect to see continuous demand from public market for our hepatitis A vaccine. The share of the market generated by public sales is expected to increase in the next two years and private pay markets are expected to decrease as a percentage of overall sales. Although, the gross margin on public sales is lower than on private sales, Sinovac expect to realize offsetting cost savings and effectiveness.

One of the most important initiatives that we have been focused on lately is production of a vaccine against H1N1 influenza A virus. Since the onset of the global outbreak of this virus, back in April ’09 Sinovac has earned a great deal of recognition from local and national governments and health agencies for our efforts to help prevent and control the spread of this virus. As China's only approved manufacturer for a pandemic influenza vaccine H5N1, we had the fully integrated human vaccine development expertise and the manufacturing capability necessary to quickly produce a vaccine for H1N1.

In June, we were the first company in China to receive an order for the H1N1 influenza vaccine with the intention to purchase vaccine covering 5 million people. The initial delivery will be cover 2 million people as Sinovac completes the production already for its first batch on the vaccine at the end of July. On July 21, we began the clinical trial for the H1N1 vaccine, enrolling a total of 1,614 volunteers including 101 elders, 706 adults, 404 juveniles, and 403 young children. By July 25 all of the volunteers have received their first shot of the vaccine, during this initial observation period, none of the volunteers participating in Sinovac’s clinical trial exhibit a severe adverse reaction. The second shot was given on volunteers between August 12 and August 15 followed with an observation period.

The clinical trial unblinding conference for one-shot results was held in Beijing on the afternoon of August 17, 2009. The analysis of the clinical trial results shows that H1N1 vaccine developed by Sinovac induces good immunogenicity and has good safety profile after one dose. Sinovac plans to complete the summary report as soon as possible and fully evaluate the safety and immunogenicity of the H1N1 vaccine. We plan to apply for the Production License for H1N1 vaccine in compliance with China SFDA's regulations. We are very proud to be able to make such a significant contribution in slowing the spread of this epidemic in China.

Overall, we remain very excited about our growth prospects for 2009 and beyond. We have a robust pipeline of other vaccines in addition to H1N1 vaccine including EV 71 and pneumococcal conjugated vaccine. Our objective for next three to five years is to have one or two product candidates per year enter into clinical trials beginning in 2010 and one or two products launched into the market per year commencing in 2012. In addition to our organic growth strategy, we have the financial flexibility to selectively pursue acquisition candidates that will help to expand our product pipeline.

Before I turn to the call over to Vanessa, I want to take a moment to review our guidance for 2009. Previously, we had projected revenues of U.S.$55 million to U.S.$60 million for the full year 2009. Given the record spread of H1N1 influenza virus and important that the government is placing in Prevention and Control of this virus we expect both our sales and our profits will be positively impacted by the demand for our H1N1 vaccine, as such is our expectation that the sales will be higher than our initial projections. However, due to uncertainty on the timing of future government orders, we're not able to further quantify our expectations.

Now, I would like to turn the call over to Vanessa Wu to review our financial results.

Vanessa Wu

Thanks, Helen and hello everyone. Starting with the three months ended June 30, 2009. Sales were $20 million up 21.2% from $6.5 million in the second quarter of 2008. Sinovac continues to devote significant resources to marketing Healive to China's private market and an increase in demand for Healive in the public market is expected as well. Sales of Healive was largely driven by fulfillment of the previously announced Ministry of Health purchase order as part of its vaccination campaign.

Sales of the hepatitis A vaccine to the public market accounted for 50% (sic) (60%) of the total sales in the quarter. Sales of Bilive increased significantly during the quarter and the company expects it to become a complementary product to Healive in the private market, whereas Healive is expected to increasingly penetrate the public market.

Gross profit was $6.3 million (sic) ($16.3 million) with a gross margin of 81%, compared to $13.9 million and a gross margin of 84% for the same period of 2008. The gross margin was adversely affected by the lower price on the 2 million doses of hepatitis A vaccine sold to Ministry of Health. The gross margin for the second quarter of 2009 increased sequentially from the gross margin of 78% reported in the first quarter of 2009.

Total operating expenses were $5.6 million, compared to $6.9 million in the comparative period in 2008. Selling, general, and administrative expenses were $4.9 million, compared to $6 million in the same period of 2008. SG&A expenses, as a percentage of the second quarter 2008 sales decreased to 24%, down from 37% during the prior year. The lower selling expenses resulted from the higher proportion of hepatitis A doses sold to the government.

Net research and development expenses were $550,000, compared to $668,000 in the same period of 2008. R&D expenses were mainly related to EV 71 vaccine, pneumococcal conjugated vaccine, and the universal pandemic influenza vaccine. Second quarter 2009 operating income was $10.7 million, compared to operating income of $7 million in the prior year. Net income included $126,000 in net interest and financing expenses and $2.1 million in income tax expenses.

Net income for the same period of 2008 included $541,000 of net interest expenses and $1.6 million of income tax expenses. Net income for the second quarter of 2009 was $5.8 million, or $0.14 per diluted share, up 74% compared to the net income of $3.3 million, or $0.08 per diluted share in the same period of 2008.

Turning to the six months results. Sales were $26.6 million, up 4.7% from $25.4 million for the same period in 2008. Gross profit was $21.4 million with a gross margin of 80%, compared to $21.7 million and a gross margin of 86% for the prior year period. The gross margin was adversely impacted by the lower selling price on the 2 million doses of hepatitis A vaccine sold to Ministry of Health in the second quarter of 2009.

Total operating expenses were U.S.$10 million, compared to U.S.$11.6 million in the comparative period in 2008. Selling, general, and administrative expenses were $8.4 million, compared to $9.6 million in the prior year period of 2008. SG&A expenses as a percentage of sales, decreased to 32%, down from 38% during the prior year. Net research and development expenses for the first six months of 2009 were $1.3 million, compared to $1.6 million in the prior year period.

Operating income was $11.3 million, compared to operating income of $10.2 million in the prior year period. Net income for the first six months of 2009 included $159,000 in net interest and financing expenses and $2.6 million in income tax expenses. Net income for the same period of 2008 included $653,000 of net interest expense and $2.3 million of income tax expenses. Net income for the first six months of 2009 was $5.8 million or $0.14 per diluted share, compared to net income of $4.9 million or $0.12 per diluted share in the same period of 2008.

As of June 30, 2009, Sinovac's cash and cash equivalents totaled U.S.$46.7 million, compared to $32.9 million as of December 31, 2008. The increase in cash and cash equivalents primarily reflects the commercial bank loan obtained in the second quarter and the payments from government for its stockpiling program.

Now, I’d like to turn the call back to Helen Yang.

Helen G. Yang

Thank you, Vanessa. Again we continue to believe that Sinovac is well positioned for continued growth in 2009 and we are very excited about opportunities ahead. We're happy now to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Thank you. Our first question today is coming from [Dan Jaffrey], a Private Investor. Please state your question, sir.

Dan Jaffrey – Private Investor

Yes. I have a few questions, one is do you have any kind of even rough timetable about what will be the next one or two vaccines in your pipeline to enter into clinical trials? And also can you say a few words about the pneumococcal conjugated vaccine, which frankly unless I've missed that, I've never heard off?

Helen G. Yang

Thank you. I'll translate your questions to Mr. Yin. [Foreign Language]

Weidong Yin

[Foreign Language]

Helen G. Yang

So to answer your first question, we're expecting the Japanese encephalitis and rabies vaccines is about to enter into clinical trials, maybe earlier compared to other frontline products. And currently we're having our animal rabies vaccines currently in field trials, which is, because it’s a animal vaccine field trial, its equivalent to clinical trials for human vaccines.

Weidong Yin

[Foreign Language]

Helen G. Yang

And all the above-mentioned products are from the viral vaccines and you’re also asking about the pneumococcal-conjugated vaccine. This is a bacterial vaccine and currently the already launched similar product, as the product generate highest revenue globally for vaccine products. And we’ve already initiated preclinical trial for pneumococcal conjugated vaccine in Sinovac and we expect to file the clinical application in the year of 2011. In order to support the large scale R&D project we’ve already nearly renovated a R&D center in Beijing and this bacterial vaccine R&D platform is also used to develop a HIV vaccine and a meningitis vaccine. And both of these vaccines are also expected to enter into the clinical trails in the next one or two years. And in general for Sinovac, we right now have both the viral vaccine platform and bacterial vaccine platform, which is to support us to conduct the research and development of more human vaccines.

Dan Jaffrey – Private Investor

Can I ask, I don’t want to hog the time, but can I ask an additional question?

Helen G. Yang

Sure.

Dan Jaffrey – Private Investor

What is the status right now of the Anflu vaccine? I understand that the pandemic vaccines have kind of taken the front seat, but I am wondering what is happening with sales and production of your seasonal?

Helen G. Yang

[Foreign Language]

Weidong Yin

[Foreign Language]

Helen G. Yang

So actually for the seasonal influenza vaccine, Sinovac has already complete order production of these products and the sales of Anflu has already been initiated in the past months. And in this year, we have produced more doses compared to the year of 2008 and we expect the H1N1 outbreak this year will encourage the demand for seasonal influenza vaccine, but for the numbers and real projections for the sales probably we can only provide to shareholders after the end of the year.

Dan Jaffrey – Private Investor

Great. Thank you very much.

Helen G. Yang

You are welcome.

Operator

(Operator Instructions) Thank you. Our next question is from the line of [Sam Bent], Private Investor. Please state your question sir.

Sam Bent – Private Investor

I guess the question is regarding the in the balance sheet there is a new item called long-term inventories. Can someone please explain what are in those inventories?

Helen G. Yang

The long-term inventory is related to stockpiling vaccines, which is expected in two years.

Sam Bent – Private Investor

So the follow-on question will be better but Panflu, the bird flu was seen as part of the inventory?

Helen G. Yang

Your question is whether the Panflu or bird flu vaccine is part of our current inventory?

Sam Bent – Private Investor

Correct.

Helen G. Yang

The inventory includes hepatitis A vaccine, hepatitis A and C combined vaccine and the seasonal flu vaccines.

Sam Bent – Private Investor

That would be the regular inventory, it means the balance sheet is long-term inventories, long-term that did not happen in the year-end report. That's a new item?

Helen G. Yang

The long inventory related to stockpiling vaccine of H5N1 vaccine.

Sam Bent – Private Investor

Thank you. That's it, that's it.

Helen G. Yang

Okay.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Helen for closing comments.

Helen G. Yang

Thank you for joining us on the call today. We appreciate your continued support and interest in Sinovac and we look forward for providing you with an update of our progress on the next quarterly conference call.

Weidong Yin

[Foreign Language]

Vanessa Wu

Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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