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China Biologic Products Inc. (NASDAQ:CBPO)

Q2 2013 Earnings Call

August 7, 2013 7:30 AM ET

Executives

William Zima – IR

David Gao – Chairman and CEO

Ming Yin – VP, IR Contact Officer

Ming Yang – CFO

Analysts

Yi Chen – Aegis Capital

Matthew Prior – Merrill Lynch

Helena Qiu – Guosen Securities

Eagle Cheng – Brean Capital

Operator

Ladies and gentlemen welcome to the China Biologic Products Second Quarter 2013 Earnings Conference Call. For the second 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 conference over to Mr. William Zima of ICR for opening remarks and introduction. Please go ahead sir.

William Zima

Thank you, operator. Hello everyone and thank you for joining us on today's call. China Biologic announced its quarterly financial results on Tuesday, August 6th 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’s developments, strategies and basic operating results, followed by the company's Vice President Mr. Ming Yin, who will discuss – address financial results in more details. The CFO, Mr. Ming Yang is also on the call and will be available during the Q&A session that follows prepared remarks.

Before we begin, I would like to remind you of our Safe Harbor statement. 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, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There could 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 an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions 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 the 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 now pleased to present Mr. David Gao, Chairman and the CEO of China Biologics. David.

David Gao

Thank you, Bill. Hello everyone and welcome to China Biologic’s second quarter 2013 conference call. We are very pleased with our strong business performance highlighted by steady sales growth, increased the margins and the several operational accomplishments in the second quarter of 2013. Our success was once again driven by strong demand for our plasma based products as well as our favorable pricing environment.

In the first half of 2013, domestic pricing across our plasma portfolio remained largely stable, as the overall market continues to show steady growth. It is worth noting that import levels of Human Albumin also experienced consistently year-over-year growth during the period. So long as the overall growth of China’s plasma market continues, we believe there is opportunity for both domestic and the foreign Human Albumin providers to succeed in China. Our pricing in the sales volume for Human Albumin products could be negatively impacted if commendation intensifies, where we’ll continue to closely monitor market trends and respond accordingly so we can maintain our strong position in the plasma market.

In the second quarter, our total sales increased by 6.2% year-over-year reaching $53.6 million. This is very positive growth considering the fact that we helped the production at our Guizhou facility on June 1st as planned. Our operating margins stood at 47.2% due to the increased margin of Human Albumin products that improved the plasma utilization efficiency in the implementation of efficient cost control measures.

Non-GAAP adjusted net income attributable to the company increased 30.8% to $17.4 million for the quarter. During the quarter, the prices of all our products either increased or maintained or remained relatively stable. Human Albumin products and IVIG products remained the two largest sales contributor, accounting for 42% – 42.5% and 39.4% of total sales respectively. Following the launch of Factor VIII products in late 2012, we achieved improved plasma utilization efficiency.

For the second quarter of 2013, sales of Factor III – Factor VIII contributed approximately 2% of total sales and we expect its sales contribution to gradually increase in the quarters ahead. During the quarter, our new plasma station in Cao County, Shandong Province commenced plasma collection operations. Additionally, our Shandong Taibang production facility obtained renewed GMP certification from the China Food and Drug Administration, CFDA, on June 28th, ahead of our original schedule. This renewed GMP certification will remain valid till June 2018.

As the current manufacturing facility in Shandong is located in the scenic area of Mount Tai has no room for future production expansion. We plan to build a new production facility on a new site in Tai'an City, Shandong Province. Before the current GMP expires in mid-2018 in order to ensure the new facility you meet the new GMP standards and has ample time to in store as most operational transition. We have initiated the process of applying for land use rights with the local government. In Guizhou Province, we helped in production and our facility as scheduled and to build up sufficient levels of inventory for the construction period. At the moment, our facility operate is on track and we currently expect that production will resume in the first quarter of 2014.

Finally, we have entered into a redemption agreement with Ms. Lin Ling Li, our individual shareholder of the Company and Mr. Ze Qin Lin, the spouse of Ms. Li , pursuant to which the Company agreed to redeem 1,479,704 shares of its common stock held by Ms. Li, representing approximately 5.49% of the total common stock outstanding on August 2, 2013. The redemption price is $20.00 per share, and the redemption shares will become treasure stock of the Company upon closing of the redemption. For more information on share redemption transaction, please refer the current report on Form 8-K filed by the Company with SEC on August 5, 2013. We believe this share redemption will improve China Biologic's shareholder structure, enhance shareholder value and benefit other existing shareholders of the company. With this, I will now turn the call over to Ming Yin, our Vice President to review the second quarter financial results. Ming, please?

Ming Yin

Thank you, David and hello everyone. Let me first review key P&L items first – second quarter 2013. Total sales increased 6.2% to $53.6 million. As a percentage of total sales, Human Albumin product revenue accounted for 42.5% while IVIG revenue accounted for 39.4%, sales volume of Human Albumin products increased by 3.9%, primarily due to strong market demand. Sales volume of IVIG products decreased by 1.6% mainly due to reduced sales in order to smooth out impact associated with production suspension at Guizhou Taibang starting from June. Sales of Factor VIII kept ramping up, contributing about 2% total sales. Gross profit was up by 9.1% reaching $37.5 million. Gross margin was 69.9% compared to 68% in the same quarter 2012. The increase in gross margin was mainly attributable to the increased margin of Human Albumin products and improved plasma utilization efficiency following the launch of Factor VIII products.

Operating income was $25.3 million representing an increase of 18.8% over the second quarter 2012. Operating margin increased to 47.2% from 42.2%. Net income attributable to the company increased by 25.9% to $16.2 million, turning to net margin of 30.2%. Fully diluted net income per share was $0.57 per share. Non-GAAP adjusted net income attributable to company was $17.4 million or $0.62 per diluted share. Non-GAAP adjusted net income and diluted earnings per share excluded $1.2 million of non-cash employee share-based compensation expenses.

During second quarter 2013, selling expenses decreased 41.4% to $2.4 million or to 4.6% of total sales. The decrease in selling expense as percentage of sale was primarily due to our adjusted sales policy and lower commission rate for certain products during the second half of 2012. We have taken additional steps to further control selling expenses since the second half 2012. However, we carried out a series of promotional and conferences activities for the newly –launched product Factor VIII starting from the second quarter 2013. As a result, we expect selling expenses as a percentage of sales to increase, but remain in the low single digits in the following quarters.

G&A expenses increased by 11.8% to $8.9 million in second quarter 2013, mainly due to higher payroll expenses and employee benefits, an increase in share-based compensation and an increased in legal expenses related to the corporate defense against the proposed share acquisition by Shanghai RAAS, a public company listed on the Shenzhen Stock Exchange and a direct competitor of the Company in China. G&A expenses a percentage of total sales was 16.5% compared to 15.7% in the second quarter of 2012. R&D expenses were $835,000 in the second quarter 2013, representing a decrease of 10.1% year-over-year. As a percentage of total sales, R&D expenses remained consistent at 1.6%. We expect the percentage level to rise back to its historical range of 2% to 3% in the second half of 2013 as we conduct research and test for the new pipeline products.

For the first six months of 2013, total sales increased 10.2% to $107.6 million. As a percentage of total sales, sales from Human Albumin products and IVIG products accounted for 40.2% and 42.5% respectively. Among total sales, $5.2 million came from sales of placenta polypeptide products. Gross profit was $74.9 million, gross margin was 69.6%, operating income was $51.3 million, representing an increase of 27.8% year-over-year. Net income attributable to company was $31.1 million, net margin was 28.9%. Non-GAAP adjusted net income attributable to company was $33.8 million or $1.22 -- $1.21 per diluted share.

Now, I would like turn to balance sheet and cash flow items. We ended second quarter of 2013 with approximately $147.3 million in cash and cash equivalence, primarily in the form of cash on hand and demand deposits. Accounts receivable was $17.8 million representing a 59% an increase as compared to the accounts receivable balance at the year end of 2012 which was cost by the increased shipments to our hospital clients as compared to the last quarter of 2012. Our accounts receivable turnover in days remains stable in the second quarter of 2013 compared with 2012.

Inventory increase to $80.9 million from $75.7 million in December 31st 2012. We are selecting higher collected raw plasma. For the six months ended June 30 2013, net cash provided by operating activities was $37.9 million as compared to $32.1 million for the same period in 2012. The increase was in line with the increase of net income, net cash using investing activities was $12.4 million compared to $6.7 million primarily due to purchase of property, plant and equipment. The investing activities for six months ended June 30, 2013 mainly is consisted of construction of (inaudible) for the plasma station in Cao County, production facility for new production of product Factor VIII, office building for Shandong Taibang and the production facility for placenta polypeptide.

Net cash used in financing activity was $10.6 million compared to $11 million for the same period of 2012. Our working capital on June 30, 2013 was $208 million and our current ratio was 5.8. Total shareholders were $303.8 million as of June 30, 2013 compared with $2057.4 million as of December 31st 2012. We believe that the company has sufficient cash on hand and the continuing positive cash inflow from continuous operations. Finally, we are… we iterate full year financial guidance of total sales in the range of $195 million to $205 million and the full year Non-GAAP adjusted net income in the range of $50 million to $53 million. Our outlook maybe subject to change depending on the market conditions and the GMP upgrade status at the Company's Guizhou Taibang facility. That concludes our prepared remarks, we will now take questions.

Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Thank you we have got a question from Yi Chen from Aegis Capital. Please go ahead.

Yi Chen – Aegis Capital

Hi, thank you for taking my questions. My first question is, will China Biologic likely obtain additional new plasma collection stations in the second half of 2013? And, whether the growth of the revenue likely come from the new plasma collection center or your existing plasma collection centers, thank you.

David Gao

The developing new plasma station is always China Biologics the primary – the most important growth strategies. Our management remains focused on the identifying proper region in which to established plasma station. However, the approval for the new plasma station at various level of government approvals, which are very difficult and uncertain. Because of this challenge, we believe it is premature to disclose our plasma station development plan at the current time. And to answer your question for the future growth, we believe it will come from the combination of organic – not only the existing organic the plasma station growth and also we will, we’re trying develop new plasma station to deliver new additional growth.

Yi Chen – Aegis Capital

Thanks. My second question is, could you tell us the cause of your acquisition of the $1.5 million shares from Ms. Lin Ling Li and her spouse. And we will China Biologic likely purchase repurchases more shares in the future? And could you update us on the status of those shares owned by Ms. Siu Ling Chan which was previously in dispute thank you.

David Gao

For the share redemption plan, we are disclosing the 8-Kim: on August 5th, 2013. The company entered into a redemption agreement with Ms. Lin Ling Li, an individual shareholder of the Company and her spouse Ze Qin Lin. A pursuant to their redemption agreement, the company agreed to redeem $1,479 million and some ’04 shares of the company’s common stocks held by Ms. Li and the total redemption price of close to $30 million. The closing of the redemption transaction is condition upon the effective on this end of liability of the settlement agreement that was entered into by Ms. Li and Ms. Lin and certain plaintiffs in depending loss about in the high court of Hong Kong court on the July 26th 2013.

We understand that the pursuant to the settlement agreement Ms. Li and Ms. Lin agreed to pay to the representative of the Plaintiffs U.S. dollars close $12 million as a one-time cash settlement payment which is ahead of the title dispute between such Plaintiffs and Ms. Li and Ms. Lin. In respect of shares being redeemed such amount where we pay out IED US dollars close to $12 million will be pay out of the redemption price to the representative of the plaintiffs out of the closing of the redemption transaction. That’s pretty much the background relate to the shares repurchase, relate to Ms. Li.

And for the Mr. Chan situation, I think, we – since we are not party to the ligation between Ms. Li and the Plaintiff in Hong Kong high court, so we don't have the specific update for this status of the litigation process and for the questions whether we will pursue the another round of share redemption in the similar fashion, I guess we can only state or we don't – we do not speculate any hypostatic scenarios at the moment. Having said that, if such opportunity does arise or broad, we’ll make a determination based on the circumstances at that time as (inaudible) saying the best interest of the company. I hope my answer did answer your question Yi.

Yi Chen – Aegis Capital

Yes. My final question is, in your opinion, when will be the next likely price adjustment for NDRC or in other words what's your outlook to the pricing of plasma based product going forward.

David Gao

Well, the price adjustment of NDRC is the public policy decision made by the China government. So we’re not in the position to make any speculation in this respect. Well, I can share with you the last time the price selling implement for the IVIG by NDRC was in 2012, but the NDRC price adjustment decision was made prior to 2012 within the 2002, so basically it's 11 years ago. So that’s we can’t share with you.

Yi Chen – Aegis Capital

Okay. Thank you.

David Gao

Thanks.

Operator

(Operator Instructions) The next question comes from Matthew Prior of Merrill Lynch. Please go ahead sir.

Matthew Prior – Merrill Lynch

Good evening. Thank you for taking my question. My question is just in regards to Albumin, can you give us some indication as to how long you – are your contracts with your customers, also I’d like to get a sense that how defendable obviously market share is against the threat is obviously greater entrance from the international players?

David Gao

I believe your question is asked the China’s – the Albumin’s market dynamics right, the current dynamics?

Matthew Prior – Merrill Lynch

That’s correct, yes, especially how long your contracts are, so if you do see threat in those market share shift or transparence, how quickly that can manifest?

David Gao

Yeah, because the – because we are stating our press releases, we have a – we haven’t seen the oversea importing Human – the Albumin market, the share raised consistently in the last couple of years. I can’t give you some data. That’s the data that’s probably reliable data, but it’s our – it’s compiled by the management and we should probably have slight difference with government release or other research analyst that compiled the data.

And on the last year, the overseas imported Albumin accounts for 46% market share in China. The total – the Albumin market, the in the form 10 grams in last year and the end of last year, it’s close to $21 million vows [ph] $46% the representing import from overseas by (Inaudible) all those international players.

And for the first seven months, the number seems – the overseas – the imported – the Albumin climbed to over 60%. The domestic – the Albumin market share to – shows another 23% of negative growths. So combined with that, we saw the Chinese – the Albumin market grows in the first seven months at least 10%. So we only can say is that we don’t what kind of impact will happen in the next few months or in the remaining of the year. But we will closely monitor the trend and adjust all pricing and our shipment accordingly to maintain our market – the position. Hopefully, that answers your question Matt.

Matthew Prior – Merrill Lynch

Yes, it did. Thank you. If I can just ask one further question, in terms of policy from Ministry of Health or the CFDA in terms of the whole plasma industry, have you seen any policy changes recently, I know obviously in terms of G&P recertification, you seemed to have managed that well and the same to have been last year increased guidelines or statements from the ministry of health around supporting collections and the growth. But I was more interested in (inaudible) and demand side, have you seen any increased or improved policy around treating hemophilia that will help drive your plasma derived Factor VIII sales or anything around Immunoglobulin to obviously keep demand strong? Thank you.

David Gao

Yeah, I think for the major product like the IVIG and Albumin, because it’s a very matured product in China. So I think the – just like you said, the demand actually grows year by year but what meant for the Albumin products because overseas imported Albumin, the market share or the import – the total quantity or volume dramatically increased in this year. So we just did (Inaudible) at this moment, so in the short term or in temporary what kind of impact to the market because what we’re concerned is that if the market – to get panic because we see that all of Albumin’s come from the overseas probably going to – temporarily going to outpace the growth of the demand. So that might have some negative impact to the domestic – the Albumin – the pricing. But again definite the Albumin – the products or the plasma derived products, the industry Albumin in China markets grows say 15% to 20% for next five years. And I believe that numbers outpaced the plasma – the derived products growth rate. I can relate it to the international estimate for the global, the plasma market is close to 10%. So in China, at least close to double – the U.S. or the international standards and for the hemophilia, the Factor VIII it’s our newly introduce of products. And I think there’s only five producer in China can currently make that products.

So demand is definitely out there, but the problem is, because there is no importation or substitute, so I think the demand is very strong. The problem is whether the domestic players can meet the current demand, I think the current answer is no because the shortage conditions to – it still exists even by this year we’re starting to deliver the Factor VIII, but we are still seeing the market did not actually relieve from the shortage condition as compared to last year.

Matthew Prior – Merrill Lynch

Great, thank you.

Operator

Thank you. The next comes from Helena Qiu from Guosen Securities. Please go ahead.

Helena Qiu – Guosen Securities

Hi, this is Helena, thanks for taking my question. My question first is (inaudible) business have a very strong position in cash and do you have any like dividends pay out of this schedule? And second question is, when do you purchase back some shares, so these shares will like reduce your total shares or you will use the purchase back shares for the like kind of an employment incentive plan or other plan? Thank you.

David Gao

I think, I missed your first of question because the conference call has some quality – has some – can you repeat your first question and can you repeat your question?

Helena Qiu – Guosen Securities

The first question is, I asked you about outreach in cash. So do you have any plan for the dividend?

David Gao

Okay, actually as we indicated in our 10-K, our company’s – the policy – we don’t have any plan to declare dividend, you mean the offshore, right?

Helena Qiu – Guosen Securities

Yeah, yeah, yeah.

David Gao

No, we don’t have any – as our company policy, we don’t pay dividends.

Helena Qiu – Guosen Securities

Okay, so what are your guaranteed you do for your – for the cash, your cash-on-hand now?

David Gao

Yeah, I think you mean – for the cash because first of all the – we announced that – we announced that the share redemption, the plan on August 5th. So which cannot use portion of our cash and then secondly we announced in the 10-Q – we for the Shandong property, we go out, probably going to build a new plan in next few years, so which will be probably very CapEx intensive project. And also we want to reserve that partial cash for future acquisition possibility if there’s a right price and the target, when there’s a wide opportunity, we want to make sure we have sufficient cash to pursue the acquisition.

Helena Qiu – Guosen Securities

Okay, my second question is, after you do the share redemption, the shares will – which means like your total shares will be reduced or decreased or you will use the shares purchase back for the employment incentive plan or some other purpose?

David Gao

No, I mean basically, the shares – as we disclose the shares we after we redeem from the Ms. Li we were putting treasure stock. So the treasure stock the benefit for – give the Company most flexibility to raise fund in the future when needed.

Helena Qiu – Guosen Securities

Okay, so you will not like decrease your total shares and it would like an approaching (inaudible) and therefore --

David Gao

No, no, (inaudible) all standard so EPS calculation their outstanding shares will decrease by the amount of we bought it back.

Helena Qiu – Guosen Securities

Okay, I understand that. So the total shares will decrease right?

David Gao

Yes.

Helena Qiu – Guosen Securities

Okay.

Operator

Thank you, the next question comes from Eagle Cheng, Brean Capital. Please go ahead.

Eagle Cheng – Brean Capital

I only have one question. I heard that it’s expected to resume production at the Guizhou Taibang in the first quarter of 2014. If the GMP upgrade at the Guizhou Taibang facility that will be finished sooner, would the financial outlook in 2013 will be changed?

Ming Yin

Well Eagle this is Ming. What we stated in the press release, the – our current year’s financial guidance were depending on the market condition and also our status of the Guizhou Taibang GMP upgrade project, which we don’t have control because we expect by end of the year even we finish the construction or the upgrade project, but there is a lot of company -- pharmaceutical company would line up for the government CFDA to do the GMP certification.

The process probably going to be delayed, so at this moment, we don’t have a very clear visibility to one the GMP certification process can be complete. So that’s why we’re not sure I think whether the guidance would be impacted, but for sure just like you said if we complete the GMP certification, we’ll be complete ahead of very ahead long ahead of our original schedule. The guidance probably won’t be changed based on that scenario, but at this moment it's hard to predict.

Eagle Cheng – Brean Capital

Okay. And so, (inaudible) I want to know what if the most of these always the hardest today that the upgrade can be finished?

Ming Yin

We expect the production to resume at the first quarter 2014, so it should be in that range.

Eagle Cheng – Brean Capital

Okay.

Ming Yin

Yeah.

Operator

Thank you, (Operator Instructions) There are no further questions. Please continue any other points you wish to raise.

David Gao

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

Operator

Thank you, ladies and gentlemen this concludes the conference call. Thank you for participating, you may now disconnect.

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