SciClone Pharmaceuticals Management Discusses Q2 2013 Results - Earnings Call Transcript

SciClone Pharmaceuticals (NASDAQ:SCLN)

Q2 2013 Earnings Call

August 07, 2013 8:30 am ET


Jane Green

Friedhelm Blobel - Chief Executive Officer, President and Executive Director

Hong Zhao - Chief Executive Officer of China Operations

Wilson W. Cheung - Chief Financial Officer and Senior Vice President of Finance


Hamed Khorsand - BWS Financial Inc.

Yi Chen - Aegis Capital Corporation, Research Division


Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 SciClone Pharmaceuticals Inc. Earnings Conference Call. My name is Narita, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Ms. Jane Green, Investor Relations. Please proceed, ma'am.

Jane Green

Good morning. SciClone would like to thank you for joining in the call today. The company would also like to remind you that today's call is being recorded. Speaking on today's call are Dr. Friedhelm Blobel, President and Chief Executive Officer; Wilson Cheung, Senior Vice President and Chief Financial Officer; and Hong Zhao, Chief Executive Officer, China Operations.

It is SciClone's intent that all forward-looking statements, including statements regarding financial guidance and commercial and development activity made during today's call be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available and SciClone assumes no obligation to update these statements. To better understand these risk factors, please refer to the documents that SciClone files with the Securities and Exchange Commission, including forms 10-Q and 10-K.

I'll now turn the call over to Friedhelm Blobel.

Friedhelm Blobel

Good morning, and welcome to SciClone's financial results conference call and webcast for the 3 and 6-month periods, which ended June 30, 2013. I'm pleased to report today that over the first 2 quarters of 2013, we have continued to make good progress in implementing important strategic, organizational and operational improvements designed to reestablish the foundation for our long-term revenue growth, continue to improve our compliance processes and build our standing in the evolving China marketplace.

We have made additions to our management team in China, who are outstanding, have deep multinational experience and a commitment to excellence. These talented, experienced and accomplished senior managers bring fresh perspectives on our business and on the China market, and believe in SciClone's potential as a growth company. Our management team and employees are aligned in their dedication to leading our company to its next level of performance and success, including maintaining our strong focus on operating and behaving responsibly and complying with all legal, ethical and regulatory standards.

It is a great pleasure for me to be joined on this call by Hong Zhao, our China Operations CEO, and by Wilson Cheung, our newly appointed corporate CFO. Wilson and Hong are excellent additions to our executive team in the U.S. and China.

A bit later in the call, both Hong and Wilson will share with you their thoughts on SciClone's prospects, and both look forward to establishing productive dialogues with investors and other key stakeholders in our company.

I am especially pleased to report that ZADAXIN channel inventory has returned to normal levels, and the buildup that affected our revenue growth in the first half of this year and the fourth quarter of last year has been corrected. We believe that the current levels of ZADAXIN inventory, which today are at approximately 6 months, are appropriate and typical for imported drugs in China. While we don't directly control channel inventory, our primary strategy for correcting this was to work with our importer over the last 3 quarters so that sales to our importer were lower than what we -- sorry, than what the importer and our distributors sold to our hospital customers. This practice, while necessary to reduce the inventory levels, resulted in the anticipated lower ZADAXIN revenues for the first half of 2013, which we announced today. These results were in line with our expectations for first and second quarters.

Now, with the channel inventory at normal levels, we are optimistic that we will be able to reverse the decline in our revenues in the second half of the year. The solid increase in the hospital demand for ZADAXIN during recent quarters, including a double-digit growth of unit demand in the second quarter over the same quarter in the prior year, supports this expectation. And as indicated in the updated 2013 guidance we are providing today, we are forecasting a 50% increase in ZADAXIN revenue in the second half of 2013, compared to the first half of the year, which reflects our confidence in ZADAXIN's continued growth potential. Throughout this period, based on our own internal market data, as well as validated third-party market reports, we were pleased to see that the therapeutic class of thymalfasins continue to grow and ZADAXIN continues to lead in revenue in this class and to command the highest market share by revenue. While strong hospital demand enabled ZADAXIN to grow in absolute dollars over the last 3 quarters, we expected to and did see a modest dip in our market share during this period. With channel inventory now normalized, we believe that we can regain a growth rate that is in line with our prior level, meaning a rate that is on par with the growth of the China pharmaceutical market, which by external accounts, continues to be quite strong.

Our overall perspective on our business today and growth prospects over the long term remains positive. We believe that the personnel additions, improvements in our business practices and accounting controls, and strong focus on company-wide compliance on all levels, which we have implemented over the last several quarters, are having a long-term positive effect on our business and reputation in the China pharma market and that we have strengthened our company's foundation for resuming it's growth trajectory.

For the remainder of my comments, I want to focus on the opportunities within the SciClone business, as well as describe some of the challenges we anticipate facing as the China pharmaceutical market continues to evolve.

ZADAXIN continues to rank as SciClone's major revenue driver in the near term. As we have previously discussed, we believe that there is potential for significant ZADAXIN growth in potential additional therapeutic indications, as well as expanding geographies in China. We have previously discussed the potential opportunity in sepsis, based on favorable results from a clinical trial conducted in China that showed a meaningful impact on clinical outcomes when ZADAXIN was combined with standard of care. With the strong support we have received from the key investigator in this study, we are exploring ways to develop ZADAXIN for use in sepsis in China, such as trying to include ZADAXIN in the government-sponsored sepsis treatment guidelines, which could open up a significant market opportunity for our company. We will also assess if there could be an interesting opportunity to potentially expand ZADAXIN utilization outside of China and plan to evaluate the market opportunity in the western world. Based on the encouraging clinical data from the China trial, and capitalizing on emerging trends in new clinical approaches to treating sepsis in the U.S. and Europe, we are having discussions with the FDA concerning the potential for a registration pathway for ZADAXIN to treat sepsis. We also plan to have similar discussions with the European agency, EMA. We have convened a Scientific Advisory Board comprised of respected sepsis experts in the U.S. and Europe to advise us on clinical and registration strategies that leverage current thinking about clinical approaches to treating sepsis by stimulating rather than depressing the body's immune system in order to fight systemic infection. If we can determine a regulatory path forward for ZADAXIN in sepsis and if the market opportunity looks substantial, we believe it may be valuable to assess the strategy of a partnership with a global or regional western pharma company. This is a long-term project and requires careful evaluation. We will look forward to keeping you apprised of how our thinking unfolds on this potential opportunity.

We intend to continue to implement strategies to expand ZADAXIN's reach in the China market, support our other branded products and drive revenue growth. Another key strategy is to expand our marketed product portfolio with differentiated high-value product that has significant therapeutic advantages and near-term commercial potential, and that can contribute to our long-term growth. In the second quarter of this year, we succeeded well in advancing and achieving this goal. Our recently announced in-license deals with Zensun for Neucardin, and with Taiwan Liposome Company, or TLC, for ProFlow, providing us with exclusive sales and marketing rights in Greater China, are significant achievements for our company. Both transactions represent major opportunities to expand our footprint in the expanding cardiovascular market segment.

We are also pleased to establish a collaboration with Soligenix, a U.S.-based biotherapeutics and biodefense vaccines company. This agreement provides them with our SCV-07 clinical and regulatory data on head and neck cancer patients with oral mucositis, in exchange for commercialization rights in Greater China for their promising development product, which is entering a U.S. Phase II trial.

Neucardin, licensed from Zensun, is an exciting, novel, first-in-class therapeutic compound being developed for the treatment of patients with intermediate to advanced chronic heart failure. Chronic heart failure has a large underlying patient base in China of approximately 5 million urban patients. It is expected that the prevalence of CHS in China will increase to over 7 million urban patients over the next 10 years, primarily due to urbanization and the growing aging population in China.

Zensun has done an outstanding job of advancing Neucardin through the clinical development and regulatory process in China. Four Phase II studies have been completed in China, Australia and the United States, including 2 Phase IIB studies in China. The China Phase IIB survival study demonstrated that Neucardin was well-tolerated and showed a significant decrease in mortality and improved survival in patients with chronic heart failure. A New Drug Application was submitted to, and accepted by the China Food and Drug Administration in 2012. One of Neucardin's potential advantages is that it addresses a new treatment modality and thus, is not directly competing with existing therapies. Given its unique mechanism of action, it is expected that if approved, it will be used as part of the comprehensive treatment of CHS, involving multiple drugs.

Another exciting advantage of Neucardin is that it occupies a unique position in China as a major innovative product that is homegrown. Zensun and we will work closely together to bring Neucardin to the market. Zensun will be responsible for regulatory activities, as well as manufacturing and supply of Neucardin, and we will be responsible for all aspect of commercialization, including pre- and post-launch activities. While there are several steps involved in the China regulatory and commercialization process, it is conceivable that it could look to a potential 2015, 2016 timeframe for Neucardin to be on the market.

We are equally excited to add ProFlow to our cardiovascular portfolio. ProFlow is a novel, lipid emulsion-based formulation of prostaglandin E1, or in short, PGE1, a vasodilator and platelet inhibitor for the treatment of peripheral arterial disease, or PAD. ProFlow has been shown to have twice the shelf life as currently marketed lipid emulsion formulations of PGE1. A patent providing broad protection for ProFlow has been granted in China, Japan and Taiwan, and TLC has also applied for worldwide composition of matter patents.

Peripheral arterial disease is a serious cardiovascular condition in which blood flow to the limbs, usually the legs, is restricted due to arterial plaque buildup. PAD represents a large and growing market opportunity in China. The current market-leading drug, which has a 1-year shelf life, generates annual revenue of more than USD 250 million. ProFlow has been submitted to the China Food and Drug Administration for approval and it is expected that some additional clinical testing may be required prior to approval. We believe that ProFlow has significant therapeutic and commercial advantages that differentiate it from other branded and generic competitors in the expanding PAD segment. We look forward to working with our partner TLC to bring this important medical advance to patients in need.

We believe that both Neucardin and ProFlow represent very large market opportunities for SciClone on the order of, or potentially even greater than, ZADAXIN. Both products are a perfect fit for our company, enabling us to leverage the deep experience and expertise of our cardiovascular sales and marketing team and expand our penetration into this growing market segment. Our primary care sales and marketing team is energized by the prospect of having 2 new potential breakthrough cardiovascular products added into their portfolio, and everyone is very excited about our new partnerships with Zensun and the TLC.

Our product promotion business continues to bring strategic and financial value to our company. Unquestionably, our ability to establish in-licensing agreements with Zensun and TLC was founded on our track record of success in promoting partner products. Especially in the cardiovascular market, we have deep experience and knowledge of the competitive landscape and established relationships for physician and hospital customers. These collaborations also have cumulative value, as they strengthen SciClone's market position and ability to take advantage of emerging promotion and in-licensing opportunities as pharma companies restructure their portfolios and look for partners with an established reputation and commercial expertise in the China market.

As we have noted in the past, our promotion agreements must contribute to our profitability. Towards that end, we are continuing to make good progress in renegotiating and renewing our agreements with our partners, Sanofi, Baxter and Pfizer, to achieve more favorable commercial terms and create a foundation for profitability going forward in these and future promotion agreements.

Our discussions with Baxter have been successfully concluded, and our negotiations with Pfizer are close to complete. One aspect of our Pfizer agreement is the joint decision to eliminate some of the previously promoted drugs such as Adriamycin and Daunoblastina for oncology, which has a significant pricing pressure through inclusion in the Essential Drug List, or EDL, and are therefore unprofitable and no longer of value to us.

Our discussions with Sanofi regarding a multi-year renewal are underway. We put a 1-year extension of our agreement with Sanofi in place months ago, which continues the partnership on previous terms through the end of 2013. While we are in fundamental agreement on our commercial terms with Sanofi, we are also discussing some portfolio changes, which could involve promoting a different set of products. Our discussions are continuing and are anticipated to conclude later in the third quarter. We believe it is prudent to anticipate that if there are significant changes in that product mix that we agree to promote for Sanofi or Pfizer, we may experience a negative impact on our near-term revenue in 2014, and possibly 2013, depending on when and how such a potential transition in the product portfolio takes place. Our view at this time may be overly conservative relative to the revenue impact, but until we complete our negotiations and agree on our promotion portfolio going forward, we want to be careful to anticipate the potential effects of any portfolio restructuring and guide investors accordingly.

It is important to note however, that we also believe a potential revenue impact will not necessarily translate into a material negative effect on our profitability. Despite these potential portfolio changes in our promotion business, we believe that having a diversity of collaborations and a diversified marketed product portfolio comprised of differentiated products that span the largest and fastest-growing therapeutic areas, such as cardiovascular, is a major strength for SciClone. We believe that continuing to cultivate ZADAXIN's potential in the market, while at the same time, advancing newer products with commercial potential that can equal or exceed ZADAXIN, is the right strategy to diversify and enhance our revenue and profitability growth in the long term.

We are keeping a close eye on the evolving China pharmaceuticals marketplace, especially in light of the macroeconomic factors that are affecting its rate of growth and the China government's increased emphasis on anti-corruption enforcement and product pricing. We understand that China's increased monitoring of compliance activities is part of a broader effort to regulate the pharmaceutical market in China, including MNCs or international companies. We recognize that China's efforts to eradicate corruption and enforce compliance may create uncertainty for companies operating in China, especially the very large multinational pharmaceutical companies. The fact that we have broadly addressed and significantly improved our compliance practices over the last few years may position us well during this process. While we cannot predict what the outcome will be of China's strengthened emphasis on compliance, we anticipate that there could be some increased pressure on pharmaceutical pricing over time. We have weathered pricing pressure in the past, as we understand well the ongoing policy of the Chinese government to periodically review therapeutic areas and impose price reduction. Whether or not the pace of those reviews will change as a result of their strengthened compliance efforts, we intend to stay prepared.

One of our strategies is to ensure that we are operating productively, efficiently and cost-effectively throughout our organization. For example, we have reduced head count wherever possible, especially in sales and marketing, in order to achieve profitability for all of our product lines, as well to respond to changing market conditions.

We respect China's emphasis on compliance and their goal to create a level playing field in the pharmaceutical marketplace. We believe that SciClone is capable of adjusting to potential changes in this market, and we anticipate that such changes will be broadly applied in our industry. We believe that our pricing practices, as well as our margins for our importers and distributors, are in line with legal requirements and are market appropriate. In fact, our prices for ZADAXIN are lower in China than in other countries. Most importantly, we have made extensive changes and improvements in our compliance activities and controls and we will continue to make further improvements.

We are also looking closely at how the compliance policies of the China government, combined with macroeconomic factors affecting China's economy, may affect the pace of growth in the pharmaceuticals market. We believe the next several months will tell us if the pharma market in China will continue to grow around 18% to 20%, or if government measures will result in slower growth for a period of time.

I think it would be informative to ask Hong Zhao, our CEO for China Operations, for his views on SciClone's prospect in this evolving market. Hong has been with SciClone for a few months now, and I can tell you confidently that he has been a valuable addition to our company. Hong?

Hong Zhao

Thank you, Friedhelm. It is a pleasure to join you and Wilson on the call today, and to meet by phone many of the investors and analysts with whom I hope to build a strong rapport in the coming months. Like you, I believe that SciClone has a bright future and is clearly on the rebound following the challenges that we faced in the second half of last year. I am impressed by the quality of the caliber of our management team here in Shanghai, many of whom joined the company recently and who bring with them deep and a broad experience and excellent track record in the performance in the China pharmaceutical market. I am also impressed with the sales, the marketing team as a whole and their commitment to comply and to meeting our ambitious goals. I believe that ZADAXIN is and will remain a major growth driver for our company. And that strategy of penetrating more widely and deeply into more geographies and more institutions is the right path to pursue.

All right. There is another additional sales opportunity for the product in the new market and the new indication and we will intend to work hard to cultivate this potential.

I'm also committed to growing our potential market leaders, such as Aggrastat, which I believe will fill an important niche in the cardiovascular market. And I'm very excited for the potential of the Neucardin and the ProFlow. And I'm excited by the prospect of having those innovative new compound in our portfolio.

Having those promising products in our pipeline to drive long-term growth is one of the best strategy we can have to respond to the changes in the China pharmaceutical market, as you noted. Ensuring that each of our promotion arrangements generate profitability for our company is a key corporate goal. And the sales and marketing team is aligned in their commitment to continue to cultivate the market potential for our partners' products.

I believe that SciClone is well-positioned to manage the evolving China pharmaceutical marketplace. I have confidence that the market profile for SciClone will be significantly strengthened in the coming years as we expand the reach, move our younger products forward, bring additional new products to the market and apply smart and creative promotional strategies to our in-house product line. I believe that we have all assets to need to succeed: A talented team, a therapeutically and commercially attractive product portfolio, an excellent, competent reputation and well-conceived strategies. I believe that our best days are lying ahead, and I will be looking forward contributing to SciClone's success.

Friedhelm Blobel

Thank you, Hong. Now, I would like to ask Wilson to say a few words about his perspective on SciClone and to discuss our financial performance for the first half of 2013. Wilson?

Wilson W. Cheung

Thanks, Friedhelm. As most of you know, I joined SciClone in mid-July. I was excited to accept this position, which included strong support from the board, to work with Friedhelm and the executive team to continue to lead the company towards improvements in a number of areas, including financial discipline and controls in both the U.S. and China, accountability and operational transparency and efficiency. While we all agree that there is more we can do to improve, I believe we have an adequate and well-designed structure to profitably capture the growth opportunities in China, and have made significant progress in addressing operational issues during recent months. I'm confident we will be able to continue to demonstrate further progress in the quarters to come.

Before I review our first half of 2013 financial results, I'd like to provide an update on our stock repurchase program. Our 10b-5, or closed window repurchases, expired in the first quarter, and we have not had an open trading window since that time. Once the window reopens, which is this coming Friday, August 9, we expect to resume the repurchase activities. At the end of the second quarter, approximately $9.9 million remained available for repurchase. Since inception of the program at the end of 2011, we have used approximately $30.6 million and repurchased approximately 6 million shares. Early in August, our board authorized an additional $10 million for repurchases of our common stock through the end of 2014. That provides a total of approximately $19.9 million for repurchase. As a reminder, we will utilize a predetermined trading plan during periods of closed trading windows, and we anticipate resuming repurchases in the upcoming open trading windows. We continue to believe that our stock is undervalued and that the increase in the stock repurchase plan is in the best interest of our shareholders.

With respect to the ongoing SEC/DOJ investigations, as we have discussed over the last few years, we have continuously implemented extensive compliance and internal controls procedures in China. While we do not have visibility on when the SEC/DOJ investigations will be concluded, I would like to reiterate that we remain absolutely committed to operating our business in compliance with the laws in the territories that we operate, with particular emphasis on the U.S FCPA, and with SOX 404 requirements, including extensive internal audit programs to monitor our operations, robust compliance training and certifications for our employees, importers and distributors, and increasing oversight and coordination from our U.S. corporate office. As previously disclosed, we required consultation with the Securities and Exchange Commission on one aspect of our accounting for one of our contracts, which caused a delay in announcing our full financial results and in filing of our first quarter 2013 Form 10-Q. The result of that process is that we are continuing to use the same accounting methodology for that contract, as in prior years, and will therefore be able to conclude the process for filing our first quarter 2013 Form 10-Q, which we expect to file on or around August 9, 2013, simultaneously with the Form 10-Q for the second quarter.

Our full results for the first and second quarters of 2013, on a GAAP and non-GAAP basis, are included in the tables accompanying the press release issued earlier this morning.

Now I would like to review our financial results for the 6 months ended June 30, 2013. For purposes of this call, I would like to focus my commentary on 6 months results versus just the first or second quarter. Please also refer to our results issued today for full details. Overall revenues were $59.1 million, a decrease of $23.3 million, or 28% for the first half of 2013, compared to $82.4 million for the same period of the prior year.

ZADAXIN revenues were $40.8 million, a 32% decrease compared to $60.2 million for the same period in the prior year. Revenues attributable to the primary care and oncology product lines were $18.3 million for the 6 months ended June 30, 2013, a decrease of $3.9 million, compared to $22.2 million for the same period in the prior year. The previously announced ZADAXIN channel inventory buildup that impacted sales for the last 3 quarters has been corrected, and we believe channel inventory returns to normal levels as of June 30, 2013.

On a GAAP basis, our net income for the 6 months ended June 30, 2013 was $2.2 million, compared with $20.9 million for the same period in the prior year, or $0.04 per share on a both basic and diluted basis, compared with $0.36 and $0.35 per share on a basic and diluted basis, respectively, for the same period in the prior year. Our non-GAAP net income for the 6 months ended June 30, 2013, was $9.5 million, compared to $22.6 million for the same period in the prior year, or $0.18 and $0.17 per share on a basic and diluted basis, respectively for the 6 months ended June 30, 2013, compared to $0.39 and $0.38 per share for the same period in the prior year.

We believe this non-GAAP information is useful for investors, taken in conjunction with our GAAP financial statements, because management uses such information internally for its operating, budgeting and financial planning purposes.

Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of our operating results as reported under GAAP. The non-GAAP calculations and reconciliation are provided in the accompanying table in our press release today, titled Reconciliation of GAAP to Non-GAAP Income.

Sales and marketing expenses for the 6 months ended June 30, 2013, were $25.5 million, compared to $35.1 million for the same period last year. In 2013, we began expense savings measures in our sales and marketing activities with the goal of bringing greater focus, efficiency and cost-effectiveness to our sales and marketing activities and contributing to our ability to achieve profitability in all of our product lines. These measures included the strategic resizing of our sales force, which combined with departures, led to a reduction of over 150 salespersons compared to June 30, 2012.

As we begin to ramp up ZADAXIN revenues for the second half of 2013, we expect that the sales and marketing run rate will return to between $18 million and $19 million per quarter.

R&D expenses for the 6 months ended June 30, 2013 were $5.8 million, which included $5 million in upfront costs related to new in-license arrangements with Zensun and TLC in the second quarter. Excluding these upfront costs, R&D expenses were $0.8 million for the 6 months ended June 30, 2013, compared with $4.9 million for the same period last year, primarily due to the discontinuation of our SCV-07 program.

G&A expenses for the 6 months ended June 30, 2013, was $16.6 million, compared with $8.4 million for the same period last year. The increases were primarily attributable to higher legal and accounting costs associated with the ongoing government investigation, improvements to our Foreign Corruption Practice Act, or FCPA, compliance efforts, legal matters associated with our MEDA arbitration, the escrow claim related to the NovaMed acquisition and the restatement of the previous financial statements, as well as higher G&A personnel-related costs. We believe that our core business remains profitable and we are optimistic about reducing these expenses going forward.

As of June 30, 2013, cash and cash equivalents, restricted cash and investments totaled $78 million compared with $87 million as of December 31, 2012. However, on July 2, we received $18 million of additional cash as a result of an accounts receivable payment that was delayed due to a banking holiday.

On the business front, we expect ZADAXIN sales will rebound in the second half of 2013 and will be 50% greater than in the first half of the year. As Friedhelm has mentioned, we believe that strong hospital demand will continue to be a major contributor to our revenue and profitability growth over the long term. However, we also believe that there are other factors that may affect our performance in the second half of the year and consider it prudent at this time to update our financial guidance for 2013. Accordingly, we are announcing updated revenue and non-GAAP EPS guidance for the fiscal year ending December 31, 2013, which excludes the impact of the $12 million collateralized loan to Zensun and our common stock repurchase.

As we focus on enhancing the profitability of our oncology and primary care businesses by our restructuring our promotion agreements at more favorable terms, as Friedhelm has mentioned, some products that are unprofitable or have become so because of significant price reduction through the inclusion in China's EDL, have and will be eliminated from our portfolio. The reduction in the number of marketed products will decrease revenue in the short term, but may not have a material impact on overall profitability.

We therefore anticipate 2013 revenues to be between $135 million and $145 million. Apart from ongoing operational expenses, our legal and accounting fees relative to the SEC/DOJ investigations and recent accounting challenges have had a near-term impact -- negative impact on our EPS expectations. The costs associated with these items represent an approximate $0.10 per share impact on our profitability. While we expect that these legal and accounting expenses can be reduced going forward, we are revising our earnings estimates for 2013. We therefore expect non-GAAP earnings per share for the full year 2013 to be between $0.55 and $0.61, including an estimated $0.05 contribution to EPS from the settlement of our escrow claim in the second half of 2013. Our non-GAAP EPS forecast for 2013 excludes employee stock-based compensation and other expenses described in our reconciliation of GAAP to non-GAAP income. We also project that cash and investments as of December 31, 2013, will be unchanged from our previous guidance of greater than $105 million, excluding the cash impact of any future repurchases of common stock from our remaining $19.9 million share repurchase plan and the $12 million collateralized loan with Zensun.

With that, I'm turning the call back over to Friedhelm.

Friedhelm Blobel

Thank you, Wilson. Now, I would like to ask the operator to open the call for questions. Operator?

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Hamed Khorsand from BWS Financial.

Hamed Khorsand - BWS Financial Inc.

I just want to get an understanding here as far as -- you're talking about multiple different aspects of what happened this quarter, right? You have the $5 million that comes from the deals. Going forward, as far as that's concerned, are you going to recognize more of those payments in the R&D line? And what is the timeframe for that?

Friedhelm Blobel

Hamed, thank you for your question. The -- as you correctly said, we have recognized $5 million and we think that there might be -- or might not be, a second payment, which could -- would be less than $1 million, later this year. And that is all what we expect for 2013.

Hamed Khorsand - BWS Financial Inc.

Okay. And as far as ZADAXIN is concerned, is there a risk here that we could see another price decline there? Or you guys feel safe there?

Friedhelm Blobel

At this point, we don't see any direct threat to ZADAXIN. However, I mean, we are watching carefully the situation in China. The GSK case, as it's called, is certainly leading to a number of actions, and it is not exactly clear in which direction this goes. And we think there could be mid-term summer pricing pressure on products in general. And if that does happen, then ZADAXIN might be part of that. But at this point, we have no reasons or indications that there would be any specific pressure or specific situation for ZADAXIN.

Hamed Khorsand - BWS Financial Inc.

Yes. Do you think that because of this overhang, I mean, there could be a bigger draw on channel inventory?

Friedhelm Blobel

I'm not quite sure if I understand your question, when you mean...

Hamed Khorsand - BWS Financial Inc.

You're talking about uncertainties about pricing in the marketplace, right? So wouldn't that mean that it would be more prudent to draw down channel inventories beyond 6 months, let's say, to 4 or 5 months than to keep selling into the market at 6 months, so we don't have the same issue as we did last year?

Friedhelm Blobel

Well, I think in the moment, we don't expect that. And it's a lot driven by the, the channel inventory, by the needs for the implication, the checking, which had happened there in a routine matter. So we don't expect that this would have any impact in the second half.


The next question comes from the line of Yi Chen from Aegis Capital.

Yi Chen - Aegis Capital Corporation, Research Division

My first question is, could you update us on the status of MEDA arbitration, and what's the status of launch in Tramadol?

Friedhelm Blobel

What was the long term?

Yi Chen - Aegis Capital Corporation, Research Division

Sorry, what's the status of MEDA arbitration and Tramadol. Are you planning to launch Tramadol in the near term?

Friedhelm Blobel

Tramadol launch, okay. Yes. We have, later in August, an important session of the arbitration panel here in China, and they may reach a decision or they may not yet reach a final decision. But even if they don't reach a final decision, the expectation is that later this year, there will be a final decision in the MEDA matter or the MEDA arbitration. And as you correctly said, this addresses Tramadol as a product, or as the most launched [ph] product. And it has certainly been approved in the China market. So we continue to believe that Tramadol will be, and could be a very attractive product. So I think I don't want to get into speculation of what the conclusion of the arbitration panel will be. That would be too early. But we feel strongly that the contracts are clear, that's why we asked for arbitration, and we will get an answer later this year.

Yi Chen - Aegis Capital Corporation, Research Division

My second question is regarding elimination of non-profitable products. Are those products from the Sanofi portfolio or from -- products from promotional services with other firms? And will you likely to renew the agreement with Sanofi with a multiple-year contract, or it will still be a year-by-year renew going forward?

Friedhelm Blobel

Right. Good question, Yi. So I think regarding the eliminations, we have seen eliminations for 2 Pfizer products, Adriamycin and Daunoblastina, in that case, for inclusion in the EDL. We have also seen stoppage of Perenan and Rulide, the 2 Sanofi products, which they stopped manufacturing because they are relatively old and have been, at least, what they consider relatively small. So it has been from both those partners that there has been products which had been stopped. Regarding your second part of the question, the expectation is that we will talk with Sanofi about a multi-year renewal. The 1-year renewal, which we put in place in the beginning of this year or late last year, was more a specific situation. But usually, these agreements are multi-year agreements and not one-to-one year extensions.

Yi Chen - Aegis Capital Corporation, Research Division

My final question is, in your opinion, what will be the effective tax rate going forward?

Friedhelm Blobel

That's a very good question. And I'll pass this one to Wilson. Wilson, I'm not sure if you had already a lot of time to familiarize yourself with the specifics of the tax situation, but why don't you give it a shot?

Wilson W. Cheung

Yi, literally, I'm at the beginning of my fourth week with the company, and one of my objectives is to actually spend a lot of time in China. And in fact, I already made a lot of meetings with a lot of the tax folks out there, trying to understand where we are in terms of the transfer pricing structure that we have already in place. And I believe that by next quarter, I would have a much better feel of how we are structuring our corporate structure. That way, I will be able to give you a better answer in terms of what I believe the optimal tax rate is going to be.


You have no question at this time. [Operator Instructions] comes from the line of Alan [indiscernible] from LPL Financial.

Unknown Analyst

Could I just clarify the stock repurchase program? Did I understand correctly that you have roughly $19 million approved and available for stock repurchases beginning after the August 9 deadline -- date line?

Wilson W. Cheung

This is Wilson, let me take this question. That is correct. We had -- after Q1 of this year, we only had $9.9 million left and then the board replenished an additional $10 million. So the revised total is $19.9 million for purchases beginning tomorrow.

Unknown Analyst

And are you able to comment on the algorithm you employ to decide whether and if to acquire shares?

Wilson W. Cheung

There would be some algorithms that management and the board decides that we have provided instructions to the banks.

Unknown Analyst

Okay. And these perhaps are related to earnings per share or book value or other metrics that are commonly available to your team and your...

Friedhelm Blobel

Well, I mean, we typically don't comment on this level of detail, but as Wilson said, there are some rules and guidelines how we decide how to drive the repurchase.

Unknown Analyst

And if my math is correct, you mentioned that because of a current receivable, you have roughly $96 million in cash and equivalents. So this suggests that about 20% of your liquidity is available for stock repurchases. Is that -- is my understanding correct?

Wilson W. Cheung

Correct. And remember, this stock repurchase program will last through the end of 2014.


We have no further question at this time. I would like to hand the call over to Dr. Blobel for closing remarks.

Friedhelm Blobel

Thank you everybody for participating in our quarterly conference call. Please feel free to contact us directly should you have any further questions. Thank you for your interest in the company. Have a good day.


Thank you for your participation, ladies and gentlemen, in today's conference call. This concludes the presentation. You may now disconnect, and have a good day.

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