Simcere Pharmaceutical Group (NYSE:SCR)
Q2 2013 Earnings Call
August 13, 2013 08:00 am ET
Jinsheng Ren – Chairman & Founder
Hongquan Liu – Chief Executive Officer
Yushan Wan – Acting Chief Financial Officer
Jie Liu D’Elia – Vice President, Business Development and Investor Relations
Alex Liu – Brean Capital
Hello everyone, and thank you for standing by for Simcere’s Q2 2013 Earnings Conference Call. (Operator instructions.) Today’s conference is being recorded. If you have any objections you may disconnect at this time. 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. Thank you, please go ahead.
Jie Liu D’Elia
Thank you and welcome to Simcere Pharmaceutical Group’s Q2 2013 Earnings Conference Call. Our Q2 2013 results were released earlier today and are available on the company’s website as well as on all newswire services. In addition, an archived webcast of this conference call will be available in the Investor Relations section of our website at www.simcere.com.
Joining us for today’s call 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.
Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provision 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.
Good morning, everyone, and welcome to Simcere’s Q2 2013 Earnings Call. With government policies impacting drug prices and restricting the use of antibiotics, our overall sales performance was less than ideal this quarter. Furthermore, as the market environment continues to change, we expect that the second half of this year will remain challenging.
Turning to our sales, impacted by factors such as government pricing policy and issues relating to the tendering process, sales of Bicun in Q2 2013 were RMB 124 million, a decrease of 18.5%. In the second half of this year, to moderate the further decline in Bicun sales, we plan to adjust the organizational structure of our sales team, increase marketing activities and adopt a more regional-focused sales approach.
Ongoing government restrictions on the use of antibiotics combined with China’s essential drug policy continued to impact sales of Anxin, Anqi, and Zailin which decreased 15.3%, 41.2%, and 30.7% respectively compared with the same period of last year. Faced with these challenges in the second half of this year we will devote more resources to key markets and hospitals while leveraging our optimized sales team and promotional activities to promote sales.
Sales of Endu, our oncology drug, were RMB 88.32 million in Q2 2013, representing a year-on-year increase of 32.3%. Our other oncology products, such as Sinofuan, [Giapaili], and Lowvo increased 9.8%, 192.0% and 15.3% compared to the same period of last year respectively. Sales of Jiebaishu remained stable.
In the second half of this year we will take advantage of the opportunities presented as the central government and provincial authorities adjust the drug reimbursement list. Our goal is to accelerate entry of our oncology drugs in to the provincial RDL as well as the reimbursement list of the new rural cooperative medical system which should help to boost sales.
Sales of our new product IREMOD were RMB 7.6 million in Q2 2013, representing growth of 22.4% year-over-year. This is not as fast as we expected, so looking forward we will optimize our sales team, focus on key hospitals, expand our product promotion, work to increase the effectiveness of our marketing activities and continue to work on IREMOD’s entry into the NRDL and provincial RDLs.
Now, turning to manufacturing, in Q2 2013 Simcere manufacturing facilities received the new GMP certification issued by the CFDA. I’m pleased to report that all of Simcere’s manufacturing facilities have now received the new GMP certification and the preparation of the relocation of Simcere’s Dongyuan facility is proceeding as planned.
In terms of R&D, we initiated the Phase II clinical trial for [Ederevon] (inaudible) combination in June this year. Also in June we entered into collaboration with BMS on development of subcutaneous formulation of Orencia for the treatment of rheumatoid arthritis. We have submitted a clinical trial application for Orencia which has been effected by the CFDA.
And on June 17, 2013, we entered into a share transfer agreement to sell Simcere’s approximately 99.99% equity interest in Jilin Boda Pharmaceutical Company to Zhuhai Rongding Equity Investment Partnership.
In the second half of 2013 we will focus on the opportunities presented by RDL adjustments and strive to have more drugs effected into the NRDL, provincial RDLs, and the essential drugs list. We will rationalize our current drug portfolio and R&D pipeline, optimize resource allocation, and improve the professional promotional capability of our sales team; and we will strictly control expenses and improve cost efficiencies in order to increase our profitability.
Thank you very much, and with that I will turn the call over to our acting CFO, Mr. Wan. I look forward to joining you for the Q&A session that follows.
Thank you, Mr. Liu. Now let me give you the financial overview for Q2 2013.
As announced on June 17, 2013, Simcere entered into a share transfer agreement with Zhuhai Rongding Equity Investment Partnership L.P. to sell the company’s approximately 99.99% equity interest in Jilin Boda Pharmaceutical Company for a total cash consideration of RMB 400 million. The assets and the liabilities associated with the sale are classified as “held for sale.”
Boda’s earnings results are listed under discontinued operations and Simcere’s earnings results are listed separately under continuing operations and discontinued operations. For Q2 2013, Boda’s total revenue was RMB 29.6 million compared to RMB 31.2 million for the same period in 2012. Boda’s net income for Q2 2013 was RMB 14.5 million compared to RMB 7.6 million for the same period in 2012.
Now moving to Simcere’s financials, for Q2 2013 total revenue was RMB 483 million compared to RMB 498 million for the same period in 2012, representing a decrease of 3%. Gross margin for Q2 2013 was 83.1% compared to 84.5% for the same period in 2012. The decrease was mainly due to a drop in sales of products with higher gross margins as a percentage of total sales.
Research and development expenses for Q2 2013 totaled RMB 45.15 million which represented a decrease of 16.5% from RMB 54.06 million for the same period in 2012. The decline was primarily due to us having completed the development of the company’s influenza vaccine products and its transition to commercial manufacturing. As a percentage of total revenue, research and development expenses decreased to 9.3% for Q2 2013 from 10.9% for the same period in 2012.
Sales, marketing and distribution expenses for Q2 2013 were RMB 280.0 million which represented a decrease of 0.8% from RMB 282.7 million for the same period in 2012. As a percentage of total revenue, sales, marketing and distribution expenses for Q2 2013 were 58.0% compared with 56.7% for the same period in 2012. The slight increase was due to an increase in marketing expenses.
General and administrative expenses were RMB 65.31 million for Q2 2013, an increase of 27.1% from RMB 51.38 million for the same period in 2012. The increase was primarily due to fees incurred during the company’s going-private process and an increase in share-based compensation expenses. As a percentage of total revenue, general and administrative expenses increased to 13.5% for Q2 2013 from 10.3% for the same period in 2012.
Income from operations was RMB 10.71 million for Q2 2013, representing a decrease of 67.5% from RMB 33.00 million for the same period in 2012. This decline was primarily due to a slight decrease in revenue and gross margin.
Investment loss was RMB 11.27 million for Q2 2013 compared to a loss of RMB 2.38 million for the same period in 2012. The investment loss was primarily due to an operational loss from the Simcere MSD joint venture in Q2 2013.
Interest expenses for Q2 2013 were RMB 10.96 million compared to RMB 18.39 million in the same period in 2012. The decrease was primarily due to reduced accounts receivables by adjusting commercial policies and increasing net operating cash flow.
Income tax benefit for Q2 2013 was RMB 10.31 million compared to an income tax benefit of RMB 0.50 million for the same period in 2012. The income tax benefit for Q2 was due to the reversal of unrecognized tax benefits and related accrued cumulative interest as a result of a lapse of the statute of limitations in accordance to the PRC Tax Administration and Collection Law.
Net income attributable to Simcere was RMB 8.23 million for Q2 2013, representing a decrease of 57.6% from RMB 19.39 million for the same period in 2012. Net margin, which represents net income attributable to Simcere divided by total revenue, was 1.7% for Q2 2013 compared to 3.9% for the same period in 2012.
As of June 30, 2013, the company had cash and restricted cash of RMB 643 million compared to RMB 201 million in 2012. The increase in cash was primarily due to the return of share transfer related to Shanghai Celgen for a cash consideration of RMB 244 million and improving net operating cash flow by adjusting our commercial policy.
Thank you very much for your attention. I would like now to open the call for questions.
Thank you. Ladies and gentlemen, the question-and-answer session of this conference call will start in a moment. (Operator instructions.) Your first question comes from the line of Alex Liu at Brean Capital. Please ask your question.
Alex Liu – Brean Capital
Hi, good evening. Thanks for taking the questions. My first question is could you please give more color on your sale of Jilin Boda? What is the intention of selling the company and what is largely behind the deal?
Jiu Liu D’Elia
Yes, Mr. Liu will address the question relating to the rationale of sale relating to Jilin Boda.
Jilin Boda has only one product which is an Iguratimod product, and Simcere, one of Simcere’s key products is Iguratimod as well. So when we acquired Jilin Boda several years ago there was only a handful, very few companies that actually manufactured and sold Iguratimod. So it was our strategic decision at the time to acquire Jilin Boda and then to acquire the Jilin Boda’s Iguratimod, which is priced at a lower pricing point than Simcere’s Iguratimod.
So at the time our strategy was to promote Jilin Boda’s Iguratimod in the second tier and third tier cities and even some rural areas while we focused Simcere’s products at the top-tier market at the higher pricing points. Now, several years later, there have been many generic Iguratimod products in the market, so now from a strategic perspective because the Jilin Boda’s Iguratimod pricing continues to deteriorate we decided to focus our resources on just Simcere’s Iguratimod, and then also focus on development of the second generation of Iguratimod which is why we made our decision to sell Jilin Boda.
Alex Liu – Brean Capital
Okay, thank you.
Thank you. (Operator instructions.) You have a follow-up question from the line of Alex Liu with Brean Capital. Please ask your question.
Alex Liu – Brean Capital
[Asks question in Chinese.]
Jiu Liu D’Elia
So let me translate Alex’s question. The question is regarding the privatization process of Simcere and he’s asking what Simcere’s process is in terms of going private. And then also once the company is privatized what will be Simcere’s strategic focus in the next several years.
Now, Mr. Liu has transferred the question to Mr. Jinsheng Ren, our Chairman, to address.
Thank you very much for your question, and as you know we proposed going private, we proposed the privatization of Simcere in March this year. And this going private process is ongoing as of now. Right now we don’t have any information to disclose, and if we do have information that must be disclosed according to applicable law we will certainly share that with you at an appropriate time. Thank you.
Alex Liu – Brean Capital
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will now hand the call back over to Mr. Hongquan Liu for closing remarks. Thank you.
Thank you very much for attending Simcere’s earnings call. Please do not hesitate to be in touch with us if you have any further questions. Thank you.
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. You may now disconnect. Good day.
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