Sinovac's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.14.13 | About: Sinovac Biotech, (SVA)

Sinovac Biotech Ltd. (NASDAQ:SVA)

Q2 2013 Results Earnings Call

August 14, 2013 8:00 AM ET

Executives

Stephanie Carrington - The Ruth Group, IR

Dr. Weidong Yin - Chief Executive Officer

Nan Wang - Chief Financial Officer

Helen Yang - Investor Relations Director

Analysts

Isabella Zhao - Morgan Stanley

Yi Chen - Aegis Capital

John Gregory - SJ Strategic Investments

Operator

Greetings. And welcome to the Sinovac Biotech Limited Second Quarter 2013 Earnings Conference Call. At this time, all participants are in 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, Stephanie Carrington of The Ruth Group. Thank you. Ms. Carrington, you may begin.

Stephanie Carrington

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 US 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. These statements are not historical facts and 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 statements. Sinovac does not undertake any obligation to update any forward-looking statements except as required under applicable laws.

On the call today we have Dr. Weidong Yin, CEO; Ms. Nan Wang, Sinovac’s Chief Financial Officer; and Ms. Helen Yang, Investor Relations Director.

I will now turn the line over to Helen Yang. Go ahead, Helen.

Helen Yang

Thank you, Stephanie, and hello, everyone. Thank you for joining us on this conference call. I will provide an update on the business on behalf of our CEO, Mr. Yin, and also as you may know, due to our prior announcement that our Vice President, Ms. Nan Wang was appointed to be the company’s Chief Financial Officer after the resignation of Danny Chung. I will provide the overview of the financial part on her behalf as well and then we’ll invite both Mr. Yin and Ms. Wang to answer your questions as needed.

Let me start with the sales performance. We are very pleased with the sales performance in the second quarter, which increased year-over-year by 86.4% driven by the robust hepatitis vaccine sales.

In the second quarter, both hepatitis A vaccine and hepatitis A&B vaccine contributed approximately 95% of the total revenue and Healive the hep A vaccine sales grew at 97% and Healive the combined A&B vaccine grew 58%.

The growth of product mainly occurred in the private pay market for this quarter. The demand for both hepatitis A vaccine and combined A&B vaccine continued to be strong under the favorable competitive environment in China.

And also we could see the sales across the public market, private market and distributors market are increasing in the first half of this year, which demonstrated the successful implementation of our diversified market strategy, as we deploy the customized sales strategy targeting each segment.

We expect the success of the new sales strategy to benefit future sales of EV71 vaccine, which is expected to be launched in 2014. And today we got a good news as well from the market that Sinovac was selected as one of the four suppliers by the Beijing Health Bureau to supply the seasonal influenza vaccine to the citizens of Beijing again.

This year, the Beijing Health Bureau plans to order up to a total of 1.8 million doses of seasonal flu vaccine for the vaccination campaign for the senior citizens and school children.

The public notification of the bidding results incorporate online today and will last for seven working days, after which the official agreement will be signing to supply the vaccine upon the demand.

After discussing the existing vaccine sales, I will now turn to the near-term opportunity, which is our proprietary EV71 vaccine candidate. We filed new drug application to Beijing Drug Administration this past May. And Beijing Drug Administration completed the site infection on all of the clinical sites in both Jiangsu province and Guangxi province, where we conduct the Phase I, II and III clinical studies on this vaccine.

The infection opinion has been issued and on July 30, 2013, the registration documentations were submitted to and officially accepted by the Center for Drug Evaluation for the technical review of this vaccine.

The enterovirus 71 vaccine remained to be a significant unmet medical across China based on the widespread outbreaks of hand, foot and mouth disease caused by EV71. In the first six months of 2013, total over 900,000 cases of hand, foot and mouth disease were reported with 156-fatality.

Currently, our dedicated EV71 production plant in Changping site is ready for the inspection and we are on track to launch the EV71 vaccine after we receive the required approval anticipated in 2014 to provide a solution to address these unmet medical need as no treatment and prevention option exist for this highly contagious disease impacting children in China and surrounding countries.

The Phase II clinical result for Sinovac proprietary EV71 vaccine was first public online on August 6, 2013. In the journal of Infectious Disease these publications is considered to be the premier global journal for original research on infectious diseases.

The paper is entitled immunogenicity, safety and immune persistence of a novel inactivated human enterovirus 71 vaccine, a Phase II randomized, double-blind, placebo controlled trial.

As we are continuing to advance the development of our adult pipeline candidate the company recently initiated research and development program for a proprietary H7 and vaccine. And according to the ratio as of August 12th this year totaled 135,879 human infectious cases were reported with 44-fatality.

Although the epidemic situation of H7 and 9 in China in the past few months is still limited, one suspected human to human transmission case were reported in Jiangsu province of China and these demonstrates the risk of potential human to human transmission still exist. Therefore, our development project is being carried out as planned.

And then let’s turn to the financial review for the second quarter. As outlined in our quarterly release, total sales increased by 86.4% to $17.5 million in the second quarter of 2013 from $9.4 million in the second quarter of 2012. Gross profit increased by 70.1% to $13.6 million for the second quarter of 2013 from $8 million in the same period of 2012.

Gross margin was 77.9% in the second quarter of this year, compared to 85.3% same period of last year. Excluding impact of H5N1 inventory provision of $0.2 million, the gross margin was 79% in the second quarter of this year. The decline in gross margin was affected by the sales of different products mix with different level of gross margin.

And selling, general and administrative expenses for the second quarter of 2013 were $8.3 million, compared to $6.7 million in the same period of last year. Selling expenses as a percentage of second quarter 2013 sales was 32%, compared to 38.9% during the second quarter of the prior year. The decrease in the selling expense as a percentage of revenue was mainly due to the increased sales team productivity.

General and administrative expenses for the second quarter of 2013 decreased to $2.7 million from $3.1 million in the second quarter of 2012. The decrease was mainly due to the effect that the bonuses paid out or to be paid out were recorded against a previously accrued liability account rather than charged to expenses.

And this had the effect of partially offsetting increased G&A resulting from the higher operating costs because the company's Changping site is now fully operational comparing this situation in first half of last year.

A part of the operating cost increase was related also to the ongoing validation activities on the manufacturing facilities in support of the EV71 vaccine for which the NDA the new drug application is currently under review.

The research and development expenses in the second quarter of 2013 were $2 million, a decrease from $4.7 million in the same period of 2012. The lower R&D expenses in the current quarter were attributable to the completion of the Phase III study of EV71 vaccine candidate in the first quarter of 2013. The R&D activities in the second quarter focused on the other vaccine candidates in the company's pipeline.

And depreciation of property, plant and equipment, and amortization of licenses and permits for the second quarter of 2013 were $0.5 million, compared to $0.3 million for the same period of last year. Depreciation increased because more assets were in service at the Changping site as compared to the second quarter of last year.

Net income attributable to common stockholders was $1.3 million, or $0.02 per basic and diluted share for the second quarter of this year, compared to a net loss attributable to common stockholders of $1.6 million, or $0.03 per basic and diluted share for the second quarter of 2012.

And excluding the impact of the bonuses revision of $1.6 million in this quarter, which was paid out or to be paid out from a previously accrued liability account rather than charged to expenses, the net loss of the second quarter of 2013 would approximately be $0.3 million, or $0.01 per basic and diluted share.

And this concludes the management statements. And operator, we can now take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Isabella Zhao with Morgan Stanley. Please proceed with your question.

Isabella Zhao - Morgan Stanley

Thank you for taking my questions. First off, I want to congratulate for another good quarter. I will translate the questions into English. My first question was I want to ask Mr. Yin to comment on the competitive landscape for the hepatitis A and hepatitis B vaccine. What have you done differently in the past few quarters to grow the sales? Number two is the sales outlook for the second half for the flu vaccine? Thank you.

Dr. Weidong Yin

So to answer your question, Mr. Yin firstly thank you for asking the question in Chinese. Mr. Yin firstly answered your first question regarding to what Sinovac has done in order to achieve the high sales growth in the first half. Mr. Yin says actually the hepatitis vaccine market does not have any material change in terms of the structure of the player. However, that previously our key competitor, GlaxoSmithKline, they mainly supplied their hepatitis vaccine to the premium market and their product sales is limited in this year because the inventory [lap] is about to be expired.

And when Sinovac is executing our own sales marketing strategy, we are also entering into part of their market as well. And actually the current market strategy for marketing the hepatitis vaccine was made one year ago. And we are having a customized strategy targeting different market as well as providing different diversified presentations of those vaccines viral and pre-dose range to target different market segments.

And we believe that a combination of hepatitis A vaccine and hepatitis A and B vaccine in their portfolio are complementary to each other which help us to strength our market position in Chinese hepatitis vaccine market. We could clearly see that we are not only executing the sales strategy in a private pay market in past -- as what we did in the past but at the same time, we are also executing the marketing strategy through a sales through the third party, we call distributors.

And also we are seeing that the sales expansion in the public market expand in the first half. For example, the province of Jiangsu actually having a pretty big population site and we enter into this market to supply inactivated hepatitis A vaccine to the EPI market and we are having about half of the market share. And to combine all these above mentioned factors to actually achieve the increase order sales growth of both hepatitis A and hepatitis A and B vaccine. And I will invite Mr. Yin to answer your second question.

And regarding to the influenza vaccine market, actually the competitive landscape would not dramatically change through the previous bids. The only one change might happen is that the timing of launching the first batch of flu vaccine to the market is expected to be earlier than the previous flu season because it is earlier to obtain the virus strain and to submit for the first drug release application to the FDA therefore that we are expecting an early lunch of these vaccines in this year.

And also we have some market information that some of the key competitors of -- within the flu market might adjust in their supply strategies because in the past, some of its strong player want to supply more in order to get market share. But at this moment, they did not assure we are expecting to see the batch release data in the coming months.

And for Sinovac, we are still maintaining a consistent strategy of selling of a flu vaccine and we believe that a good result on hepatitis A vaccine and hep A and B vaccine in the first half will allow us to set more efforts on flu vaccine in the second half. And right now, our sales team is actively preparing on the commercialization of flu vaccines in these season.

And both for us this year, we don’t expect to increase the number of vaccines delivered to the dramatic increase compared to last year. However, our purpose is to decrease the level of product return in this year comparing to the prior year. As you may know that flu vaccine is only -- can only be used for one year due to the change of virus strain. Therefore all the vaccines has not been used on human or not immunized to human, it will be either returned and the product life on inventory can only be destroyed. That also incurred additional cost for the company.

And therefore this is how we want to improve the management and improve the profitability of flu vaccine franchise. And also the good news we obtain is that Sinvoac won the tender of Beijing flu market. However that right now in China, there are only one city, Beijing to provide a public market opportunity for flu. And we are expecting that more cities or provinces may adopt these similar strategies. And at that time, we would expect that market for flu will expand. And this is Mr. Yin’s answer to your question.

Isabella Zhao - Morgan Stanley

Thank you. If I can ask another question, if I may, do you comment as Helen or Ms. Wang’s comment on the margin trend in the second half of the year, especially given the fact that the gold margin has been trend up over the past two quarters?

Helen Yang

Thank you for questions. I may just answer it directly. Because in the first half, the vaccine we sold are only Hepatitis A and Hepatitis A&B vaccine. And I believe most of you are aware that the gross margin of these two vaccines are pretty high with around 70% and 80%. However, that in the first -- in the second half of this year, we would start selling flu-related vaccine.

And we expect a lower gross margin attached to flu vaccine since may occur and if the flu vaccine sales contribute more sales in the total revenue, we would expect the overall gross margin must be decreased comparing to the first half. And also further information, we obtain a note of each viron vaccine in the two years ago and that is under a governmental stockpiling program.

And we would expect to recognize about $20 million on the revenue in the third quarter. And this due to expiry -- after the vaccine are expired and we also expect a lower gross margin which is about 50% of each amount of revenues. And these will be included in the sales in Q3, we would expect the gross margin of the third quarter would be less compared to the first half.

Isabella Zhao - Morgan Stanley

Okay. Thank you. That’s all my question. Congratulations for good quarter again. Thank you.

Operator

Thank you. Our next question comes from the line of Yi Chen with Aegis Capital. Please proceed with your question.

Yi Chen - Aegis Capital

Hi. Thank you for taking my questions. My first question is, where is sales this quarter. How much sales comes from public market percentage wise and how much is from the private market?

Helen Yang

In this quarter…

Yi Chen - Aegis Capital

Yeah.

Helen Yang

… we have seen about -- you mean the sales growth or the contribution of the revenue from each market segment.

Yi Chen - Aegis Capital

The contribution of revenue.

Helen Yang

Contribution. So, in the third -- in the second quarter, about 90% of the revenue coming from the private pay market, the right -- overseas market is only 1% and right of them are the public market.

Yi Chen - Aegis Capital

Okay. My second question is how many people do you have currently in your sale force. And do you -- will you recruit more sales force once you get the EV71 vaccine approval?

Helen Yang

I would like to invite Mr. Yin to answer the question.

Dr. Weidong Yin

Right now. There are about 140 members in our sales team. As we are expecting the commercialization of EV71 vaccine next year, we plan to start organize the preparation for commercializing these vaccines in the fourth quarter. And we would expect the other increase of number of sales rep in a team will be in line with the sales activity for the market demand of EV71 vaccine after its commercialized. So the company internally has a plan and we will execute what we think the dynamic situation on the market.

Yi Chen - Aegis Capital

Thanks. My next question is do you expect your 2013 Hepatitis vaccines sales to be comparably the same or maybe some -- a little bit gross compared to the 2012 revenue?

Dr. Weidong Yin

We would expect the overall -- the total revenue of hepatitis vaccines will be higher comparing to last year, and particularly for the first half, all of its growth are contributed by the Hepatitis A vaccines.

Yi Chen - Aegis Capital

Thank you. My next is looking for the hand, foot and mouth disease, looking at the number of infection cases and also the number of death cases for the first half of 2013 compared to the first half of 2012, both numbers are lower. So do you -- I wanted to hear your comments on whether you see any trend in this or there is any trend in your opinion?

Helen Yang

I would like to invite Mr. Yin to answer the question.

Dr. Weidong Yin

Mr. Yin said he does not believe the decrease on the number of reported cases has any meaningful for the epidemic situation of the entire disease in China, because what we have seen in China that every month that were reported cases from January to May and also we have seen the reported cases from elsewhere. Therefore that we still think the disease operate still surround us and that’s why we think providing a vaccine to resolve the [Sinovac] treatment as they a need solution.

Yi Chen - Aegis Capital

Thank you. My final question is do you expect the EV71 that same to be approve by the end of 2013. Thank you.

Dr. Weidong Yin

Mr. Yin explained the few factors may affect the timeline of getting this vaccine approved. Firstly, we think from technically speaking we have successfully complete the Phase III clinical study. And the submission of our registration documents were completed as well. This show that we don’t believe there is any technical hurdle of getting this vaccine approved or we could see that it is highly possible for the vaccine to be finally approved to be commercialized.

And on the other hand, we believe that disease epidemic situation will provide a incentive to the government to approve the vaccine and given the current with either the reported cases or the epidemic situation, we have run from the industry, we still believe the government should be very incentivized to approve this vaccine.

But third factor may affect the timing is the organization now start to change with industry FDA. And this is partly to be managed. But we believe that this vaccine is quite important related to the public health issues in China. And we would expect that we should take an active and positive feel of approving this vaccine.

And of course, the management would expect -- would hope the vaccine can be approved by the end of the year but there are uncertainties. And we will do whatever we can in order to get the approval done as soon as we can. However that we can have any control on that.

Yi Chen - Aegis Capital

Thank you very much for the answers.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of John Gregory with SJ Strategic Investments. Please proceed with your question.

John Gregory - SJ Strategic Investments

Thank you. First, congratulations to management on developing a unique vaccine company that really seems to be getting sales growth and traction with its business model. I’ve got a couple of questions. Most of us have read recently about the Chinese government cracking down on big pharmaceutical companies in China about some of their marketing practices to doctors which the government seems to suggest orders on bribery. I note that two of the companies are GSK and Sanofi, which I think both of these companies sell vaccines in China. Does management think that the pressure being put on these big pharma companies and China will actually benefit Sinovac’s revenues in the future, since these companies are your competitors?

Dr. Weidong Yin

So, Mr. Yin answered your question that because this case, these issues are happening for the other companies. He is not willing to comment on those cases and he is not willing to comment on whether Sinovac getting benefit because of that. But the comment Mr. Yin wants to make is that the entire Chinese vaccine market is high, is growing very fast and within these for the high growth there must be some uncertainty.

What the management within Sinovac can do is that we will be the company to get benefited for the business to be benefited on every kind of opportunities we can leverage, but at the same time, we need to make sure that we are having a good compliance system in order to eliminate the other risks that might happen during conducting business.

John Gregory - SJ Strategic Investments

Okay. I realize that there’re some other companies that are going after the hand, foot and mouth disease vaccine other Chinese companies, but it seems like Sinovac is on a faster track from mice research getting approval first before any other Chinese vaccine company. Does management have any insight on that as far as where they stand in the queue compared to the other people trying to get approval of this vaccine?

Helen Yang

Thank you for your question. Now I will translate to Mr. Yin and I’ll ask him to answer.

Dr. Weidong Yin

Actually there are three companies all complete their Phase III clinical study and the NDA was submitted for all three. So these three companies are at a similar stage. We don’t see we have a very clear advantage compared to other two peers to get EV71 vaccine approved before them, but we believe that as the goal of the management team and also to provide a good return to our the investors and we will do whatever we can to get the approval as soon as we can.

And another point Mr. Yin made to this question is that, this vaccine were never been studied by any another entities outside of China in the past and we believe that having three companies are conducting the research on these vaccines can actually demonstrate the result of everyone and to provide a confidence to the public and also to -- for the authorities in order to approve these vaccines more smoothly.

And on the other hand, these vaccines have never been used on humans ever in the past and our purpose is not to commercialize it as the first company, in fact we want to collaborate with the other two peers to launch the entire market size of this vaccine in order to control the disease of operates in China and also in other countries.

John Gregory - SJ Strategic Investments

Okay. Just my final question is, I didn’t think that mumps vaccine was supposed to be that bit of a revenue product, does management surprised by how well they are selling that product?

Helen Yang

So your question is that you think the mumps vaccine sales are higher than you expected?

John Gregory - SJ Strategic Investments

Yeah. I thought it was -- I didn’t think you all thought it was going to be that big of a product. It looks like you sold almost a $1 million in the quarter, is that what you’re expecting?

Dr. Weidong Yin

And for the mumps vaccine, we actually -- these vaccines normally compares with our other vaccines may bring relative lower level of revenue and internally we have a budget, and we think the sales that we have made in the first half demonstrate that the Chinese market has a big potential that these vaccine sales are address some regional operate of mumps in China, but we still think compared to the other vaccines there relatively small.

However, as we think having these vaccine sales on the market, they can actually give us a good foundation for developing a good combination of vaccines to combine that with other live attenuated vaccines, which are manufactured by our Dalian site and these actually move the Dalian company from a R&D space to a entire companies with commercial production which we think is more meaningful than increase of sales -- limited sales of mumps.

John Gregory - SJ Strategic Investments

Okay. Thank you.

Helen Yang

You’re welcome.

Operator

Thank you. Ms. Yang, there are no further questions at this time. I’d like to turn the floor back over to you for closing comments.

Helen Yang

Thank you. We’re very glad to share these quarterly results with all of you and I would like to take this opportunity to remind that we are going to host the 2013 Annual General Meetings of Shareholders on August 21, 2013 and all shareholders of record of our common shares as of the close of business day on July 3, 2013 are entitled to vote. And here we want to urge all investors to vote your shares at your earliest convenience and we also look forward to seeing you at our AGM which will be hosted on our headquarters in Beijing of China. And should you have any questions on AGM voting, please then contact to us by sending email to ir@sinovac.com. And thank you for your time. Have a good day.

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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