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Simcere Pharmaceutical Group (NYSE:SCR)

Q3 2013 Earnings Call

November 14, 2013 08:00 am ET

Executives

Jinsheng Ren – Founder & Chairman

Hongquan Liu – Chief Executive Officer

Yushan Wan – Acting Chief Financial Officer

Jingwu Zang – Chief Scientific Officer

Joy Haiying Wang – Business Development Manager, Simcere of America Inc.

Analysts

Operator

Hello everyone. Thank you for standing by for Simcere’s Q3 2013 Earnings Call. (Operator instructions.) Today’s conference is being recorded. I would now like to turn over the meeting to your speaker for today, Ms. Joy Haiying Wang, Senior Manager of Business Development, Simcere of America. Please go ahead.

Joy Haiying Wang

Thank you. Welcome to Simcere Pharmaceutical Group’s Q3 2013 Earnings Conference Call. Our Q3 2013 results were released earlier today and are available on the company’s website as well as [web feed] services. In addition, an archived webcast of this conference call will be available on our Investor Relations session of our website at www.simcere.com.

Joining us for today’s call are Mr. Jinsheng Ren, our Chairman; Mr. Jongquan Liu, our Executive Director; Mr. Yushan Wan, our Acting Chief Financial Officer; and Jingwu Zang, our Chief Scientific Officer.

Before we continue please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined with our public filings with the SEC. Simcere does not undertake any obligation to update any forward-looking statements except as required under applicable law.

I will now turn the call over to Simcere’s CEO, Mr. Hongquan Liu.

Hongquan Liu

Good morning, everyone. Thank you for participating in our Q3 2013 Earnings Conference.

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(Inaudible) of China’s pharmaceutical market continues its integral significant change in Q3 2013. In Q3 we completed the sale of our equity interest in Boda and in Kanda in line with our future business strategy, enabling us to focus more effectively on our core business.

In part due to price policy and EDL tendering, Q3 sales declined. However, we are pleased to see that our cost controls in sales and marketing, G&A and R&D are proving [substantial]. In particular, sales and marketing expenses as a percentage of total revenue decreased 1.4 percentage points from 59.5% for the same period in 2012. Excluding one-time items, Q3 net income was RMB 30.13 million, representing a year-on-year increase of 36%. Overall, we are encouraged by the signs of improvement in our operations.

Drilling down on the restrictions on the use of antibiotics combined with China’s essential drug policy continues to impact sales of Anqi, Anxin, and Zailin which decreased to various degrees compared with the same period last year. Sales of Bicun, our Eddaravone drug, were RMB 115 million in Q3 2013 representing a year-on-year decrease of 28.2% mainly due to the price policy and price erosion from generic competition.

Sales of Endu, Jie Bai Shu and Nuowei, our oncology drugs, were up 7.6%, 11.2% and 8.9% respectively. Sales of Sinofuan dropped 14.3% compared to the same period of last year. In Q4 we will keep working on key hospitals and on increasing penetration in the markets which have entered a PRDL, the Provincial Reimbursement Drugs List.

Sales of our new product IREMOD were RMB 11.97 million in Q3 2013 with projected growth of 66.9% year-over-year. In Q4 we will further rationalize the resource allocation and integration of the four post-market clinical trials with (inaudible ) our marketing activities in order to promote IREMOD growth.

In terms of R&D, in Q3 we submitted an IND application to CFDA for [Topotinit], a new generic anti-(inaudible) drug.

And in Q3 we completed share transfer and equity interest clearance relating to Boda, and we realized a gain from the sale of equity interest in Kanda. Also in Q3 our influenza vaccine obtained a lot release approval for 200,000 units, marking the resumption of normal commercial manufacturing.

In summary, while we are still facing various challenges from government-mandated price cuts, market competition and [tethering] policies we will remain steadfast in our focus on budget management, rational allocation of resources, improvement in cost efficiency and enhancing the company’s profitability. At the same time we will strengthen our sales training and adhere to our standard (inaudible) professional marketing strategy in order to increase marketing efficiency.

In addition, we will improve our customer management, focus on key hospitals and keep a close track of ongoing adjustments to healthcare policy while sparing no effort to act upon market opportunities so as to continuously improve Simcere’s operations and realize sustainable growth.

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.

Yushan Wan

Thank you, Mr. Liu. Now let me give you the financial overview for Q3 2013.

In July, 2013 we completed the deal of our equity interest in Jilin Boda Pharmaceutical Company. Boda’s operational results in July and the gain from the disposal, which in total amounted to RMB 217.1 million are presented as discontinued operations.

In Q3 we also completed the transfer of our equity interest in Kanda and realized a gain of RMB 233 million from the sale, which has been reflected as an investment gain in Q3.

(Inaudible) that a company may not realize projections in (inaudible) 2013 as previously planned. In Q3 2013 management reassigned the present operation status and the future expectation of the company investing industry, and revised our sales forecasts. This led to an impairment loss of RMB 106.0 million for goodwill, and RMB 18.96 million for intangible assets. In the meantime, RMB 26.1 million of inventory write downs were recorded in Q3 2013.

Now, moving on to Simcere’s continuing operations including impacts from the special items mentioned above in Q3 2013. In Q3 2013, revenue from continuing operations was RMB 421 million, a decrease of 15.5% compared to RMB 505 million for the same period in 2012. The decrease of revenue from continuing operations was primarily due to the sales drop of products such as Zailin due to the issue related to the tendering process, restriction on the use of antibiotics and the government-mandated price cuts.

Gross margin from continuing operations for Q3 2013 decreased to 82.2% compared to 84.2% for the same period in 2012. The decrease was primarily due to the drop in the sales of products with higher gross margins as a percentage of total sales.

Sales, marketing, and distribution expenses from continuing operations for Q3 2013 were RMB 207 million, which represented a decrease of 31.1% from RMB 300 million in the same period in 2012. As a percentage of total revenue from continuing operations, sales, marketing and distribution expenses from continuing operations decreased to 49.1% for Q3 2013 from 59.5% for the same period in 2012. The decrease was primarily due to the decline in travelling and conference expenses and promotion expense.

G&A expenses from continuing operations were RMB 66.12 million for Q3 2013, which represented an increase of 13.6% from RMB 38.20 million for Q3 2012. The increase was primarily due to the legal and professional fees incurred during the company’s going-private process and an increase in share-based compensation expenses. As a percentage of revenue from continuing operations G&A expenses increased to 15.7% for Q3 2013 from 11.5% for Q3 2012.

R&D expenses from continuing operations for Q3 2013 totaled RMB 47.5 million, representing a decrease of 26.5% from RMB 64.7 million for Q3 2012. The decrease occurred after Simcere completed development of influenza vaccine and it began commercial manufacturing, which leads to the decrease in R&D expenses in the vaccine business. As a percentage of revenue from continuing operations, R&D expenses decreased to 11.3% for Q3 2013 from 12.8% for Q3 2012.

Operating income for Q3 2013 was RMB 25.93 million compared to RMB 26.47 million for Q3 2012. Interest expense for Q3 2013 was RMB 12.02 million compared to RMB 15.47 million for Q3 2012. The decrease was primarily due to the increase in net operating cash flow as we adjusted our commercial policies which decreased the amount of bills receivable and accounts receivable.

The income tax benefit from continuing operations for Q3 2013 was RMB 5.78 million compared to income tax expense of RMB 3.2 million for Q3 2012. The income tax benefit in Q3 2013 was due to the tax losses of Simcere’s PRC subsidiary.

Excluding the impact from the special items, net income attributable to Simcere was RMB 30.13 million for Q3 2013. Including the impact from the special items net income attributable to Simcere was RMB 384.10 million compared to RMB 22.16 million for Q3 2012.

As of September 30, 2013, the company had cash and restricted cash of RMB 873 million compared with RMB 202 million as of December 31, 2012. The increase in cash was primarily due to the RMB 644 million cash consideration received from the sale of Simcere’s equity interest in Kanda Biotech and Boda, the increase in net operating cash flow as we adjusted our commercial policies which decreased the amount of bills receivable and accounts receivable.

Thanks for your attention. I would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) As there are no questions I would now like to hand over the conference to your speaker for today, Mr. Hongquan Liu. Please go ahead with the closing remarks.

Hongquan Liu

Thank you for your participation in our Q3 2013 earnings call. Thank you very much, bye-bye.

Operator

Thank you for your participation in today’s conference, you may now disconnect. Have a good day.

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