Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

3SBio Inc. (NASDAQ:SSRX)

Q4 2009 Earnings Call Transcript

February 12, 2010 8:00 am ET

Executives

Tom Folinsbee – Director, IR

Dr. Jing Lou – CEO

Bo Tan – CFO

David Chen – EVP and COO

Analysts

Katherine Lu – Oppenheimer

Hongbo Lu – Piper Jaffray

Sean Wu – Morgan Stanley

Chang Chew [ph] – Stanza Capital [ph]

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 3SBio 2009 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator instructions) I must advise you that this conference is being recorded today, Friday the 12th of February, 2010. I would now like to hand the conference over to your host today, Mr. Tom Folinsbee. Thank you, sir. Please go ahead.

Tom Folinsbee

Hi, this is Tom Folinsbee and I am the Director of Investor Relations for 3SBio. Welcome to our fourth quarter 2009 results conference call. Before I turn the call over to the management team, I would like to remind you that the presentation today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks, uncertainties, and assumptions and as such 3SBio’s actual financial conditions and operational results may differ materially from those forward-looking statements. A number of risks and uncertainties are discussed in Risk Factors and other relevant sections of 3SBio’s filings with the Securities and Exchange Commission.

Please see the earnings press release under the heading Safe Harbor statement for more information. 3SBio undertakes no obligation to update or revise these forward-looking statements. As the management team proceeds through their remarks, they will refer to the fourth quarter results presentation, which can be downloaded from www.3sbio.com under the Investor section on your webcast. The management team will open the floor to questions after their opening comments.

I will now turn the call over to 3SBio’s CEO Dr. Jing Lou. Dr. Lou, please go ahead.

Dr. Jing Lou

Thank you, Tom, and thank you everyone for joining our fourth quarter 2009 conference call. Joining me today are David Chen, Chief Operating Officer; and Bo Tan, Chief Financial Officer. After some brief comments we will be pleased to answer your questions.

2009 was a significant year for 3SBio despite various challenges we faced during the year. We again grew our top line over 30% and exceeded the financial objective we set at the beginning of the year. Beyond top line growth, we also improved our operating margins from 19.6% to 26.6%. We also made significant progress on our operational fronts against our business plan. We completed the construction of our new EPIAO and TPIAO plant in Shenyang as planned in the beginning of this year. We will now focus our efforts on obtaining GMP certification from the SFDA to next stage of our strategy to produce high-quality, cost-effective products for patients in China and in selected international markets.

We have also introduced strategic alliances to build our future pipeline. The collaboration and the license agreement with Panacor Bioscience to develop the China market for Nephoxil, a treatment for elevate phosphate in the blood, or hyperphosphatemia once again demonstrated our ability to build our pipeline through external partnership and is another excellent execution of our business development strategy, which is to leverage our core franchise in nephrology.

We have also concluded a strategic investment in Ascentage Pharma, a Shanghai based drug discovery firm, which combined expertise from the U.S. and across effective drug discovery platform in China to develop a best-in-class target cancer NCEs that have a global IP position.

We have filed clinical trial application for Feraheme and NuPIAO with the SFDA. We now have five products in the SFDA approval pipeline.

I would like to take a moment to reflect on our achievements as a public company since 2007. We have roughly tripled our revenue and net profits compared to 2006. We have significantly expanded our sales and marketing and management infrastructure to increase our strategy position in the faster growing pharmaceutical industry in China.

As our flagship EPIAO has gained significant market share and has remained dominant market leader at 41.6% as of third quarter 2009, we have also entered four strategic partnerships to build our pipeline and fuel future growth of the Company. We have also significantly advanced our internal pipeline now with the three products in the SFDA approval pipeline and three ready for clinical trials.

We have turned the blueprints of a new manufacturing plant into a reality, which is well-positioned to meet domestic for our products and to explore global but similar opportunities.

Looking into the future, I am very excited about the high growth potential of the Chinese pharmaceutical market and its increasing importance on the global landscape. I feel that last year’s healthcare reforms will further fuel market growth and we are in a strong position to benefit from this trend.

For 2010, we will remain focused on executing our business strategy and delivering a strong top line and bottom line growth from our core products while laying the foundation for long term shareholder value. We are confident in setting a 2010 total net revenue target between US$56 million to US$58 million, representing approximately a 20% to 25% increase over 2009.

So, I would now like to turn the call over to Bo Tan, our CFO, who will review our financial results and then David Chen, our COO, will – who will update you on our operations. Bo?

Bo Tan

Thank you, Dr. Lou, and hello again to everyone on the call. As I go through some financial highlights, you can find more details on slides eight to 12 as well as in the press release. We continue to show both adjusted and non-GAAP and GAAP numbers for this quarter. You can find the reconciliation tables in the press release. I am also going to use U.S. dollars throughout, but you can find the RMB figures in the press release.

Firstly, a couple of key items in the income statement. In the fourth quarter of 2009 our net revenue increased by 23.6% to $10.9 million from the same period in 2008. Full year net revenue increased by 30% to $46.4 million, which exceeded our guidance, a result of strong sales across our product alliance.

Gross profit in the fourth quarter increased year-on-year by 25% to $10 million compared with $8 million for the final quarter of 2008. For the full year gross profit grew 31.6% to $42.7 million compared to a $32.5 million in 2008. The gross profit margin for 2009 was 92%, 0.9% higher than 91.1% in 2008.

Our adjusted operating income for the fourth quarter was $2 million, an over 122.5% increase over the same period last year. Our adjusted operating income for 2009 was $13.3 million, a year-on-year increase of 52.3% over the same period in 2008. Our adjusted operating margin for 2009 was 28.7%, a 4.1% improvement over 24.6% in 2008. Our GAAP operating margin for 2009 was 26.6% compared to 19.6% in 2008, a 7% improvement.

Looking at the bottom line, adjusted net income for the fourth quarter was $2.1 million, and for the full year it was $13.2 million, a 20.3% year-over-year growth – increase over 2008. Our GAAP net income was $2 million in the fourth quarter of 2009 compared to a net loss of $0.2 million for the same period in 2008. GAAP net income for 2009 was $12.2 million compared to a net income $5.8 million in 2008, a 111% year-on-year growth increase.

Turning now to the cash flow and the balance sheet items, 3SBio had again positive operating cash flow of $12.9 million in 2009. At year-end we had cash, cash equivalents, restricted cash and time deposits of $108.5 million, a 1% increase from 2008. Total CapEx in 2009 was US$13 million and we expect the CapEx in 2010 to be between US$10 million to US$12 million.

As Dr. Lou mentioned, with our past performance and the view of the future economic environment and the market condition, we provide a total net revenue target of between US$56 million to US$58 million for the full year of 2010.

Thank you. And I would now like to turn the call to David Chen for some remarks on what drove our growth and some operational developments. David?

David Chen

Thank you, Bo. Overall, the strong momentum from the start of this year has continued through to the fourth quarter with revenues from our core products EPIAO and TPIAO both increasing year-on-year by 26.9% and 32.7%, respectively. According to the latest data from IMS Health, we’ve retained a dominant market share position of 41.6% of the EPO market in China.

Please refer to the graphs on slide 22. (inaudible) EPIAO growth is mainly driven by the growth of the dialysis market in China and our ability to continue to differentiate EPIAO and 3SBio corporate brands among nephrologists and patients. As we continue to progress through the SFDA approval process with three Phase III applications already under review, namely, 36000 IU dosage formulation of EPIAO, NuLeusin and a TPIAO label extension for the treatment of ITP, we also added our approval pipeline with the registration trial application for Feraheme and an application for a Phase I clinical trial for NuPIAO, our second generation EPO product.

2010 will be a significant year in terms of maturation of our SFDA approval pipeline and we look forward to updating the market on our progress.

Construction of the new EPIAO and TPIAO manufacturing plant in Shenyang was completed according to the plan and work is on the way to begin validation of the (inaudible) with the objective to obtain China GMP certification by the end of 2010 and initiate the approval process in selected international markets. We’ve seen very encouraging trends in export sales in 2010 and are planning to step up our efforts as our new plant becomes fully operational.

We are very excited about our newly formed strategic alliances with Panacor and Ascentage Pharma. We believe these investments are the optimal ways for us to deploy capital and build an innovative pipeline. Nephoxil is a well-differentiated phosphate binder that could be a significant addition to the recurrent [ph] phosphate management of CKD patients in China. We believe that most of the development risks have been discharged given the compelling Phase II data generate in the U.S. and Taiwan, and we look forward to initiating the approval process soon.

Our strategy investment in Ascentage Pharma is another example of how we think about deploying capital to build an innovative pipeline. One of the exciting programs Ascentage Pharma are working on are novel small molecules that are designed to restore apoptosis by blocking the function of pro-survival Bcl-2 family of proteins. Bcl-2 family of proteins, which are – extracts at high levels in many tumors play a central role in regulating apoptosis and consequently are thought to impact tumor formation, growth and resistance to treatment.

Globally two Bcl-2 inhibitors are in Phase II development stage and show promise and efficacy in prostate cancer and small cell lung cancer and leukemia. With this investment, we now have China commercial rights, potential best-in-class cancer [ph] that are attractive globally to multinational companies and gain access to proven and cost-effective small molecule drug discovery engine in China.

Moving forward, we will continue the strategy to look for opportunities to invest our strong balance sheet to build our pipeline and create long term shareholder value. Our main criteria in business development remains unchanged the most important ones being that new products should complement our core strengths while leveraging our existing cells for marketing infrastructure in nephrology and oncology in China.

Overall, we are very pleased with our operating results and progress with the pipeline and our business development efforts over the past year and we look forward to providing you further updates.

Thank you, and now I turn the call back to Dr. Lou for some closing remarks. Dr. Lou?

Dr. Jing Lou

Thank you, David. Well, just to sum up, we are very pleased with our achievements both operationally and strategically over the past year and the operating outlook for 2010 and beyond is shaping up well. We will continue to remain focused on our established strategy of investing for the long term and we look forward to giving you update on the promising initiatives we have discussed today.

Our team will now take your questions.

Question-and-Answer Session

`

Operator

(Operator instructions) You first question comes from the line of Katherine Lu from Oppenheimer. Please ask your question.

Katherine Lu – Oppenheimer

Hi, good evening, Dr. Lou, Bo, and David. Congratulations on a very strong quarter and two very successful business development deals. First of all, I want to get a sense of your assumptions behind the 2010 revenue guidance. Could you talk about if there is any assumption for new product launches in 2010 and what kind of a market growth do you expect fro EPO market? And also, pricing. In terms of manufacturing facility, you said you are waiting for SFDA GMP inspection. So should we assume that the facility will be up and running in late 2010 and contribute to the figures [ph]?

Bo Tan

Hi Katherine, this is Bo here. Basically when we look at the market – the overall market growth of 2010 we feel that the overall market in our relevant segment will continue to be at double digit. In the past, the CAGR has been around 15% to 18% and we have been growing faster than the market average growth. So we – that’s how we set our guidance at 20% to 25% of growth for 2010. In terms of the pricing environment, in the past we have factored in a average selling price decline of 3% to 5% but over the past year or two we have been seeing a stable pricing environment and going forward we still expect the pricing to be stable with plus or minus of 3% to 5%. In terms of the manufacturing facility, we completed the construction and we are in the process of getting the validation and a certification process with the Chinese SFDA and we are expected to get GMP certification by the middle of this year. And our current capacity, we’ll be able to support our market demand in China and also from selective international markets right now.

Dr. Jing Lou

Just one – yes, one additional point you raised, we didn’t factor in any new product launches for this year in our guidance.

Katherine Lu – Oppenheimer

Okay, great, thank you. That’s very helpful. You just talked about pricing and I look at your presentation, looks like China EPO market volume growth was exceeding the sales growth in 2008. So, I am just wondering given the initiation of government healthcare reform and the government tender process in the provincial level, what kind of pricing trend have you seen in the past few months?

Bo Tan

In the past few months we – the pricing trend we’ve seen has been quite stable for our product. Based on IMS data, in the first quarter – in the first three quarters of 2009, the market growth – volume growth rate was 21%. And the dollar growth was 18%. Well for us we have been able to have a stable pricing for our key products.

Katherine Lu – Oppenheimer

Okay, so thank you. Yes, go ahead.

David Chen

Yes, so probably if you look at small dosage forms, you probably see some pricing pressure in many other EPO products, but we mainly sell in 10,000 IU vial. And we are seeing a very stable pricing on our dosage form.

Katherine Lu – Oppenheimer

Okay, that’s great. And Dr Lou, you said you were very encouraged by the growth outlook of China’s pharmaceutical market. Would you be able to elaborate what kind of opportunities do you see there for 3SBio and as well as our country [ph] risk do you see?

David Chen

Katherine, are you asking this question to Dr. Lou.

Katherine Lu – Oppenheimer

Yes. Or whoever can take the question.

David Chen

Yes, let me try to answer the question. I think overall we have seen very clear plan in terms of where the healthcare reform dollars are going to be spent next year, namely, spending on the – covering the essential drug list, expanding the basic insurance coverage, dosing [ph] the community health centers and also some other public health initiative as well as the possible reforms. So all these are very positive trends for us in terms of the boost of the overall healthcare the spending in dollars. And certainly as we expand our EPIAO more around the EPIAO hospital penetration into the second tier cities and even third tier cities, we certainly can se some benefits in that area. But, overall, I think our concentration are mainly in the large institutions and oncology hospitals, so the specific impact for the next year we think will be marginal. But as far healthcare reform goes we are – it’s an overall positive trend for 3SBio as well as for companies that are in our position who have unique product offerings.

Dr. Jing Lou

Yes, Katherine, this is Dr. Lou. Besides those common factors as everybody knows, ageing and chronic disease incidents going up and the coverage of the insurance the government are increasing I think there is specific for us is the – we are in nephrology market, the dialysis market are (inaudible) by some local governments also the central government.

Katherine Lu – Oppenheimer

Okay, great, thank you. And my final question is for David. Congratulations on the business development deal again. Could you just elaborate on the market opportunity for the products you just in-licensed and also may be give us some details in terms of the clinical development trend for the products.

David Chen

Right, okay, for Panacor deal, the – Nephoxil is a – is very differentiated phosphate binder. It doesn’t help the accumulation of this heavy metals and also in terms of the calcium and other heavy metal accumulation and there is no concern over metabolic acidosis and very good safety profile. All of these we think will contribute to a very unique product offering to the marketplace.

As to the phosphate management market, if you look at the global marketplace in the U.S. it’s roughly $600 million market growing at 20% a year. Worldwide it’s almost a $1 billion market. And in China it’s not developed yet. It’s – most of the patients they are all in need phosphate control but they are on the OTC calcium or other like aluminum to control their phosphate. So, we think the market potential is very significant particularly [ph] for those patients on dialysis.

In terms of our development plan, our current strategy is to conduct a Phase III, multi-center trial in conjunction with our partner Panacor in Taiwan. They have set their protocols and recruited hospital and getting ready to start Phase II trial in Taiwan and our strategy is to conduct clinical trials and multi-center Phase III trials along with our partner for the future approval.

Katherine Lu – Oppenheimer

Can I quickly follow-up on that? So, for the Phase III trial you are going to conduct with Panacor in Taiwan or product introducing---

David Chen

No, in China.

Katherine Lu – Oppenheimer

Okay.

David Chen

Roughly 200 patients on the drug, and it’s about two months trial.

Katherine Lu – Oppenheimer

Wonderful, okay. Okay, when do you expect to initiate the trial?

David Chen

If everything goes well, we are looking at to initiate a trial probably in 2011, early 2011.

Katherine Lu – Oppenheimer

I see, got it, and in your early remarks you did mention that you view oncology as a growing area, a growing opportunity for 3SBio. Now with your high dose EPO approval pending, I am just wondering are you going to expand your sales force in the oncology area?

David Chen

Yes, we are targeting to grow our sales and marketing infrastructure roughly 10% every year and we have done that in the past three years. So, once we launch the EPIAO 36000 we certainly will step up a little bit our efforts on the oncology studies.

Katherine Lu – Oppenheimer

Okay. Thank you very much, and Happy Chinese New Year.

David Chen

Same to you.

Operator

Thank you. Your next question comes from the line of Hongbo Lu from Piper Jaffray. Please ask your question.

Hongbo Lu -- Piper Jaffray

Thank you. Hey Dr. Lou, David, and Bo, how are you guys?

Dr. Jing Lou

Good, thank you.

Hongbo Lu -- Piper Jaffray

I have a – good – I have several questions. First, just want to clarify, on the new facility, I have two versions, one is the GMP certification by mid-year, the other is by the end of the year. Can you clarify what are you going to do? What’s still left [ph] remained to be done for the new facility and out of the $10 million to $12 million CapEx for 2010, what portion will be spent on the new facility?

Bo Tan

Hongbo, this is Bo here. The $10 million to $12 million CapEx for this year about $8 million to $10 million will be spent on the new facility. And I don’t know where you heard the two versions. I think we are targeted to have the GMP certification by the mid of this year.

Hongbo Lu -- Piper Jaffray

Okay good. And then so now going back to what you have spent, I think in 2009 you spent $13 million and then 2008 you spent $5 million. if we add those together you are looking at about $28 million in total spending, right, for this new facility.

Bo Tan

That’s right. About $28 million to $30 million for the new facility.

Hongbo Lu -- Piper Jaffray

Okay. Now, when do you expect to start depreciation of this new facility.

Bo Tan

Right now it’s all construction in progress. And as soon as we are able to get the GMP certification we’ll be able to start the depreciation.

Hongbo Lu -- Piper Jaffray

Are you going to start depreciation once you start production or you – as soon as you get GMP certification you will have to start depreciation?

Bo Tan

Well, that’s in time, right, that’s a – it’s an point [ph] in time.

Hongbo Lu -- Piper Jaffray

Okay. Are you going to – would you be able to depreciate only the proportion that you use for manufacturing commercial goods or you will have to depreciate the whole amount right from – right after you get the GMP certification?

Bo Tan

We will – right now our plan is that you depreciate the whole amount right after we get certification.

Hongbo Lu -- Piper Jaffray

Okay, got it. Okay, thank you. And then second question is on your Slide 16, it actually says Feraheme submitted for SFDA approval. I am a little bit confused.

David Chen

It was submitted for approval after clinical trial.

Hongbo Lu -- Piper Jaffray

For a Phase III clinical trial, right?

David Chen

Yes for registration trial, yes. Registration--

Hongbo Lu -- Piper Jaffray

It’s (inaudible) okay.

David Chen

Sorry about the confusion.

Hongbo Lu -- Piper Jaffray

Okay. That’s okay, thank you, David. And then the third question, on the full year basis, if we look at EPIAO, can you talk about the market dynamics in nephrology and oncology because historically I think in 2008 oncology has been growing faster than nephrology. In third quarter, last quarter, you mentioned both nephrology and oncology grew almost at the same rate. So, on a full year basis, what are you seeing for nephrology and oncology? And then for your guidance for 2010, what kind of assumption you built in for EPIAO’s growth in these two areas?

David Chen

This is David here, Hongbo. The EPIAO growth this year has been in line with our expectation. We certainly did a – we factored in our guidance about 5% of pricing decrease for this year. Our sales and marketing team has done a remarkable job in terms of stabilizing that price. So you see about 26% of the growth on a full year basis.

In terms of – this is more on the dialysis side in terms of growing generally to the dialysis market. In terms of the oncology we have seen some modest growth throughout the year and partially certainly because of the market education effort on the promotion side throughout needed to educate the doctors and certainly the negative impact of ESA usage from the U.S. has some negative impact as well. So we have seen some slowing down on the oncology side.

Hongbo Lu -- Piper Jaffray

I mean do you have the current breakdown in terms of EPIAO sales for nephrology and oncology, I know it’s hard to get that set of a data.

David Chen

(inaudible) now it’s roughly I would say before it was 30%, now it’s roughly a little bit less, it’s probably 20%, 27% or so.

Hongbo Lu -- Piper Jaffray

Okay, great, thank you. And then the fourth question, if I may, is the exporting actually is tracking ahead of my expectation. Usually fourth quarter usually is not a strongest quarters for exports. Can you comment on what happened in the fourth quarter for 2009 for your exporting business?

David Chen

Export – because we managed our export businesses through our local distributors, so the quarterly numbers can be quite lumpy. So I – this increase is probably due to some of the increased orders on our interferon and EPIAO. So on the quarterly basis it can be quite lumpy, but overall, it’s – it has been growing faster than our domestic sales for this year, which is a positive sign for us.

Hongbo Lu -- Piper Jaffray

Okay. Last question is for the Ascentage deal, my understanding is you actually do not have access to the two clinical stage compounds. However, you do have – you will have the China commercial rights to their – the pipeline of preclinical assets. Can you double-confirm that and also if you decide to in-license or how does that work? Do you need to pay additional in order to in-license or I guess my question is what does that $3 million entitle you for?

David Chen

Okay. Ascentage Pharma is a spin-off from Ascenta Therapeutics. So it’s a clean break. They don’t have any relationship right now on that front from a business perspective. Obviously the founders of Ascentage Pharma’s all the scientists [ph] original founders of Ascenta Therapeutics. So what – what $3 million give us is to fund their drug discovery efforts in several highly promising targets area that potentially can produce the best-in-class molecules that are going to be globally attractive to multinational companies who are interested in this area. But also giving us the commercial rights to these products when they go to the market. So--

Hongbo Lu -- Piper Jaffray

Do you need to make additional payment – you wanted to (inaudible) commercial rights?

Dr. Jing Lou

We don’t need to pay additional capital for the Chinese market.

Hongbo Lu -- Piper Jaffray

I see, okay. And are you going to help with Ascentage’s R&D spending or this $3 million is just what they are going to get?

David Chen

This is a straight equity investment and certainly when they produce the – in two years they will be able to deliver like clinical compound and also probably one to two candidate selections, which we think will – depending on the data, will generate significant value for the Company.

Hongbo Lu -- Piper Jaffray

Okay, great, thank you so much.

Operator

Thank you. (Operator instructions) Your next question comes from the line of Sean Wu from Morgan Stanley. Please ask your question.

Sean Wu -- Morgan Stanley

Hello. Hi Lou, and Bo.

Dr. Jing Lou

Hi Sean.

Sean Wu -- Morgan Stanley

Thanks. Thanks a lot. Thank you very much for taking my call and congratulation on very historical quarter. I have – almost all the good questions have been asked and I can try to be (inaudible) One question is like it looks like you have – you have tax benefit in the fourth quarter. Bo, can you please help me with this?

Bo Tan

Sure. When 3SBio had a couple of subdivision, subsidiaries before and in 2008 in art of the sort of streamlining our Company so we closed down one of the subsidiaries, Beijing Sunshine, and we have listed some of the loss as – as after tax item in 2008 and in 2009 the National Tax Bureau has the new policy for the related companies sort of – so for certain transactions between the related companies you could actually list it as a before tax item so that we can actually enjoy some tax benefit. That’s the way that one-time item showed up. So, it’s a benefit to the Company, but it’s one-time in nature.

Sean Wu -- Morgan Stanley

What is – the way I see for your standard tax rate for next year?

Bo Tan

Still going to be 15% as we have obtained the high tax at a price status [ph] in 2008. That give us a three-year 15% tax rate.

Sean Wu -- Morgan Stanley

Okay, that’s great, Bo. David, you must be extremely busy these days so I would not like to doing a lot. Likely common question, you spent that $1 million to get a late stage product and you spent $3 million for this Ascentage Feraheme. It looks to me a little bit more, why like the other – what appeared to us much more than the other deal in terms of the dollar you paid upfront?

David Chen

Right. These two deals are very different. One, we certainly have a different percentage ownership of Ascentage Pharma versus the Panacor. We have significant more equity position in Ascentage Pharma, so that’s certainly explain the difference. And the second is we are looking at Ascentage Pharma that has the potential to on the global IP position on small molecule targeted cancer therapeutics around very exciting targets; Bcl-2 is highly pursued by only a few U.S. biotech companies and pharma companies in the U.S. with about Phase II development status. So these are very different. One is looking at the global markets, and then the other – the phosphate binder only looking at the China market. So that – those two – and they are also different ownership positions on the Company.

Sean Wu -- Morgan Stanley

I thought they don’t have the channel right to the product at Ascentage but as a shareholder you benefit--

Bo Tan

Yes we – shareholder – yes, we also – right. Certainly the 40% of equity position in the company will allow us to have the global – will allow us to have the access to the global IP. At the same time, we have the China rights to the products they develop through the Ascentage Pharma.

Sean Wu -- Morgan Stanley

So the drug development from the Ascentage Pharma preference should be – should come from strictly proprietary talk. Perhaps if I as well recommend those drugs in China. Is this is a collision course--?

David Chen

Now, could you repeat that question. I am sorry, Sean.

Sean Wu -- Morgan Stanley

I am just saying the drug you can get off the Ascentage Pharma perhaps should be classified as a proprietary drug not like a first to market generic or something like that.

David Chen

No that will be a completely new NCE.

Sean Wu -- Morgan Stanley

Okay, that’s all from me. That’s all. I am going to jump back in the queue.

Bo Tan

Thank you, Sean.

Operator

Your next question comes from the line of Chang Chew [ph] from Stanza Capital [ph]. Please ask your question.

Chang Chew -- Stanza Capital

Right, good evening everyone. Bo, maybe one question for you first. Can you give us some color regarding operating profit and margin for year 2010.

Bo Tan

Yes, actually we don’t give out any guidance on the operating margin, but as a company we definitely strive to balance the need to grow the business while maintaining the cost. And lastly we showed some operating leverage and so that’s a significant – that’s a good improvement. Going forward, we will continue to strive to balance – again, balance the need of growing the business, building up of our infrastructure, and while controlling the cost.

Chang Chew -- Stanza Capital

Yes, from what I can see, say if the – you got the GMP approval by mid of the year and then for the third and the fourth quarter we should see more depreciation. So the gross margin will come down right? And then you have some research projects which – including the recently announced Phase I which means on the R&D front the spending will also increase, right?

Bo Tan

In terms of the depreciation, if you assume that the total CapEx for this new plant is roughly $13 million and average depreciation period is about 15 years, so it’s going to be about $2 million U.S. dollars per year for the depreciation and well -- with our revenue going to be growing at over 20%, 25%, we think that our gross margin will be under slight – some pressure, but still maintaining at a high level for the gross margin.

For the R&D expense, we do expect to start our registration trial for ferumoxytol, Feraheme, and in the second half of this year. And so the R&D expense will – we will see some increase in R&D expense, but we feel it’s good for the long term for the Company to bring additional new products to the market.

Chang Chew -- Stanza Capital

Okay. Also you mentioned earlier in the sales guidance for 2010 you did not include any contribution from the new products, but on the other hand, what’s the – with the three Phase I that’s completely the last year that stuff lead [ph] you to SFDA what’s the realistic chance for this year? Any of them will be commercialized?

Well, usually it takes normally about 18 months to 24 months for the SFDA to approve these applications. So we submit the Phase III in the second – in the latter part of the 2008. So, if everything goes well, and we are hoping to get these approval throughout the year. But there is uncertainty there that’s why we have not factored this into our assumptions.

Chang Chew -- Stanza Capital

Okay. And with the investment, $3 million investment, if I hear you right, you got 40% equity ownership?

Bo Tan

Yes, we are a substantial shareholder of the company.

Chang Chew -- Stanza Capital

And also what would be – I suppose we will recognize some equity loss going forward so what would be that amount? Do you have some initial estimate, may be equity loss per quarter or even per year?

Bo Tan

No, we don’t have that estimate yet, and we will have that reported starting from the first quarter this year.

Chang Chew -- Stanza Capital

Okay. Okay, thank you.

Bo Tan

Thank you.

Operator

(Operator instructions) You have a follow-up question comes from Hongbo Lu from Piper Jaffray. Please ask your question.

Hongbo Lu -- Piper Jaffray

Thank you. Hey, Bo, just to followup Chang’s [ph] question, what kind of the burn rate of Ascentage do you know?

David Chen

We are looking to develop one clinical compound in two years and also a couple of potential candidates selections.

Hongbo Lu -- Piper Jaffray

I am asking about burn rate, cash burn rate per year roughly. For example in 2009 what was – what roughly was the level?

David Chen

So that gives you – Ascentage doesn’t have any funding – other funding resources, so we are looking approximately in two years for that $3 million to deliver a clinical compound --

Hongbo Lu -- Piper Jaffray

Oh, I see, I see.

David Chen

-- and two candidate selections. However--

Hongbo Lu -- Piper Jaffray

Got it.

David Chen

It’s a very unique company that will continue to have other funding sources. If we don’t – if the company doesn’t have it then we are talking about that two years.

Hongbo Lu -- Piper Jaffray

Oh, I see, I see. Okay, thank you so much, David.

Operator

(Operator instructions) You have a followup question from Katherine Lu from Oppenheimer. Please ask your question.

Katherine Lu – Oppenheimer

Hi, thank you for taking my followup. In terms of your R&D expense in 2010, Bo, you mentioned that you expect that to increase. I am just wondering with your in-licensing deals when shall we expect that expense to hit the R&D line. And in terms of R&D as a percentage of sales, should we also expect that number to go up let’s say excluding the payment from those two deals?

Bo Tan

When you see, Katherine, when you see the in-licensing deals, are you talking about the Panacor deal?

Katherine Lu – Oppenheimer

Yes, I mean both deals?

Bo Tan

Yes, based on our estimation right now, we should expect to see the R&D – the (inaudible) ferumoxytol trial starting in the second part of this year. and for the Panacor deal we expect to start clinical trial sometime next year.

Katherine Lu – Oppenheimer

Okay.

David Chen

And those will probably cost you around four million RMB.

Bo Tan

And in terms of the percentage, R&D expense ratio, as you know, we are growing our sales at over 20% to 25%, that’s our expectation. So the growth in the R&D line should be reasonable.

Katherine Lu – Oppenheimer

So, I take that as R&D as a percentage of sales will remain relative stable.

Bo Tan

Right. In the past it has been anywhere from 5% to 9%, 9% to 10%. And in the future as an innovative-driven Company, we expect that to be stable over the next couple of years.

Katherine Lu – Oppenheimer

Okay, got it. And I also want to followup on the pipeline product approval timeline. I remember you submitted high dose EPIAO may be in mid 2008. So should we be expecting this product approval maybe sometime mid this year as well? And also--

Bo Tan

That’s – yes – Katherine, that’s definitely our hope as well, but there is uncertainty as we are waiting for the SFDA decisions on this.

Katherine Lu – Oppenheimer

Okay, I see. And David also mentioned about a 10% annual sales force ramp-up. I am just wondering if this 10% sales force ramp-up would start from the beginning of the year or maybe more towards the latter of the year?

Bo Tan

It will be throughout the year, but obviously we would have to put these additional sales reps at the beginning of the year so that they – we can penetrate additional hospitals and again expand our coverage.

Katherine Lu – Oppenheimer

Okay. Okay. What stage of the review process is the high dose EPIAO at right now?

David Chen

Say it again, I am sorry.

Katherine Lu – Oppenheimer

Yes, basically I am asking what kind of stage of review process is high dose EPIAO at right now, is it – did it already get SFDA review and if it’s in the process for approval, because I think--?

David Chen

But they have finished the technical review and they have – do the inspection in the facility. So we are waiting for the SFDA response.

Katherine Lu – Oppenheimer

Okay. So may be it will take about six days or 90 days?

David Chen

I don’t want to put a precise estimate to – on the SFDA approval timeline.

Katherine Lu – Oppenheimer

Okay, okay. And final question. Did you even notice any changes in terms of SFDA approval process, I mean the length of the SFDA review period in 2009 because I think the government statistics basically said SFDA approved pretty much the same amount of products in 2009 versus 2008? Is that a trend you have seen for the biological products as well?

David Chen

In terms of workload I think they have so many other backlog cases have been finished. So on that perspective, it’s a positive movement. But on the other hand I think SFDA has been extremely cautious reviewing the products and – from – both on technical perspective as well as inspecting the manufacturing facilities. So, if this change I think SFDA becomes very conservative organization, the valuing of new products

Katherine Lu – Oppenheimer

Okay. Thank you very much.

Operator

(Operator instructions) We have no further question at this time. I will like to hand it back to Dr. Lu for our closing.

Dr. Jing Lou

Right. Thank, operator. It looks like we’ve done all the questions. Thank you again for participating in this last day before the Chinese New Year and thank you for your interest in 3SBio. We look forward to updating you again. Good bye and Happy Tiger Year.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect the line.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: 3SBio Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts