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Sinovac Biotech Ltd. (NASDAQ:SVA)

Q4 2009 Earnings Call Transcript

April 6, 2010 9:00 am ET

Executives

Stephanie Carrington – IR, The Ruth Group

Helen Yang – IR Manager

Vanessa Wu – Senior Financial Manager

Weidong Yin – CEO

Analysts

Hongbo Lu – Piper Jaffray

Ingrid Yin – Brean Murray

Michael Taft [ph] – Barone Capital [ph]

Steve Brozak – WBB Securities

Operator

Greetings and welcome to the Sinovac Biotech Limited fourth quarter 2009 earnings conference call. At this time, all participants are in a 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 morning 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, intend, plans, believes, estimates, and similar statements. Statements that are not historical facts, 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 statement. Sinovac does not undertake any obligation to update any forward-looking statements, except as required under applicable laws.

On the call today, we have Mr. Weidong Yin, CEO; Helen Yang, Investor Relations Manager; Vanessa Wu, Senior Financial Manager; and Chris Lee, Investor Relations. I will now turn over the call to Helen Yang and Vanessa. Go ahead, Helen.

Helen Yang

Thank you Stephanie, and hello everyone. Thank you for joining us on this conference call. I would like to take this opportunity to update you on our full-year results, recent strategic developments, and Sinovac’s outlook.

Following my comments, I will then turn the call over to Vanessa Wu, who will discuss the fourth quarter financials. These comments have been prepared in comprehension with Sinovac's Chairman, Mr. Weidong Yin. Mr. Yin is with us today on the call, and will be able to answer questions. I will translate his comments accordingly.

In 2009, it was a very productive year for Sinovac as we executed our growth strategy on all fronts. We generated record revenue from our existing vaccine products, expanded our production capacity and advanced our development pipeline of novel vaccines. We want to recognize and give thanks to the entire team for their tremendous efforts during the year. Looking at the full year 2009, we generated record results, with sales up 81% to $84.2 million. These results were in line with the updated revenue guidance we provided in January 2010.

The sales figure included in the recognition of 10.08 million doses of Panflu.1, our H1N1 vaccine purchased by Chinese Ministry of Industry and Information Technology for the national purchase plan. As we previously disclosed, Sinovac has delivered 10.23 million doses of Panflu.1 in 2009. Out of these amount, we replaced 0.15 million doses with longer shelf life in 2010. Therefore, in 2009, we recognized the revenue of 10.08 million doses of H1N1 vaccine.

Gross profit for 2009 rose by 75% to $64.1 million given the higher revenue level. Gross margin was 76%, down from 79% in 2008, due to the greater percentage of sales to the public market, which carries a lower margin compared to the private market. More than 50% of our total sales in 2009 were to the public market. For the full year, our operating income rose 152% to $40.8 million, as a result of the higher revenue level and greater economies of scale. 2009 net income attributable to shareholders increased by 150% to $19.96 million or $0.46 per diluted share.

Turning to the corporate development, we were pleased to close a public common share offering in February this year. A total of 11.5 million shares of common stock were issued at $5.75 per share, including 1.5 million common shares according to the full exercise of the underwriters' over-allotment option. We received net proceeds of approximately $62 million, after deducting underwriting discounts, commissions and operating expenses. We intend to use the proceeds to foreign capacity expansion initiative, to advance our development pipeline and other corporate activities.

We are pleased with the progress that we made over the past few months to increase our production and manufacturing capacity. Both at our headquarters and by securing additional capacity. We increased the annual production capacity at our headquarters in Beijing by approximately 60% in 2009 by expanding production lines that is used to manufacture the seasonal influenza, H1N1, or H5N1 vaccine.

In February 2010, our subsidiary, Sinovac Beijing completed the acquisition of five existing buildings located about 30-minute drive away from our headquarters, in Changping District, Beijing. We intend to set up two new production lines with a combined annual production capacity of about 40 million doses and to manufacture our approved flu vaccine as well as the currently under development vaccine for enterovirus 71, which causes hand, foot, and mouth disease. The Changping site will enable us to expand our production capacity as a world-class true state-of-the-art production lines and other necessary supporting functions, including a feeding and packaging line, a warehouse and animal house.

We anticipate that it will take approximately two to three years with the lines to be set up and production of our commercialized flu vaccine to begin. The total investment needed to bring Changping facility to this point is estimated to be approximately $50 million. We expect to lay these investments from 2010 to 2012.

In January 2010, we established Sinovac Dalian through a joint venture. The new entity will focus on the research, development, and manufacturing of vaccines for human use, research indication that rabies, chickenpox, mumps and rubella. Live attenuated vaccines and vero cell cultured vaccines will be manufactured at Dalian facility. We expect our initial cash contribution of $8.8 million according to the JV agreement to be completed by the end of second quarter, once the necessary government approval are received.

Therefore in total, we expand our facilities from two sides, which is in Beijing and in Tangshan, to right now with full different production sites and total production area expanded from 157,000 square feet to 715,000 square feet [ph], which can house as many as 14 production lines. And these facilities will help our existing products and the future launched pipeline products.

Turning to the R&D initiative, we restructured our program in 2009, establishing a new R&D team in Beijing and better utilize our scientific and personnel resources. We currently have about 50 scientists and eight major R&D projects are underway. In December of 2009, we filed the application with China’s SFDA to commence a human clinical trial for our vaccines against human EV 71. The application once submitted ahead of our original timetable, this is the first clinical trial application submitted in China for hand, foot and mouth disease vaccines. We believe that this vaccine subject to positive human clinical trial results and commercialization to represent a structured product of our company based on our current market projections and demand coming out of Asia. We intend to commence these trials in 2010 upon receiving the approval of the clinical trial application from SFDA.

Also in this year, we anticipate a preclinical study rabies vaccine, chickenpox vaccine, meningitis vaccine, (inaudible). This year, we intend to complete preclinical and submit clinical trial application to SFDA for pneumococcal conjugated vaccine, HIV vaccine, mumps vaccine, and rubella vaccine.

Regarding our international distribution strategy, we have already entered into a distribution agreement to register and market our Inactivated Hepatitis A Vaccine in Ukraine, India, Nepal, Mongolia, Korea, and the Philippines, and we entered into distribution agreements to register and market our seasonal influenza vaccine in Mexico, Philippines, Korea, Mongolia and India.

We have also entered into distribution agreement for our H1N1 vaccine in Philippines, Korea, Mexico, and India. In October 2009, we received a certificate of approval to distribute our H1N1 vaccine in Mexico. In September 209, we obtained the regulatory approval on our H5N1 vaccine in Hong Kong. The registration process for other vaccine products in Philippines, Mexico, India, Hong Kong, and Korea are going on. We expect to secure additional marketing partners in some of these countries in the year of 2011 at the earliest, and expect that sales will commence in that year. We want to point out that our aggregate 2009 sales to overseas market were about $145,000.

Turning to sales activities of our commercialized vaccines, we have received orders by the government for a total of 20.97 million doses for our Panflu.1 H1N1 vaccine from China’s government for a national purchase plan. Originally, we have received a total of 21.06 million doses. However, the total order was reduced by 98,000 doses based on the recent consolation received by the company due to the decrease in demand from two local CDCs.

In January of 2010, Sinovac received its fifth purchase order for its H1N1 vaccine, Panflu.1 from China's Ministry of Industry and Information Technology for the national purchase plan of total 8.57 million doses. Under this purchase order, Sinovac is required to deliver an additional 2.33 million doses of Panflu.1 to the Chinese Central Government. In this order, 0.18 million doses have been delivered in 2009 required by the government under emergency. The remaining 2.15 million doses are required to deliver before March 15th, 2010. However, the delivery was delayed due to the delayed completion of batch release process within the Chinese government.

The delivery schedule shall be re-confirmed after the products are released by the government in second quarter. The remaining 6.24 million doses of this order will be stockpiled in the company's warehouse as per the government’s requirement.

In 2009, sales to the public market of hepatitis A vaccine represented 43.3% of total Healive sales. A significant portion of sales to public market particularly in our largest market segment of children of 18 months, resulted from providing value-added services to the local government. However, public market demand for the hepatitis A vaccine for the 18 months population has decreased as this segment is now covered by the public market vaccination program.

It is projected that the public market demand for hepatitis A vaccine will continue to gradually increase in 2001 [ph]. Therefore, we are well positioned to further expand our market share in the public market for the 18 months population, and at the same time, we will make effort to expand the private market sales for a wider scope of age groups.

As we indicated previously, the public market purchase of hepatitis A vaccine will be fully implemented in China as per Chinese government plan. And as we see in the first quarter of this year, the public market is not open up enough as many CDCs are still in the preparation for the tender operating process, which we expect to take off from the second quarter of 2010. In 2009, benefitting from our successful R&D on H1N1 vaccine, the company’s overall market recognition was greatly enhanced. Specifically, Sinovac’s market share for its flu vaccine in China grew from 5.8% in 2008, which is Number 9 market position to 11.3% in 2009, which brought us to the Number 3 market position.

In 2010, we intend to continue to focus on marketing our seasonal flu vaccine to maintain and expand our market share in both private and public markets. In China, the public production of vaccines have been impacted by the recent media report. Earlier this year, the media reported on improper storage of vaccines by a distributor in one province in China, which might have linked to a few cases of serious adverse events.

Although Sinovac was not involved with both the events, we believe that these problems may adversely impact the public's perceptions of vaccine's safety and thus may reduce vaccine administration by the Chinese government. Therefore, we expect our organic business may be impacted in the short-term. But we still expect our business to grow gradually and at the same time, the company will increase investments on vaccine research and development, capacity buildup for existing products and pipeline products in order to maintain the sustainable growth in the long-term. Furthermore, we believe that our core competencies inclusive of proven R&D capabilities, manufacturing and distribution capabilities position us to capitalize on potential partners or acquisition opportunities during this period.

Now, let me elaborate on our full-year 2010 guidance that we provided in today’s press release. For the full-year 2010, we expect sales of our non-H1N1 vaccines to increase by approximately 10% to 20%, compared to $54.5 million of non-H1N1 sales revenue in 2009. These translate into 2010 sales from our non-H1N1 vaccine in the range of about $59.9 million to $65.4 million [ph]. We expect the remaining of 2.15 million doses of H1N1 vaccine will be delivered in 2010. And the revenue of this amount will be recognized in this year. And our stockpile amount of 8.74 million doses will be produced and stored in the company’s warehouse and the revenue of this amount will be recognized in the year of 2011 unless the government require us to deliver the product prior to that time. And the revenue of H1N1 vaccine, which could be recognized in the year are about 7.1 million [ph]. Therefore we expect total revenue for 2010 to be in the range of $67.1 million to $72.5 million.

Our 2010 guidance does not include additional orders for H1N1 vaccine. And based on our current projections, we expect to realize total capital expenditures of approximately $80 million over the next three years to foreign expansion initiatives that I have outlined earlier. The breakdown of the $80 million CapEx is expected as the following

$50 million for Changping facility as this ramps up, 22 million doses for the two capital contribution in Sinovac Dalian joint venture, $3 million for Tangshan facility, which is to industrialize animal vaccines, and $5 million for Beijing headquarters.

With that, I will now turn the line over to Vanessa who will review the fourth quarter 2009 results.

Vanessa Wu

Thank you Helen, and hello everyone. During the fourth quarter of 2009, sales were $36.4 million, up 194% from $12.4 million in the fourth quarter of 2008. Fourth quarter 2009 sales included the full recognition of purchase of 10.08 million doses in December 2009 of Sinovac’s Panflu.1 vaccine by China’s Ministry of Industry and Information Technology, MIIT, as part of China's national purchase plan.

Gross profit for the fourth quarter of 2009 was $25.2 million, with a gross margin of 69%, compared to $7.7 million and a gross margin of 36% [ph] for the same period of 2008. The gross margin for the fourth quarter of 2009 increased from that of prior year due to increased production efficiencies as Anflu and Panflu.1 utilized the same production line and also lower product returns in the fourth quarter of 2009.

Total operating expenses for the fourth quarter of 2009 were $8.2 million, compared to $4.6 million in the comparative period in 2008. Selling, general and administrative expenses for the fourth quarter of 2009 were $6.3 million, compared to $4.1 million in the same period of 2008. SG&A expenses as a percentage of fourth quarter 2009 sales decreased to 17%, from 33% during the prior year. The lower selling and administrative expenses as a percentage of revenue resulted from increased economies of scale and H1N1 vaccine sales made to Chinese government, which incurred much low selling expenses.

Net research and development expenses for the fourth quarter 2009 were $1.6 million, compared to $359,000 in the same period of 2008. The higher R&D expenses were mainly related to the continued development of the EV 71 vaccine and pneumococcal conjugated vaccine, and universal pandemic influenza vaccine.

Fourth quarter 2009 operating income was $17.1 million, compared to operating income of $3.1 million in the prior year. The higher operating income in the current year quarter was attributable to the significant sales growth and the greater economies of scale. Net income for the fourth quarter of 2009 included $1.06 million in interest and other income, 37,000 in interest and financing expenses and $4.6 million in income tax expenses. Net income for the same period of 2008 included $327,000 of interest and other income, 46,000 of interest and financing expenses, and $248,000 [ph] of income tax credit. Net income attributable to shareholders for fourth quarter of 2009 was $8.9 million, or $0.21 per diluted share, up 275% compared to net income attributable to shareholders of $2.4 million, or $0.06 per diluted share, in the same period of 2008.

As of December 31st, 2009, Sinovac's cash and cash equivalents totaled $75 million, compared to $32.9 million as of December 31st, 2008. The increase in cash and cash equivalents primarily reflected the company's operating activities cash inflow of $48.4 million.

With that, we will now open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Hongbo Lu with Piper Jaffray. Please proceed with your question.

Hongbo Lu – Piper Jaffray

Weidong, Helen, and Vanessa, how are you? I think I have quite a few questions, probably mainly on 2010 guidance. By reading the press release, I understand probably the major moving part for 2010 revenue expectation would be the seasonal flu market in China. So, Weidong, can you actually, you know, walk us through what are the major contributing factors for this market on (inaudible) and what assumption did you make in order to give us the 10% to 20% of guidance for 2010, mainly on the seasonal flu part, and I will ask for the hepatitis vaccine market after this? Thank you.

Helen Yang

Thank you. Let me translate your question first.

Weidong Yin

(foreign language)

[Interpreted] So, actually the management make these projections based on the stable, but with growth assumptions. And as you said, we believe in 2010, flu vaccine is one of the contributor to keep the sustainable growth of the company. As you may know that in 2009, China actually is experiencing the great event of H1N1 vaccination program, which in that year vaccinated with seasonal flu vaccine and over 70 million people were vaccinated with H1N1 vaccine. Actually in Chinese history, this is the first time that over 100 million people were vaccinated with flu vaccine and actually this is the first time for the government and the public to pay attention and understand the importance of guiding flu vaccination and the total vaccination coverage is greater than 5% of Chinese population. And we believe this is a positive factor for flu vaccine and these positive impacts will be also transferred in the year of 2010.

Therefore we expect the demand for seasonal influenza vaccine in this year will also increase, and we believe that Sinovac is right now well positioned as we are benefited from our previous research development in H1N1 vaccine, and we will get – we still strengthen our good comparative advantages in this industry and we will try to make the flu vaccine sales revenue as one of the key contribution for this year’s revenue.

Hongbo Lu – Piper Jaffray

Okay, thank you. And then, Weidong, if I may follow up over your answer, you know, 2009 is a special year. You know, more than 30 million seasonal flu vaccine immunization in China, probably partially driven by people’s fear towards H1N1, you know, when they can get H1N1, that’s the time they rush to the clinic to get seasonal flu immunization, and then, you know, when that happens, do you continue to or would we continue to see a strong demand for the seasonal flu now, H1N1 turn out to be a much milder, you know, pandemic. The second question is also on the H1N1 vaccine, you know, those are mainly purchased by Chinese government and then so in 2010, would that demand in H1N1 vaccine translate into the seasonal flu. I guess, you know, what would I try to understand is for your overall non-H1N1 revenue growth 10% to 20%, what kind of underlying assumption on the overall seasonal flu vaccine market growth in China did you view that?

Weidong Yin

(foreign language)

[Interpreted] We actually believe that in 2010, definitely the H1N1 operate were not as serious as in last year. However, this case, last year and also in this year was actually intend the understanding and awareness in government and public to know about flu vaccine important, and this is why we believe the demand of seasonal flu vaccine will continually increase and as we are making our projections for this year, our underlying assumption is that it’s also underlining that the flu vaccine market demand will keep increasing, but as we said earlier that in this year, there are also some uncertainties like H1N1 impact on this year will not be as big as last year.

As you asked, what are the assumptions under the 10% to 20% growth of non-H1N1 revenue, firstly, actually for our seasonal influenza vaccine, the production capacity is one of the limitation to further growing the market opportunities as to the current production line, it’s previously designed to have 2 million doses capacity and after we improve the production process and do the restructuring of the production line, we expanded to 5 million doses and recently with the internal adjusting of our facilities, we expanded further to 8 million doses. But this is to the maximum amount and there is no other to make any breakthrough over these capacities. Therefore this is one of the limitations for us. And on the other hand, for hepatitis A vaccine, right now, we are experiencing the transformation from private market to public market. Although we have received the – although we have won the bid of entering to public market in Beijing, Shanghai. However, in total, these markets represent less than 10% of the total public market of hepatitis A vaccine in China.

Even though for Type A, we are well prepared for our capacity, but our challenge is to largely enter into private market in other provinces, and this control is at a provincial level CDC. That’s why under these two considerations, we are making the projection with a gradually growth projection for 2010.

Hongbo Lu – Piper Jaffray

Great, thank you. And then a few more questions if I may, one is, you know, your last question on the flu franchise, do you think the fact that H1N1 strain is now being included into the seasonal flu vaccine, is that good thing or bad thing for your seasonal flu vaccine sales, and then tell us why?

Weidong Yin

(foreign language)

Helen Yang

[Interpreted] Mr. Yin believes that this is a positive to our flu vaccine sales as we can tell the public that with vaccinating the seasonal influenza vaccine, we cannot only get protected from H1N1 vaccine but also to other prevalent strains. Recently, Mr. Yin attended a meeting organized by the Ministry of Public Health. The officials and experts are sitting together to discuss the similar issues at US, and finally, they decide that the promoting vaccinating seasonal flu vaccine with H1N1 strain is the right thing to do. Therefore, we believe this is the positive news for us.

Hongbo Lu – Piper Jaffray

Okay, great. I promise two more questions and I am done. The next question probably just on the hepatitis A vaccine, you know, I actually, maybe I missed it, I don’t have the breakdown of hepatitis A vaccine sales in private versus public market in the fourth quarter, if you can provide me that? And also question to Weidong is, you know, if we look at the private hepatitis A vaccine market in 2008 and 2009, that market had probably declined quite substantially. And then, what is your view in 2010? And then, you know, are we going to stabilization of the private market for hep A vaccine, you know, during this private to public transition? And then, you know, what sort of time that we can see the public – the demand from public purchases that you pick up?

Weidong Yin

(foreign language)

[Interpreted] So, actually in the fourth quarter, we do not sell any hepatitis A vaccine to public market. This is also due to the public market purchase metric is not very seasonal. And to answer your last question is that we expect after the public market is open, the private market demand will for hep A will be decreased. Therefore, our strategies are including three different parts, and the first one is that in some areas, which previously do not have a substantial recognition program for young children, maybe from two to three years old or even under the elementary school children or younger, we can focus that part and to provide vaccination for that part of population.

And secondly, we are also trying to lobbying the government to increase the financial project to purchase higher quality products of hepatitis A vaccine, which is inactivated vaccine we provided to have Healive included in more provinces for CPI program, and the fifth one is that we are also promoting Bilive heavily in private market as in some developed areas, welcome this idea that with vaccination, with only one vaccination that it can get protected from two different diseases. As you may have seen that in 2009, the sales growth in Bilive increased somewhat, and we expect to sow the sales marketing activity to keep track in the next following years.

Hongbo Lu – Piper Jaffray

Okay, and is it realistically for us to expect a flat year-over-year for your hepatitis franchise with Bilive growth, offsetting Healive decline for 2010 compared to 2009?

Weidong Yin

(foreign language)

Helen Yang

[Interpreted] Yes, that probably would be the assumption Mr. Yin will like to make, and that as we expect if the government starts to purchase the hepatitis A vaccine in greater amount, that will have a significant growth in public market of hepatitis A vaccine, and therefore our revenue will be increased as well. However, this profitability was not included in our current projection for this year.

Hongbo Lu – Piper Jaffray

Okay, great. One last question for Vanessa and I will jump back to the queue, you said, minority interest intense rate going forward for 2010, how should we think about it?

Vanessa Wu

Actually, we set up a joint venture with Dalian. Now, we have another subsidiary – joint venture Sinovac Dalian. For 2010, Sinovac has interest of 30%. I think in 2010, we will consolidate Sinovac Dalian even though we have only 30% ownership, because we have full control of that subsidiary. Therefore the minority interest will increase not only including the current (inaudible) and also have another 70% from Jin Gang Group, so the increased minority share.

Hongbo Lu – Piper Jaffray

How about tax rate?

Helen Yang

Tax rate? Yes, for Sinovac Beijing, we are still in 15% income tax rate. For two other subsidiaries, because those subsidiaries, it’s in the loss position, so they won’t pay any income tax, but I think overall, because the income, the blended income tax rate could be increased, because the loss from other subsidiary cannot offset the profit from the Sinovac Beijing.

Hongbo Lu – Piper Jaffray

Okay, thank you. I will get back into the queue. Thank you.

Helen Yang

Thank you.

Operator

Thank you. Our next question is from Ingrid Yin with Brean Murray. Please proceed with your question.

Ingrid Yin – Brean Murray

Good evening Weidong, Helen, and Vanessa. Thank you for taking my questions. So, my first question is regarding Healive. Can you tell us about the price difference you could get from public market and private market?

Weidong Yin

(foreign language)

[Interpreted] All right. So, in public market in the year 2009, for public market, the unit price of Healive is 21 to 39 RMB [ph] per dose. In private market, it’s 42 to 55 RMB [ph] per dose.

Ingrid Yin – Brean Murray

Okay. So, you talked about basically Healive/ Bilive adding together will be flat year-over-year. So, as I understand, Bilive is a booster vaccine for hepatitis A and hepatitis B. So, what are you thinking about the growth rate for that product?

Weidong Yin

(foreign language)

[Interpreted] Actually, the Chinese government issue it, initiate a program which is to vaccinating all child under 12 years old with hepatitis B vaccine within three years time and in some developed areas, most of the people would like to be vaccinated with Bilive which can prevent from both hepatitis A and hepatitis B, and therefore our effort is to develop the – in those areas in order to achieve the higher growth for these products.

Ingrid Yin – Brean Murray

Right. So, I am trying to get a feel whether it’s going to be, you know, 50% growth rate or, you know, 100% growth rate for this line?

Weidong Yin

(foreign language)

[Interpreted] We expect that the growth will be higher than 20%, but it will be difficult for us to give whether it’s 40% or it’s 50%, we will make all of our effort to achieve maximum profitability.

Operator

Thank you. Our next question is from Michael Taft [ph] with Barone Capital [ph]. Please proceed with your question.

Michael Taft – Barone Capital

Hi, yes, thanks. I just wanted to ask regarding the stockpile of doses, whether those – if they are not used and you are compensated, you know, in 2011, is that the same pricing mechanism and what is the current pricing mechanism and how does pricing I guess across all the vaccines in the public market is there kind of an annual decline curve in question or does it stay relatively fixed?

Helen Yang

Let me try to clarify. Are you talking about –?

Michael Taft – Barone Capital

Two or three different questions.

Helen Yang

Are you talking about H1N1 vaccine only or including –?

Michael Taft – Barone Capital

I guess what I am asking, first on the H1N!, the 8.74 million doses that are going to be stockpiled, it won’t be reflected as revenue under the current expected, you know, rate of ordering rate, to the stockpile doses, do those come in at full pricing next year if they are not used, is it the same prices if it gets ordered and gets distributed to the CDC, and how does pricing for H1N1 or any other vaccine that’s sold to public, what is, you know, on a like-for-like basis, is there an assumed decline curve that I should be using on pricing for those vaccines every time as the volumes grow?

Weidong Yin

(foreign language)

[Interpreted] So, actually for vaccine orders of H1N1 vaccines, we all enter into a specific agreement with government including the specific terms of price and quantity. And right now, we have completed production for these, about 8 million doses stockpiles. However, when we are making the projection, revenue projection for this year, this amount is not included in this year, as they will be expired in next year, and we expect to recognize the revenue based on the agreement we entered with the government in next year. Of course, there are also possibilities that the government may require us to deliver this amount or some of this amount in this year. And when this product is delivered, we are or we are capable to recognize that revenue.

Operator

Thank you. Our next question is from Steve Brozak with WBB Securities. Please proceed with your question.

Steve Brozak – WBB Securities

Great. Thanks for taking the call and in courtesy, I will just be brief. I will break it down into two parts. The first part, one of the important things and the thing for the American launches are when would you say that you would expect GAAP accounting or some kind of audited accounting and how are we looking at – you are satisfied that it’s GAAP, but it is not audited, what are our expectations in terms of when we might be able to see audited accounting, so that we can look at it on a more formalized basis? And that’s the first question, and I have got a follow-up on the science and the sales?

Helen Yang

Actually, the audit has been substantially complete. The reason we did not put our audited financial statement because we haven’t formally received the signed copy from our external auditors. Actually, the numbers have been – it’s not going to have any change, I think we will release the – we will file our 20-F with SEC very soon, within the end of the week probably.

Steve Brozak – WBB Securities

So, you will get – the numbers will come out as early as the end of the week in terms of the actual audited numbers?

Helen Yang

Right, yes.

Steve Brozak – WBB Securities

Okay.

Helen Yang

Yes, the number we put out today actually is come out from the 20-F we are going to file with the SEC.

Steve Brozak – WBB Securities

I see, so these are just, we can use these numbers as numbers that you are going to file an official document saying that these are the same numbers and they are just going to be a difference in terms of timing as far as the release goes?

Helen Yang

Yes, I think that.

Vanessa Wu

We are just waiting for the answer.

Steve Brozak – WBB Securities

Okay, that’s good to know. Okay, let’s talk about sales going forward. Now, you have an advantage in terms of given the fact that globally flu is identified pretty much around your region. So, for the 2010, 2011, whatever the years are, they have a synthesis of identifying the different flu strains that take place. I would assume given your proximity on your working in conjunction with CDC that you would be kept informed of what the new flu strains are for the new season, how does that work? Can you give us any granularity on that front?

Weidong Yin

(foreign language)

[Interpreted] Actually, for manufacturing seasonal influenza vaccine, we are strictly using the virus strain distributed by WHO. But it is good to know that in early this year, one of the Chinese CDC laboratory was qualified as the first laboratory under WHO for distributing flu virus strain. So, in the future, we probably can get strains directly from these Chinese labs, but in this year, we are still getting, using the strain from WHO.

Operator

Thank you. Our next question is a follow-up question from Ingrid Yin with Brean Murray. Please proceed with your question.

Ingrid Yin – Brean Murray

Hi, this question is for Vanessa regarding to the margins, you have very high margins for 2009 because of the, you know, government order. So, how should we estimate the margins for 2010, considering you know sales and marketing costs, you know, the depreciation costs from recent acquired facilities etcetera?

Vanessa Wu

To answer your question, I think you have to understand that the new – the recently acquired facilities from Dalian, because there was not going to have any sales. So, the cost won’t be affected by their amortization and all of those things. So, the margins still will be the hepatitis A and Bilive and for those conditional products from Sinovac Beijing. Normally, we have higher – our margin is around 75% to 80%, a little bit higher than 80%. So, I think next year, we will be in the same range because what product we sell most, if we sell more flu-related products and the margin will be more close to flat flu product margin, which will be a little bit lower than hepatitis A product margin.

Ingrid Yin – Brean Murray

Okay, great. So, also can you provide us the hand, foot, mouth disease vaccine clinical trial timeframe?

Weidong Yin

(foreign language)

[Interpreted] We disclosed previously that in December 2009, we have submitted clinical trial application of EV 71 vaccine and last month, we actually participated into an official technical communication meeting with Chinese government to exchange the technology of these vaccines to prepare for the future development. And also Mr. Yin actually joined the meeting organized by the advisory of MOH in China to talk about the – to understand about the situation of hand, foot, mouth disease in China. And as far as he understands internally from the government, the number of incidences and the severe cases numbers are far more compared to the numbers in 2009. And therefore right now, we are expecting to receive the approval for commencing clinical trials, But it’s difficult to tell when we can get it. But we have already making a lot of efforts to have the government to approve under a fast-track approval, and we are well prepared for commencing clinical trials once we receive the approval from the government.

So, the protocol of clinical trials are actually having (inaudible) which will depending on which one approved by the SFDA. One proposal is to conduct a six months trial with Phase I and Phase II trials conducting together, or we can spend longer times to conduct the Phase I and then Phase II trials subsequently. So, which one will be approved, we are definitely depending on the government decision.

Operator

Thank you. Ladies and gentlemen, we have come to the end of our allotted time for questions. I would like to turn the floor back over to management for any closing comments.

Vanessa Wu

Thank you for all the participants, and we appreciate our shareholders’ growing support. We continue to believe that Sinovac is well positioned to grow our business and expand our market share in the rapidly expanding Chinese vaccine market and we expect to benefit from the Healthcare Reform Plan and increasing expenditure in healthcare industry by the Chinese government. We will also continuously execute our strategy to exploit the international market to further contribute to our sales revenue in the future, and we are looking forward to sharing our results with you next quarter. Thank you.

Weidong Yin

Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Sinovac Biotech Ltd. Q4 2009 Earnings Call Transcript
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