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Sinovac Biotech Ltd. (NASDAQ:SVA)

Q4 2013 Earnings Conference Call

March 20, 2014 08:00 ET

Executives

Stephanie Carrington - The Ruth Group, Investor Relations

Weidong Yin - Chief Executive Officer

Nan Wang - Chief Financial Officer

Helen Yang - Investor Relations Director

Analysts

Isabella Zhao - Morgan Stanley

Yi Chen - Aegis Capital

Operator

Greetings, and welcome to the Sinovac Biotech Limited Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Stephanie Carrington of The Ruth Group. Thank you. You may now begin.

Stephanie Carrington - The Ruth Group, Investor Relations

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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by such words as will, expect, anticipate, future, intends, plans, believes, estimates, and similar statements or phrases. These 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 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 Mr. Weidong Yin, CEO; Ms. Nan Wang, CFO; and Ms. Helen Yang, Investor Relations Director.

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

Helen Yang - Investor Relations Director

Thank you, Stephanie, and hello, everyone. Thank you for joining us on this conference call. I will provide an update on the business and the financial review on behalf of our CEO, Mr. Weidong Yin; and Ms. Nan Wang, our CFO.

2013 was a fruitful year for Sinovac across the entire business. Our top line growth was 47.4% and we generated a positive net income in excess of $7 million. For the full year, we had recognized $10.7 million revenue of government stockpiling from H5N1 vaccine in 2013. Excluding Panflu sales, our regular sales increased by over 25% in 2013 as compared to 2012. The sales growth was achieved across all of our commercialized products. Sales from those of our hepatitis A vaccine and influenza vaccine increased by over 30% year-over-year. Sales growth of Healive, our inactivated formulation of hepatitis A vaccine that is on par with the hepatitis A vaccine sold in the U.S. was mainly driven by the sales in the private pay market in lieu of the government-funded expanded immunization program that covers the lower cost live attenuated formulation of the hepatitis A vaccine.

As we discussed on our third quarter conference call, Anflu sales for 2013 were up over the prior year as we were well-positioned to launch our seasonal influenza vaccine by the beginning of the flu season in the third quarter based on the expanded badge size. As such, a higher percentage of our seasonal flu vaccine was administered in 2013 thereby reducing the product return and inventory write-off levels as compared to last year.

We will now turn to the progress we made in 2013 on the clinical development of our proprietary EV71 vaccine. We completed the Phase 3 clinical trial for our EV71 vaccine against hand, foot and mouth disease and reported the top line data in March of last year. Just last month on February 27, 2014, the Phase 3 clinical results of our proprietary EV71 vaccine were published in The New England Journal of Medicine. The clinical results show the efficacy of the vaccine against EV71-associated hand, foot and mouth disease was 94.8% among infants and young children. An anti-EV71 neutralizing antibody titer of 1:16 was associated with protection against EV71-associated hand, foot and mouth disease. As outlined in the New England Journal of Medicine article, Sinovac’s vaccine was demonstrated a 100% efficacy rate against EV71 associated hospitalization and against HFMD with neurological complications, the main cause of fatalities.

Publication in these prestigious journals further validates our scientific contribution to the HFMD Control and Prevention. Besides our progress in EV71 vaccine development the continuous H7N9 infection generated significant attention in China and neighboring Asian countries. In 2014, over 200 human cases were reported in China, although no cases of human to human transmission has* been verified. More cases have been reported, *during the first *three months in 2014 as compared with the full year of 2013. This read of the infection still exist for H7N9.

In January of this year we completed our preclinical study for our H7N9 vaccine candidate and submitted clinical trial application with China Food and Drug Administration to commence human clinical trial. The application was officially accepted by CFDA on January 29, 2014. We will utilize our flu vaccine production facility in Beijing to develop and manufacture the flu associated vaccine including H7N9.

In 2013 all of our vaccine commercial manufacturing facilities in Beijing site passed the GMP certification implemented by CFDA in compliance with the new GMP guideline issued in 2010. The GMP certificate is valid for five years starting on April 17, 2013 than of the deadline for obtaining the certification which was the end of 2013.

Now, let’s turn to the review of our financial results. Let’s first turn to the – on audited results for the first quarter ended December 31, 2013. As outlined in our release fourth quarter 2013 sales increased by 17.1% to $22.9 million from $19.6 million for the same period in 2012. The increase was mainly due to the revenue recognition of Panflu H5N1 manufactured under the government-stockpiling program excluding revenue of Panflu H5N1 sales for the fourth quarter 2013 decreased by 19.5% to $15.8 million compared to $19.6 million in the same period of 2012. However, the growth of our regular product sales was maintained.

The decrease of fourth quarter was mainly due to three reasons. The first one, 2012 sales of fourth quarter included a one-time order of Healive from Gansu Province after a natural disaster. So sales of Healive decreased by 20.6% in the fourth quarter of 2013 compared with that of the same period in 2012. And this is part of our public market sales, but our regular public market sales that is to supply to the government Expanded Program of Immunization was still growing with a modest rate.

The second reason is that Bilive sales decreased by 31% due to timing difference of vaccination campaigns. Different from Healive that is part of the regular immunization program in China for infants and young children, Bilive is mainly administered as a booster through vaccination campaigns organized by local CDCs, which results in sales fluctuation from quarter-to-quarter. Bilive sales for full year of 2013 were still higher than 2012.

And the third reason is that as we discussed at the beginning the sales of Anflu decreased by 36.1% as the majority of Anflu sales shifted from the fourth quarter to the third quarter due to the early launch of the vaccine during 2013 to 2014 flu season. Compared to fourth quarter of 2012, the gross profit margin for the fourth quarter 2013 increased to 64% from 55.6%. Higher gross margin was mainly driven by the improved operational management which resulted in less inventory provision charged to the cost of sales, as well as increased selling price of some of our products.

Selling, general and administrative expenses for the fourth quarter 2013 were $7.9 million, compared to $12.8 million in 2012. The decrease in SG&A expenses was mainly due to lower G&A expenses of ongoing validation of EV71 vaccine facilities and GMP certification preparation.

The R&D expenses for the fourth quarter of 2013 were $2.5 million, a $1.2 million increase over the same period in 2012. We incurred more expenditures related to the continued advancement of pipeline vaccine candidates, such as pneumococcal polysaccharides vaccine and varicella vaccine in the fourth quarter of 2013.

Net income attributable to stockholders for the fourth quarter 2013 was $5.8 million, or $0.10 per basic and diluted share compared to a net loss of $4.6 million, or $0.08 per basic and diluted share in the same period of last year. Excluding the impact of bonus revision of $0.6 million, which was paid out or to be paid out from an accrued liability account rather than charged to the expenses, the net income for the fourth quarter 2013 was $5.2 million, or $0.09 per basic and diluted share.

Now, I’d like to turn to the key highlights for our full year financial results. Our total sales for 2013 increased by 47.4% to $72.5 million from $49.2 million in 2012. Excluding revenue recognition of Panflu under the government stockpiling program in 2013, the regular sales of Healive, Bilive, Anflu, mumps vaccine and Rabend increased by 25.5% to $61.8 million in 2013 from $49.2 million in 2012. The increased sales mainly derived from the growth of Healive and Anflu.

Gross profit margin for 2013 increased to 70.7% in 2013 from 61.2% in 2012. Excluding the impact of Panflu sales under the government stockpiling program in 2013, gross margin increased to 72.6% in 2013 from 61.2% in 2012. Net income attributable to stockholders in 2013 was $7.4 million or $0.13 per basic and diluted share compared to a net loss of $14.9 million or $0.27 per basic and diluted share in 2012. . Excluding the impact of the bonus revision of $2.4 million, which was paid out or to be paid out from an accrued liability account rather than charged to expenses, net income of 2013 was $5 million, or $0.09 per basic and diluted share.

As of December 31, 2013, cash and cash equivalents totaled $107.2 million, compared to $91.2 million as of December 31, 2012. Net cash provided by operating activities was $5.7 million in 2013. Net cash used in investing activities was $5.2 million in 2013, which was mainly for payment of property, plant and equipment for the Changping facility. Net cash provided by financing activities was $14.3 million in 2013, including loan proceeds of $16.8 million.

And that concludes management’s prepared remarks. Operator, we will now take questions. Thank you.

Question-and-Answer Session

Operator

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

Isabella Zhao - Morgan Stanley

Firstly, I want to congratulate for the strong Q4 results. And my first question is regarding for the progress of application for EV71. Also if I can – please let me to compare the difference between Sinovac’s EV71 vaccine to the other competitors? And also what kind of penetration rate we expect if we start to sell the vaccine probably in 2015?

Helen Yang

Sure. I will translate Mr. Yin’s answer to the first part of your question. Firstly, Mr. Yin is saying these are very important questions and thank you for you to raise those questions. So firstly, Mr. Yin explained the differences in terms of the vaccine, EV71 vaccine developed by the three Chinese companies. Actually three of us are using different viral seeds and Sinovac and CNBG, one of the biggest state-owned enterprises of making vaccines, we’re both using a vero cell and Kunming Institute of Biological Products, the third developer of this vaccine using the human cell to develop this vaccine.

And in terms of the production process Sinovac and the other one are using a Cell Factory technology, where the other one are using (indiscernible). So from the production process we have differences as well. However that – how this will impact on the use of the vaccine is still difficult to tell at this moment, we have to wait until those three vaccines are largely commercialized into the market and then we could compare either the cost and the use of the vaccine or the effect.

In terms of the research from the clinical study, we have seen until now the three companies has already published their results of the Phase 3 clinical study. And we think the first important criteria we want to focus on is the safety result and we have seen that for three of us, the vaccine group, it is (indiscernible) rate of the vaccine group are not significantly different from the placebo group which conclude that these three vaccines are all having a very good safety profile. And in terms of the efficacy rate we have seen that the three companies are all reporting over 90% efficacy rate. And we think among three of us those numbers are not materially different as well. Even though we conduct the trial on different sites with our OMPI we cannot compare exactly to among each other. So we think that this number of over 90% efficacy rate is already beyond our expectation when we design the trial.

So in terms of the competitive landscape of these vaccines we think that after these three vaccines are commercialized in China even though we’re all supplying the vaccine to the market but we’ve seen that the demand are from the entire country that we have to take such (buybacks) in terms of production and the supply and getting that release. Therefore that we would expect within two to three years after the vaccines are commercialized there is still a shortage of the supply and therefore that we don’t think there is any direct competition in order for expanding the market share at the beginning of among the three of us at the beginning of the commercialization of these vaccines.

Therefore, the long-term we think that we plan to supply the vaccine in the private market and generating more post license clinical study results and once it’s ready we may recommend to the government to include this vaccine into the public funded program of EPI in China, but that was also depending on the budget capability of each local government. But we would expect that when we sell the vaccine private pay market, the price rose relatively higher compared to if it’s included in the public pay market. And for Sinovac, we also have an expectation to expand to the overseas market beyond China, because we have seen the reported cases in some neighboring countries. Therefore that we set up a relatively high standard when we are conducting the clinical studies in China and the purpose of doing that is to having our vaccines registered and to be sold in other countries. So this is our plan for commercializing this vaccine.

Isabella Zhao - Morgan Stanley

I will translate this question in English. If I can ask Ms. Wang and Helen, what’s your expectation for the sales growth in 2014? And also what we are going to look at for the gross margin and operating margin in 2014? Thank you.

Helen Yang

So, to answer your question, Ms. Wang said, from the sales – the regular sales of our hepatitis vaccines and flu vaccines in 2013, we have seen that we were successfully implemented our sales strategy in China and therefore that we would expect that this trend will be maintained until 2014. And in terms of the gross margin, we would expect the level of gross profit margin would be similar to what we have been achieved in 2013.

Isabella Zhao - Morgan Stanley

And if I can add a follow-up question, what about the SG&A expense and R&D expenses?

Helen Yang

So, firstly for the research and development, for those the R&D expenses as a percentage of revenue and the absolute amount of R&D funded would be both higher than the level of 2013, because we have a few projects that may enter into the clinical studies and that will require a higher level of spending. As we still aim to maintain the growth of revenue in 2014, we would expect the level of SG&A expenses will be higher than the level of 2013. However, that we think the SG&A as a percentage of revenue should maintain to be similar at the level of 2013.

Isabella Zhao - Morgan Stanley

Okay, thanks. That’s all my questions. Thank you.

Helen Yang

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is coming 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 things for the past three quarters, Sinovac has achieved positive earnings, do you anticipate to continue to achieve positive earnings even without the approval of EV71 vaccine for the four quarters in 2014?

Helen Yang

Yes. We are translating the question. So actually from the results we have achieved for 2013, we think we are successfully executing the business strategy. And if you remember that in 2012, we have a relatively high loss position due to the highest trending of research and development. Therefore that at the beginning of 2013, we think there are big challenges for us to maintain the growth and improve the profitability. I mean for some of you that may have heard in the Chinese vaccine industry, there are some events that happened may impact the performance of the entire industry and some of the Chinese local vaccine companies reported a growth rate lower than 10%, but we think Sinovac has still maintained a relatively high level of growth rate in terms of sales revenue. And we think that the improvement of the performance of the company is solid resources for keep investing in research and development for our long-term growth.

And we are all expecting the commercialization of EV71, but this is only a cost of timing. We have conducted the studies and having a regular dialog with the regulators in order to help them to move the review and approval forward. But at the same time, we are also advancing other pipeline programs, including the polysaccharides vaccines, varicella vaccines. And we believe that only if we have the – we are capable of making investment in R&D, we are – we can be able to generate a sustainable growth for the long-term. So we think that in the short-term, we don’t need to have a big investment into the commercial front and all spending are actually focused on research and development. And we think this is the core business strategy for Sinovac in order to drive up the long-term growth.

Yi Chen - Aegis Capital

Okay. Second question is do you anticipate to have any – to receive any government stockpiling purchase during 2014?

Helen Yang

Are you talking about the Panflu H5N1 or other stockpiling?

Yi Chen - Aegis Capital

Yes.

Helen Yang

The H5N1?

Yi Chen - Aegis Capital

Any, mostly Panflu, yes.

Helen Yang

Great. And actually, that we received another order before the end of last year and we manufactured the vaccine. So if you are reading our balance sheet, you will find deferred revenue, which are actually the payment we received from government for the new order.

Yi Chen - Aegis Capital

That will be recognized in the first quarter 2014?

Helen Yang

No. That will be – I think the revenue will be recognized in about two years’ time, I think in 2015 – in ‘15 or ‘16.

Yi Chen - Aegis Capital

Okay. So regarding EV71 vaccine, is there still – is there still a chance that we can see some revenue from that vaccine in the fourth quarter 2014?

Helen Yang

We are translating your question. Well, actually we have been ready from our commercial front and production team that once the vaccine is approved we can – we will be able to ram up the production there quickly. So we think that if the approval can be received, we still expect to produce the vaccine-generated sales. Therefore, the only question would be relying on when the approval could be granted.

Yi Chen - Aegis Capital

Okay. My final question is can you comment on the tax expenses for the first quarter and what do you expect the tax rate to be in 2014? Thank you.

Helen Yang

What tax rate? So if I answer your first question, our tax rate for our core operating entities, Beijing and (indiscernible) is 15%, because we are qualified as a high-tech company. So we don’t expect this rate will be changed. What about your other question?

Yi Chen - Aegis Capital

I would say, the tax expenses for the fourth quarter 2013 that’s actually revenue of $2.3 million?

Helen Yang

Yes. Actually, that is the recognition of deferred tax assets. And as Sinovac Beijing turn to be profitable in 2013, it was able to recognize a deferred tax asset. Therefore, it was resulted a tax recovery of over $2 million.

Yi Chen - Aegis Capital

Okay, thank you.

Helen Yang

We probably we will not expect that to be recurring in coming years.

Operator

Thank you. Our next question is coming from the line of (Gary Chang with BRG). Please proceed with your question.

Unidentified Analyst

Thank you. Thank you for taking my question. I have a question for Mr. Yin about the development of your pneumococcal vaccines, especially about the pneumococcal conjugate vaccines? *As I learnt it has started to apply for clinical trial permit ever since 2011, but until today, there is still no any further news about it. I was wondering if it is being delayed or being – is there are any difficulties or hurdles in cost of so such a long time of waiting. Thank you.

Helen Yang

So, to translate Mr. Yin’s answer, he thinks that this is a very good question and it’s very professional. And in terms of the development of pneumococcal conjugate vaccine, actually the production process of this vaccine is very complicated and we did a great effort when we are conducting the research and development in-house. And as you said, we have already started the clinical trial to patients to the CFDA. And as what we encountered, as the difficulties we encountered in the development, we believe that CFDA also have their challenges when they are reviewing the files for approving vaccines. And actually as far as we know some of the other files might be reviewed for years. And actually while we are developing the conjugate vaccine, we also develop a polysaccharides vaccine.

Before our development in the pneumococcal vaccines, Sinovac only have the platform of developing newer vaccines including the inactivated and live vaccine. But since we start the program of pneumococcal vaccine, we start to set out our capabilities of developing bacterial vaccines. And we have had a very good advancement of developing these polysaccharides vaccines. And we would expect this moves faster comparing to the conjugate. And the company is already preparing for making the investment on commercializing these vaccines and we would expect to have additional progress being made on polysaccharides vaccine in this year. And once that happens, we will share this news with the investors. And Sinovac believe that we were definitely making a good development on the bacteria type of vaccines.

Unidentified Analyst

Thank you. And may I continue to the question about the PCV vaccines, (indiscernible) Prevenar 13 of Pfizer is trying to launch in China maybe not so long time, so is there any connections between the Prevenar 13 with the delay of approval from CFDA. I mean, is there any hurdles or difficult obstacles from the IP from the independent point of view? And is there any difference of what kind of differentiation you can make from your PCV vaccine in comparing with Prevenar 13? Thank you. That’s all my questions.

Helen Yang

We are translating the question. Yes, to translate Mr. Yin’s answer. *He is saying this is a very good question. And actually, while we are developing these pneumococcal conjugate vaccines, we have also studied the granted patent by the other suppliers of a similar vaccine. And our goal is to develop our own conjugate vaccines and to design our own intellectual property rights. And in order to create aid advantage, Sinovac is a company and we very much respect the right of intellectual property and we think we will do whatever we can to develop our own vaccines and not to have any infringement to the others right. And also Mr. Yin highlight that the patent protection does not relate to whether these vaccines can be reviewed and approved from the regulatory approval process, these are two independent issues.

Unidentified Analyst

Thank you.

Operator

Thank you. It appears we have no further questions at this time. I would like to turn the floor back over to management for any concluding comments.

Helen Yang - Investor Relations Director

Thank you everyone for joining us and we are very excited about the results we achieved this year and we are looking forward to sharing more good news with our shareholders and our friends. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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