Interview with Yin Ming, Head of IR and VP of Finance for China Biologic Products (NASDAQ:CBPO)
Zack: Can you give me some background on your company?
Ming: China Biologic entered the United States capital markets in 2006. Our decision was largely prompted by the Chinese government’s decision to start privatizing plasma collection centers and we needed immediate capital to pursue strategic acquisition opportunities. At that time, we were too small to pursue an IPO and the RTO was an effective way to raise capital. The Company’s stock was quoted in on the OTC bulletin board since March 2008. In December of 2009, CBPO achieved a significant milestone in the Company’s history with the uplisting of our common stock to the Nasdaq Global Market.
Before 2008, China Biologic had one operating subsidiary, Shandong Taibang. By the end of 2008, we had completed two acquisitions with the purchase of a majority ownership in Guiyang Dalin and a 35% equity interest in Xi’an Huitian. With those two acquisitions, China Biologic became the largest non-state owned company in China’s plasma industry.
Zack: Where do you see the company in 5 years? 10 years?
Ming: Until recently, we were a small plasma-based products manufacturer. Within the last eight years, we have generated significant growth organically and executed 2 acquisitions to achieve annual sales of US$119 million in 2009 from approximately $4 million in sales 8 years ago. In the next 5 years we will continue to execute a similar strategy through organic growth and pursuit of additional suitable strategic acquisitions to increase our market share in China. In the next 5-10 years, we want to have more global presence in the world plasma-based product markets. We view US-based Baxter (NYSE:BAX) and Australian company CSL as our models for expansion.
Zack: What are the various segment lines of the company?
Ming: We have a fully integrated plasma business with the main products of Human Albumin Human Immunoglobulin for Intravenous Injection, and various hyper immune products. We have more products in the pipeline including Human Prothrombin Complex Concentrate and Human Coagulation Factor VIII. Our current revenues are mainly from the plasma protein derivatives, which is our core business and our strength. Looking ahead, we would like to further evaluate the possibility to expand into complimentary businesses.
In 2009, sales of Human albumin represented close to 60% of revenues. It used to be the No. 1 product of plasma derivatives. But the situation is changing. CSL and Baxter have less Human albumin sales concentration in other countries, but PRC companies are 20 years behind international standards because the doctors are not fully aware of advances in the development of plasma derivatives and its clinical applications. Tier 2 and Tier 3 hospitals in China often overprescribe Human Albumin, which has created very high demand in China. The sales are starting to soften now as doctors and other healthcare professionals are becoming more familiar with the global trends and the plasma-derived medicine’s applications. In 1Q 2010, Human albumin product continued to be our single largest product, accounting for 46.9% of total sales, but with the smallest average price increase of 3.1%. The average price for the Company's most in-demand product, the human immunoglobulin for intravenous injection products, rose 34.2%, and contributed to 19.9% of total revenues, while, the average price for the Company's human immunoglobulin products contributed only 2.4% of total revenues, a 118.3% increase.
Zack: Who are your main competitors?
Ming: In China, our main competitors are Shanghai RAAS Blood Products, Hualan Biological Engineering and Beijing Tiantan Biological Products.
Internationally, we face competition from CSL and Baxter because they all selling their human albumin products in China. We believe international companies will have limited opportunities in China in the future as they only have permission to sell human albumin products.
Zack: Can you explain expansion of your network of plasma collection centers?
Ming: The regulation before 2008 said the government did not want more stations. The severe shortage of plasma and plasma-based products has created an imbalance between supply and demand, causing the government to rethink their position and start to relax the rule on zero allowance. It is still extremely difficult to apply for launching new plasma collection centers because the approval process is handled at the provincial level. We must submit the application for new plasma center to the county government first, then the municipal government, then the provincial government. Each government authority has different opinions in supporting the growth of plasma industry. We are working aggressively to increase our plasma collection centers but we are unsure of how many additional centers we can add or how long the process will take since each approval will be decided case by case by each provincial government.
In May, China Biologic received approval from Shandong Province Health Department to build two new plasma stations. The Company will complete the construction by the end of this year. Once the new stations are operational, China Biologic will own seven of the eight plasma collection stations in Shandong province, and 18 total plasma collection stations nationwide. With up to 660 metric tons of plasma collection capacity at that time, we believe that we are well positioned to increase our market share in China.
Zack: What affect will the launch of Human Prothrombin Complex Concentrate and Human Coagulation Factor VIII have on future revenues?
Ming: Those products are relatively new to the PRC government and there are only a few manufacturers in the PRC that can make them. The market is still relatively small and we need time to build the opportunity by educating doctors more about the products, their efficacy and how to incorporate them in their practices. This also depends on how quickly the PRC government implements the healthcare reform. These two products will be pretty expensive for people to buy out of pocket. Future demand for these products will be partly driven by the government’s reimbursement and insurance coverage policies. Overall, we expect these two products combined can reach 10% of sales in the next few years.
Zack: What is the maintenance capex required every year to keep the business running?
Ming: Major maintenance is driven by the GMP standards revisions. The government just said GMP will be tightened again change in next few years, so we have to upgrade the new plant facilities. Other than those, the maintenance alone will cost approximately $4-5 million USD per year. We can have large capex spending because of government policy changes or building new stations. This year we expect 15-19 million in capex, including the construction of two new plasma stations, which were recently approved by the government, and system and other facility upgrades.
Zack: Why do your customers choose you over the competition?
Ming: The key reason is that China Biologic has been on the market for a long time and has built strong brand recognition. Our predecessor company of Shandong Taibang has been in the plasma business for 30 years and had built a reputation for manufacturing and distribution high quality products. We have built our reputation with our focus on quality and have gained the trust of hospitals and doctors. Additionally, we offer to our customers (hospitals) a wider range of plasma products and have a more extensive product pipeline of potential new products as compared to those of our competitors.
Zack: How is the growth in the overall industry in China?
Ming: The blood plasma industry in China is still in the early development stages compared to western counterparts in the industry. The industry has a long way to grow before catching up to the international standards. According to industry analyst, the growth rate will be 15-20% in the industry in China. We hope to grow faster than the industry.
Zack: Who are your main customers?
Ming: The local hospitals, the largest hospitals, and also local CDC’s.
Zack: Who is the Chinese businessman/businesswoman you admire most?
Ming: Zhang Yin – the entrepreneur and owner of the paper recycling company called 9 Dragons (OTCPK:NDGPF). She started the business from scratch as a paper recycling producer. She used to rank as the No.1 self made businesswoman in China. She is a phenomenal business entrepreneur.
Zack: If you had to invest in a small cap, US listed publicly traded Chinese company other than your own, what would it be?
I believe if China Aoxing is successful and brings all their products to the markets they will be very successful in the next few years.
Disclosure: No positions