China Biologic Products, Inc. (NASDAQ:CBPO)
Q1 2014 Earnings Conference Call
May 07, 2014 08:00 AM ET
Bill Zima - IR
Xiaoying Gao - Chairman, CEO and President
Ming Yang - CFO, VP, Finance and Compliance and Treasurer
Yi Chen - Aegis Capital
Matthew Prior - Bank of America
Hello, everyone, and thank you for joining us on today's call. China Biologic announced its quarterly financial results on May 6, after the market closed. The earnings release is now available on the Company's website.
Today you will hear from China Biologic's Chairman and CEO, Mr. David Gao, who will start off the call with a review of recent company developments, strategies, some basic operating results; followed by the Company's Vice President, Mr. Ming Yin, who will address financial results in more detail; CFO, Mr. Ming Yang is also on the call and will be available during the Q&A session that follows the prepared remarks.
Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ materially from those projected. There can be no assurance that those expectations will prove to be correct.
Information about the risks associated with investing in China Biologic is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The Company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise except as required by law.
The Company will also discuss non-GAAP measures, which are more completely explained and reconciled to the most comparable measures noted under generally accepted accounting principles in the Company's earnings release and filings with the SEC. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure and that non-GAAP measures are not uniformly defined by all companies including those in the biopharma industry.
With that said, now I'm pleased to present Mr. David Gao, Chairman and CEO of China Biologic products. David, please go ahead.
Thank you, Bill. Hello, everyone. And welcome to China Biologic's first quarter 2014 conference call. We are pleased to start off 2014 with a strong first quarter. Total sales increased 4.1%, $256.3 million in spite of strong financial performance in the prior year period as well as a temporary production suspension of Guizhou Taibang plasma production during this period.
During the quarter, our Shandong facility maintained strong sales growth momentum. And our Guizhou facility experienced a 37% of sales decrease due to the production suspension, which was in line with our internal forecast.
Our plasma collection volume continued to grow as planned. Our operating margin and net margin of the first quarter of 2014 reached 49.7% and the 32.5% respectively representing a year-on-year improvement. This solid growth was primarily attributable to a strong market demand especially for our human albumin products, stable products pricing and a more profitable product mix, improved plasma utilization efficiency, as well as effective cost control measures.
I have restated in previous quarters, we had ongoing concerns about albumin import volume and it impact on product pricing. During the reporting quarter, we observed (certain line of) [ph] decline in overall albumin import volume, in spite of generally strong market demand. Consequently, we experienced modest growth in both price and sales volume of albumin for the reporting quarter. We continue to closely monitor margin trends and we adjust our pricing and the product shipment accordingly in coming quarters.
During the reporting quarter, human albumin products and IVIG products remained our two largest sales contributors, while other products also experienced positive developments. We experienced a modest growth in both price and the sales volume of albumin products, for our higher margin, high grade new products in particular human rabies immunoglobulin products.
Our overall market share continues to grow and we experienced strong growth in sales volume during the reporting quarter. The overall revenue contribution from rabies immunoglobulin products increased to 12% of total sales from 2% in the same quarter of 2013. We attributed the success to our R&D efforts in the last year.
With improved vaccination practices, our specialty plasma collection in the product yields. As a result, we increased the supply of rabies vaccinated plasma and expanded their production in our Shandong subsidiary since the second half of 2013.
Additionally, sales of Human Coagulation Factor VIII continued to ramp up, which further improved our plasma utilization efficiency. For our non-plasma products thanks to the recent remodeling of our placenta polypeptide production line, sales volume of placenta polypeptide increased by 21% year-over-year in the first quarter of 2014 and we expect the production volumes to continue to rise in the coming quarters.
As for our operational developments, Guizhou Taibang received GMP certification for its placenta polypeptide production facility in January and the GMP certification for its plasma production in March. Our Guizhou Taibang facility has since resumed production with increased production capacity. We also began commercial production of human prothrombin complex concentrate at Guizhou Taibang. With these updates, we expect more products available for sales in the second half of 2014. We are confident that we can enhance our total sales and operating efficiency to meet growing market demand. We expect that the growth momentum we saw in the first quarter to accelerate in the following quarters.
Finally, at the non-operational level, we repurchased 2.5 million shares of common stock from Ms. Siu Ling Chan, an individual shareholder of the company, at a total consideration of US$70 million in February 2014. Through this action, we continue to enhance our shareholding structure and increase shareholder value.
I will now turn the call over to Ming Yang, our Vice President to review first quarter financial results. Ming, please go ahead.
Thank you, David and hello everyone. Let me first review key P&L items for the first quarter 2014. Total sales were $56.3 million, an increase of 4.1% from the same quarter of 2013. Excluding foreign exchange translation effect, the increase was primarily due to the increased sales at the Shandong Taibang, partially offset by the reduced sales at Guizhou Taibang due to its production suspension during such a period.
During the first quarter human albumin products and IVIG products remained the largest two sales contributors while the sales volume of human albumin products increased during the first quarter as a result of increased sales of volume at Shandong Taibang. The sales volume of IVIG products decreased during this period primarily due to the planned production suspension at Guizhou Taibang during such period.
As a percentage of total sales, human albumin product revenue accounted for 42.3% while IVIG revenue accounted for 36.5%. In addition during the reporting period sales of rabies immunoglobulin products rose significantly accounting for 12% of total sales. Sales contribution from placenta polypeptide products and human coagulation factor VIII products was 4.7% and 2% respectively.
Gross profit was up by 3% reaching $38.6 million; gross margin remained relatively stable at 68.5% and 69.2% for the first quarter of 2014 and 2013, respectively. As stated earlier, our gross margin will face pressure from increased from plasma collection cost and we intend to support the future margins through increased sales of higher margin products and improved manufacturing efficiency.
For the first quarter 2014, selling expenses increased by 24.3% to $2.3 million or 4.1% of total sales. The increase was primarily due to the increased sales of placenta polypeptide product shipments which have higher selling expenses.
G&A expenses decreased by 16.9% to $7.2 million or 12.8% of total sales, this decrease was mainly due to the decrease in expenses associated with share-based compensation as well as the absence of amortization expenses in relation to GMP certificates with respect to the 2008 acquisition of Guizhou Taibang in the first quarter of 2014. G&A expenses as a percentage of total sales declined to 12.8% from 16.1% from the same quarter of 2013.
R&D expenses were $1.1 million in the first quarter of 2014, representing an increase of 17.6% from the first quarter of 2013. The increase was primarily due to the expenditure paid for certain clinical trial programs and engagement of external experts for certain pipeline products. As percentage of total sales, R&D expenses accounted for 1.9% compared to 1.7% in the same quarter of 2013.
Operating income was $28 million representing an increase of 7.7% from first quarter 2013. Operating margin increased to 49.7% from 48.1% in the first quarter of 2013. Net income attributable to the company increased by 22.5% to $18.3 million resulting in net margin of 32.5%. Fully diluted net income per share was $0.69. Non-GAAP adjusted net income attributable to the company was $19.1 million or $0.73 per diluted share. Non-GAAP adjusted net income and diluted earnings per share excluded $0.8 million of non-cash employee share-based compensation expenses.
Now, I will like to turn to the balance sheet and the cash flow items. We ended the first quarter of 2014 with approximately $77.5 million in cash and the cash equivalents, net cash provided by operating activities for the reporting period was $11.5 million as compared to $22 million for the same period of 2013. The decrease was primarily due to the increase of accounts receivable and inventories and a decrease advanced from customers for the first quarter of 2014.
The increase in accounts receivable was $6.4 million as compared to $3.3 million in the same period of 2013. This increase was primarily due to the delay in our shipments of enhanced customers payments for certain batches of products during the first quarter of 2014. This delay was a result of delayed inspection and approval by the National Institute for the Food and Drug Control of such products. Additionally we incurred approximately $2.9 million increase in inventory for the reporting quarter as compared to $0.6 million in the same period of 2013, mainly attributable to an increase of raw materials.
Lastly, the decrease of advance from customers was $1.4 million for the three months ended March 31, 2014 as compared to the increase of $1.5 million in the same period of 2013. This decrease was primarily due to a lump sum prepayment made by certain distributors in the first quarter of 2013 for certain immunoglobulin products. A portion of these products were delivered during the three months ended March 31, 2014 upon which the corresponding prepayment was recognized as sales.
Net cash provided by investing activities was $0.9 million; net cash used in financing activity was $78.2 million. Our working capital on March 31, 2014 was $149 million and our current ratio was (2.84) [ph]. Total shareholders’ equity was $256 million as of March 31, 2014, compared with $304 million as of December 31, 2013.
We believe that the company has sufficient cash on hand and can continue to generate positive cash inflow from continuous operations. We aim to optimize our balance sheet as we progress throughout the year.
And now to our financial forecast. Our outlook for the remaining of the year is strong and we reiterate our full year financial guidance of total sales in the range of $230 million to $240 million and non-GAAP adjusted net income in the range of $67 million to $69 million. This estimate assumes only organic growth.
That concludes our prepared remarks, we’ll now take questions.
And our first question will come from Yi Chen of Aegis Capital. Please go ahead.
Yi Chen - Aegis Capital
My first question is, can you explain the sales dynamics between human rabies immunoglobulin and IVIG, and what the sales number from these two products look like going forward?
The IVIG and the hyper-immune products such as rabies immunoglobulin belong to one category products or immunoglobulin products. The products production volumes of our IVIG products depends primarily on the general plasma supply, and secondly on the allocation of production capacity among human immunoglobulin products which including IVIG and other hyper-immune products. The production volumes of our hyper-immune products which including the human rabies immunoglobulin and the human hepatitis B immunoglobulin and [indiscernible] are subject to the availability of the specific investment made at plasma and our production capacity.
The supply of the specific vaccinated plasma in general requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune products any given time and we rotate the production of different types of the hyper-immune products from time to time and in response to the market demand and as such the sales volume of any given type of hyper-immune products may vary significantly from quarter to quarter.
As David mentioned early in 2013 we made certain R&D initiatives with collaborating and acquiring external expertise to improve our vaccination practice on specialty plasma collection and accordingly, the production yields and accordingly we increased the supply of rabies vaccinated plasma and expanded the production of our Shandong subsidiaries in the second half of 2013 and that’s why in this quarter, our sales volume from the rabies immunoglobulin increased significantly from last year’s incurred 2% to 12% this period and on the other hand the IVIG production given the partial production was allocated to the immunoglobulin to the rabies immunoglobulin products, that’s why IVIG production volume declined and I guess your question for the following quarters as we want to actually further pursue our strategy to improving our rabies immunoglobulin market share in the remaining of the year and also we want to actually monitor the market trends related to the overall rabies immunoglobulin supply volume and adjust our production and pricing the strategy according to the market the dynamics.
So I guess that answer your question Yi.
Yi Chen - Aegis Capital
Okay, thanks. My second question is can you give us some color on the timeframe of new product launch during this year and next year?
Yes, I mean as we disclosed in our 10-K in March, we just got the production approval in Guizhou for the new product prothrombin complex. So after the Guizhou obtain the GMP license, so we will start to produce the PCC since April and also our Shandong subsidiary in the final stage of applying for the production approval and the manufacturing license for the same products, the PCC. Hopefully we can get the FDA approval by end of the year, that will means the two subsidiary will start to produce the same products by end of this year, so that’s for 2014.
And 2015 as we disclosed in our pipeline and we have our -- the Hepatitis B Immunoglobulin for the intravenous injections, then new products expect to launch in the 2015. And 2016 we’re looking forward to another products, the 2016 -- in 2016 as we disclosed in the 10-K we also have three new pipeline products in the early stage we just announced end of last year, so hopefully which those products will be launched to the market in the after 2016.
Yi Chen - Aegis Capital
Okay. My final question is in terms of growth in plasma collection volume, what is the expected number this year and going forward?
You mean the actual collection volume?
Yi Chen - Aegis Capital
Yes, plasma collection volume.
I hope you can appreciate, we don’t disclose this data primarily for the competitive progress which is a norm for the new -- for the few companies we compete with in this sector in China. What we can say is that we enjoy a high competitive comfortable position in the industry and we intent to grow our collection volume in double digit percentage terms in this year. As you might remember we put in our last press release in March last year we had 16% year over year growth in collection volume as a group. Hopefully that answers your question Yi.
And our next question is from Matthew Prior of Bank of America. Please go ahead.
Matthew Prior - Bank of America
Good evening Ming and David. I have two questions. My first question is in relation to the competitive landscape. You mentioned profitability for albumin during the first quarter with one of the large importers absent in the market which we understand is due to the licensing issue. But given this competitors have stated their recent result and they plan to return to China in the second quarter, what is your outlook for albumin pricing? And do you think some of the market share that you captured during the first quarter will stay with China Biologic for several quarters?
Well Matt I think this will be a tough question, but I will try to answer. Because I just want to give you the few numbers, because as you mentioned, the importation volume decline during the reporting period, that's true, because we actually monitored the similar trends because we -- from the time we saw there is about 5% decline in the importation volume as overall.
And -- but we’re not sure whether the all the importation volume will pick up from the second quarter or second half of 2014. But we can only assume if the importation, the trends continue. And also the local produced albumin volumes remains the similar trend, and probably the albumin marketing, the pricing probably will stay in a very similar trend. But if the overall importer albumin pick up the volume in the second quarter or going forward in the remaining of the year, I think it will be hard to predict whether we will lose some market share, because first of all in this quarter we produced more albumin because definitely there is the increased shortage situation. But again, we have a different channels and a different selling region. So I think the China Biologic will primarily focus on the -- our existing regions which has less competitive situation, because like our Shandong, in our channel subsidiary we sell to region which all are pretty much the sales is a direct sales to the hospitals. So from that sense, we probably will face less pressure.
But again, the overall, the market condition probably, it's hard to predict at this moment.
Matthew Prior - Bank of America
I am sorry for asking the question, but given the dynamic trend, I had to ask. If I can ask the second question, just in regards to our coverage of Honk Kong China healthcare and the impact of the anti-bribery and corruption campaign and investigations of the second half of last year. Do you think that that investigation by the government has had any slowdown effect on the industry of plasma therapeutics in the fourth quarter or first quarter? And do you think we could see any improvement in industry growth over the course of 2014 of ’15? Thank you.
Yes that question I guess we -- it’s kind of remote for -- at least for the China Biologic or the plasma manufacturing in general. Because you might notice the average selling expenses rate for this industry is a single -- no single-digit. So as compared to the other drugs companies, some expense 30%, 40%. So I guess from that perspective, the overall, the plasma protein therapeutics manufacturer might get less scrutiny as other chemical drugs company which they have 40% selling expense. So I guess we don’t feel much impact now. So I guess in the last year, so going forward we don’t expect the same there or the more severe impact will impact our industry.
Our next question is from Peter a private investor. Please go ahead.
Hi Ming its Peter [indiscernible]. Just very quickly a few question. First is on the rabies immunoglobulin and placenta polypeptide where you sited growth and the higher margins. Are there price controls on those? Were there any changes in those price controls?
Yes, for this rabies immunoglobulin product, also the government has price setting on this one.
And were there any changes recently to contribute to that higher margin or were they…
No, actually I guess the higher margin is because recently we improved the vaccination practice and also the production yields. Because our research efforts we made out in 2013. So improve our yields and because of yields are higher and that’s why we have a higher margin.
And my next question is on acquisitions you’ve [indiscernible] several references to the organic growth for now, but also hinting at potential acquisition. Could you explain what type of profile would be suitable if you were to make an acquisition? And also how would you plan to finance that?
Well, tough question I -- let me try to answer. Because our position in this industry, there is -- I think, plasma protein does really happen only one -- there is only one reason the deal was last year, is one of the Chinese plasma. The public company acquires another private plasma acquisition which has better higher PE and have more than 20 times PE. So I think for us, we’re trading like 15 -- we’re trading below 20 times. So I think the benchmark for us to acquire -- do any acquisition we -- first of all, we want to make sure, it will be accretive to our bottom-line. And also definitely the [indiscernible] will be an important gross strategy for the company. And then we will actively monitoring the market for any suitable, the (candidate) [ph] and primarily we'll be focused on the plasma protein business which is all core business and it will easy for us to manage.
In terms of finance...
Are you going? Yes, if there is a more suitable or they have a synergy to their existing business, we’re definitely looking to that direction.
Okay. And my final question is regarding the G&A and operating expenses, as a percentage of revenue is obviously an improvement there. I am just wondering is that sustainable or should we expect this in further improvement, can you give us some outlook on that please?
Yes, I mean that’s a tough question. Definitely this quarter, if you actually look at our -- the reported financials toughen the G&A expenses was 1 -- it’s actually 19 expenses, contributed to the overall margin improvement. And -- but if you actually happen to looking into our prior year’s quarter or the results you will find -- actually the SG&A expense varies quarter-by-quarter and there is few reasons. And this quarter, we particularly have G&A savings from the few factors.
Number one is, we actually have less -- the expenses which is the employee share based compensation expenses, which was fully amortized by end of the year. So this year we have less of that expense. And second we have less amortization expense related to the acquisition we made in 2008, that has been fully amortized as well. And for the following quarters we were committed to improving margins, that’s what our priority. But we can only assume there is not any unexpected incidents happen like last year.
We have our large legal expenses related to the cooperate the defense, the takeover [indiscernible], so we have a more -- incur more legal expenses. And also we have [indiscernible] the strategic investor litigation that spent a lot of -- the legal expense. So if we assume that expenses are not going to happen, which at this moment, it’s hard to predict. I guess, by the end of year or the remaining quarters, again we’re trying to improve the margin but we cannot guarantee the current -- the SG&A will be the benchmark for the following quarters.
And additionally for the selling expenses, we implement to -- trying to initiate more, like promotion and the marketing activities with the new region like -- we’re disclosing our 10-Q. We recently signed up with a new agent in Beijing in the tier one cities, so we might incurred more marketing expense with penetrating through the higher end market. So from that perspective our selling expenses might actually increase.
Our next question is from (indiscernible). Please go ahead.
Hi, Ming, hi David. Just quickly, just what do you expect going forward with the receivables and the inventory situation? Is this temporary?
Yes. I mean for the receivable situation as we disclosed in the press release and 10-Q that basically, what happened is the products, we’re supposed to deliver it in the early March and because the inspection -- the garment actually -- the inception results was delayed, so we have to ship those products to the hospital by end of the March. So because in general our [indiscernible] terms to the hospitals are within 30 days to -- or less, 30 distributors probably less than 30 days, hospitals are between 15 days to 90 days, according to the credit rating of the different hospitals.
So this quarter the accounts receivable situation definitely will improve in the following quarter unless we have such similar, the inception delayed, that’s for the receivables. But for the inventory, as the Guizhou facility start to production back to or resume the production in April. All the inventory collector, the raw plasma, particular for raw plasma collected during the last nine months or 10 months were going to the productions. So you will notice a certain level of raw material inventory depletion during the next few quarters. And also for the inventories, just want to see the overall, the inventory (total) [ph] days did not actually change a lot. So it basically remained comparable. So from that perspective, the account receivable situation, it’s not a significant issue actually.
Okay. But then with your inventory, it was quite low at the end of December right. I imagine you already started, sort of collecting in preparation for the Guizhou plant to come back into production. So why was it low at the end of December and is suddenly high at the end of March or am I mistaking that?
Well if you look at the inventory, you have to look into the different lines; we have the raw material and the work in process and the finish goods, right. So if you look at the overall combination of the three, yes, it varies but if you look at the inventory of the -- I guess it won’t be actually moving from the raw materials to the finished products and also because this quarter the collection volume grows, will contribute raw plasma growth, that was the reason why for the raw materials increase.
I am showing no further questions, this concludes our question and answer session. I’d like to turn the conference back over to management for any closing remarks.
Thank you for your participation and ongoing support for China Biologic. Have a good day.
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