China Biologic Products (NASDAQ: CBPO), a biopharmaceutical company focused on developing plasma-based products, has been subjected to a roller coaster ride over the last several months. Back in mid June, shares fell more than 11% after the company announced plans to sell over 3 million shares of common stock, but later recovered upon the closing of that offering. In early August, however, shares of China Biologic have gradually moved in sync with the general market, down to about $45 a share as of the close on August 4. The next potential catalyst is earnings, scheduled for August 5 after the market closes. Here is what investors need to consider going into this event.
Q1 2014 earnings hindered by Guizhou suspension
First off, China Biologic suffered from lackluster earnings for Q1 2014. Total sales of the company's plasma-based products only increased 4.1% to $56.3 million from $54.0 million in the same quarter of 2013. While the market demand for plasma-based products has increased over the last several decades, China Biologic's performance was hindered largely due to the productions suspension of the Guizhou facility. Although specific details have not been fully disclosed, management did note in a press release that the suspension occurred because China Biologic initiated construction of a new production facility. The suspension was caused after the slower-than-expected approval of its land-use rights, which, in turn, caused the company to realize a 37% decrease in sales at Guizhou, falling in line with its internal forecast. Investors should look for more details surrounding the resumption of productions at the Guizhou facility during Q2 earnings tomorrow.
Also on the radar for Q2 earnings is China Biologic's balance sheet. After the latest offering, the company reportedly sold 920,000 shares at $38 a share, garnering approximately $35 million. This improves the company's current cash position, which now sits around $103 million. Furthermore R&D expenses for Q1 2014 increased 17.6% to $1.1 million, while selling expenses increased 24.3% to $2.3 million, or 4.1% of total sales. While the company is expected to burn more cash related to its late-stage clinical programs and product expenses, the offering should alleviate any concern regarding its capacity to fund these expenditures. Nevertheless, it's important for investors to look for China Biologic's selling and R&D expenses for Q2, since management has previously stated that both can be somewhat unpredictable.
The plasma market is highly competitive
In the plasma market, major international players compete with China Biologics on the basis of product quality, cost synergies, product portfolio and logistical capabilities. The most notable competitors are Novo Nordisk (NYSE:NVO) and Baxter International (NYSE:BAX). Novo Nordisk's NovoEight, which was approved in the U.S. in October 2013 and in the EU in November 2013, is a recombinant Factor VIII replacement therapy for Haemophilia A patients. The company also markets NovoSeven and NovoThirteen.
And then there's Baxter's ADVATE for Hemophilia A. As I've previously discussed in several of my recent Baxter write-ups, (accessible here and here), ADVATE is rapidly acquiring significant market share internationally, particularly in the U.S. and Brazil. In fact, Baxter stated during the Q2 earnings call that it has successfully converted 35% of the 10,000 Haemophilia A patients in Brazil, and expects to record more than $100 million in sales in 2014. This represents a 5% increase over Q1 2014, and Baxter expects to continue converting these patients to ADVATE as local awareness increases.
Furthermore, Baxter initiated plans to develop a new manufacturing facility in Singapore to support production of ADVATE. Other developments surrounding this asset namely include a 4-year award for ADVATE as Australia's preferred recombinant FVIII product, which became effective on July 1, 2014. With this designation, ADVATE now has market access to approximately 2,300 people diagnosed with Haemophilia A. The company is also making additional efforts to market ADVATE to 5,600 Haemophilia patients in the UK.
(Note: since Baxter and Novo Nordisk don't break down plasma-based product sales for China, I'm unable to determine both companies' respective market share.)
China Biologic has developed a niche in China
Where does China Biologic stand relative to its international competitors such as Baxter and Novo? While global sales of Baxter and Novo's plasma-based products generated approximately $1.7 billion and $1.4 billion in 2013, respectively, China Biologic's plasma-based products generated approximately $204 million solely from the Chinese market. In fact, it has already seen a 12% rise in total sales of its immunoglobulin products, up 10% in the same quarter last year, as well as a 21% YOY increase in total sales of Factor VIII. Thus, as awareness increases, the company expects the demand for its plasma-based products to also increase. I suspect this segment will be at the crux of the conference call, given that product uptake will continue to dictate China Biologic's overall success in the industry.
Indeed, Baxter and Novo dominate the international Haemophilia market, but it's important to point out that China Biologic has made impressive strides to acquire more market share in China, which, in itself, resembles a large market opportunity. Currently, it's estimated that the nation has 100,000 Haemophilia patients, with only 10% of patients actually registered and treated in 40 registered hospitals. This translates to a $2.5 billion market opportunity through 2015. Given this discrepancy between the amount of patients with Haemophilia and those actually registered with the condition, China Biologic's primary effort is to increase awareness among patients and doctors in China. After all, it seems that China remains largely untapped due to the lack of cultural awareness of Haemophilia. But, given that China Biologic Products is domestic to China, I suspect the company's efforts to improve cultural awareness could be effective. As a result, the company may have seen a favorable affect on the demand for its plasma-based products in Q2.
Nevertheless, this also comes as the company struggles with disappointing albumin import volume, which has directly impacted product pricing. Last quarter, for instance, China Biologics reported that the overall albumin import volume declined in spite of rising market demand, leading to a decline in both price and sales volume of albumin. As the company monitors this ongoing issue, it alters pricing and product shipment to adjust for shifting margins. Investors should look for an update on the problem in the Q2 earnings report.
Going into Q2 earnings, investors should also be aware of China Biologic's extensive pipeline. Human Coagulation Factor VIII, Human Prothrombin Complex Concentrate and Human Hepatitis B Immunoglobullin are all in late stages of clinical development, so I suspect management may provide an update on the status of these programs. Given that management has stated that commercial production would commence later this year following possible regulatory approval, these developments shouldn't be overlooked. Further, the Chinese market represents a significant opportunity for China Biologic, and I suspect that it will continue acquiring market share for its products and, thus, drive further shareholder value going forward. Clearly, there are many reasons to remain bullish on shares of China Biologic.
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