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Executives

Jing Lou – Co-founder and CEO

David Chen – EVP and COO

Kevin Teo – CFO

Yingfei Wei – Chief Scientific Officer and VP for Business Development

Analysts

Hongbo Lu – Piper Jaffray

Katherine Lu – Oppenheimer

Kim Lee – Pacific Growth Equities

Chang Wee [ph] – Sunset Capital [ph]

Pat Gallagher [ph] – BBER Research [ph]

Louis San – Brean Murray, Carret

Joe Aguilera – BioRevolution Capital

Jodie Wehner – Global Hunter Securities

3SBio Inc. (SSRX) Q2 2008 Earnings Call Transcript August 13, 2008 8:00 AM ET

Operator

Welcome to the 3SBio 2008 Second Quarter Results Conference Call. Hosting today’s call will be Dr. Jing Lou, Chief Executive Officer; Mr. Kevin Teo, Chief Financial Officer; Mr, David Chen, Chief Operating Officer; and Dr. Yingfei Wei, Chief Scientific Officer.

Statement in the conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon 3SBio management's current expectations, and actual results could differ materially. For additional information on these and other factors that may affect the 3SBio's financial results, please refer to the Company's filings with the Securities and Exchange Commission at www.sec.gov. 3SBio undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this conference call.

Following management’s opening comments you will have the opportunity to ask question. I would now like to turn the call over to Dr. Jing Lou. Sir, you may go ahead.

Jing Lou

Thank you, operator, and thanks everyone for joining us on our second quarter 2008 results conference call. Joining me today are Kevin Teo, Chief Financial Officer; David Chen, Chief Operating Officer; and Dr. Yingfei Wei, our Chief Scientific Officer. As we proceed through our remarks we will refer our results presentation, which can be downloaded from our website at www.3sbio.com.

Following an overview slide, the slide pertaining to the EPO market and our results begin on Page nine. We are happy to report another quarter of top line growth bolstered by continued positive momentum in our therapeutic end products. Again, for reference, we have included on Slide six and seven an overview of firs the historic growth in the Chinese EPO market and second data demonstrating the low penetration rates in the (inaudible) oncology market in China.

I will now review these in detail again at this point. However, I would like to impart on your other fact that one we expect the overall growth in the EPO to remain at or close to historic leads in the coming year. And second, as the only manufacturer currently of an EPO product approved for use in the oncology setting, we believe we remain well positioned to benefit from the increasing penetration of this market.

(Audio Gap)

Operator

Ladies and gentlemen, please remain on line. The conference will begin shortly. Once again, please remain on line. Thank you.

Jing Lou

We believe there is a strong market potential for this product, and we are encouraged by its performance thus far. A full breakdown of our sales by product can be found on Slide 13. Let me now turn the call over to David Chen, our COO. David?

David Chen

Thank you Dr. Lou. I’d like to provide you with an update on some of the key strategic and operational developments and an update on our pipeline. But, first of all, on the business development front, as we know that business development (inaudible) remain a key component of our overall strategy for growth and as a significant first step in the process, we announced in late May that we entered into a strategic partnership with the Cambridge based AMAG Pharmaceuticals for development and commercialization of ferumoxytol. It’s a new generation intravenous iron replacement therapy being developed to treat iron deficiency anemia in chronic kidney disease patients.

Certainly, this partnership is a clear demonstration of our ability to design and execute business development strategy and validation of our market-leading position and very strong commercial nephrology franchise in China.

In addition, we believe (inaudible) agreement it will support our long growth prospects and further solidifies our position as the partner of choice by biotech companies worldwide.

Now, if we look at – let’s look at the pipeline. I start with 36,000 IU EPIAO trials. Now, we have completed the full analysis of Phase III to evaluate the safety and efficacy of this weekly subcu injection of high dose EPIAO in oncology patients compared with a regimen of – the current regimen, which is three times per week administration of 10,000 IU EPIAO. Results show 70% of patients on high-dose EPIAO injections had Hemoglobin improvement of one to two gram [ph] per deciliter from baseline. We have seen similar results on three times per week dosing of 10,000 EPIAO, which is the major dosage form we are selling to oncology market.

More importantly, this weekly administration of 36,000 IU EPIAO demonstrated equivalent safety and tolerability profile as three times per week 10,000 EPIAO. So, we remain in track to file with SFDA in the third quarter of 2008. Pending approval, this weekly EPIAO will improve compliance for both existing and new patients as a result of a greater convenience given the reduction in the number of injections required for the – throughout the course of the treatment.

Moving to TPIAO for ITP, we have achieved our enrollment goal for the Phase III trial for TPIAO for the treatment of ITP and we continue to expect to complete the clinical study and file with SFDA in the fourth quarter of 2008. We remain on track.

The – on the front of NuLeusin, which is our high dose IL-2, preliminary results from the analysis of Phase III trial data showed 11% partial response, with one patient registering a complete response. If approved, we believe NuLeusin could be the first to the market of its kind for the treatment of late state renal carcinoma in China. And certainly, we have provided very important treatment alternative for late stage renal cancer patients who have exhausted other treatment options.

In order to maximize our commercial potential and ensure the long-term healthy growth of TPIAO, we initiated a new Phase IV study in the second quarter of 2008 to demonstrate the efficacy of TPIAO on specific tumor types and chemotherapy regimens known to cause Thrombocytopenia. Once we have the data available, we will roll out a new promotional platform to further increase the penetration of TPIAO in oncology segments.

We are very pleased with the continued progress we have made on the business development and operational front. In all three of our Phase III programs remain on track and AMAG partnership marks certainly a key milestone for the Company, which we believe will have very positive long-term effect on the Company and set the stage for future opportunities.

With that, let me return the call over to Kevin, our CFO, to take your through the numbers. Kevin?

Kevin Teo

Thank you, David. Let me now walk you through the overview of our financial highlight for the second quarter ended June 30th, 2008. A summary of our results can be found on Slides 19 to 22 of our presentation.

Total net revenues for the quarter reached US$8.7 million, a 38.4% increase over the second quarter 2007. For the first half 2008, total net revenues increased 46.7% to US$16.8 million. Gross profit increased 38.9% year-over-year to US$7.9 million for the second quarter 2008.

Operating expenses totaling US$5.7 million increased 54.3% over the second quarter 2007. R&D expenses increased 62% to US$0.4 million as we continue to invest in our early stage pipeline product of anti-TNF mAb and HPV vaccine.

Sales, distribution, and marketing expenses increased 31.9% to US$3.9 million as a result of increases in personnel, conference, advertising, and promotional cost, due to the expansion of sales force and network in China.

G&A cost totaling US$1.4 million increased by 186.2% over the second quarter 2007. This increase was mainly due to increases in personnel costs and professional fees associated with on-going efforts to improve internal control procedures, investor relations, and compliance with listing and regulatory requirements for a public company.

Despite the commitments in operating expenses, our operating income increased 10.5% from the second quarter 2007 to US$2.2 million. Operating margin was 25.5%, down from 31.9% in the year-ago period.

Finally, our net income decreased by 16.9% from the second quarter 2007 to US$2.8 million. Net margin for the second quarter 2008 was 32.5% as compared to 54.2% for the second quarter 2007. The decrease was mainly due to lower interest income and higher income tax expense resulting from the increase in the enterprise income rate for a major operating subsidiary in China from 15% to 18% effective from January 1st, 2008.

Thank you. Let me now turn back to Dr. Lou.

Jing Lou

Thank you, Kevin. As discussed, we believe our Company remains well positioned to continue our successful track record growth reported by underlying strength of our therapeutic end markets and our capability of development of new products and manufacture technologies. As such we announced that we are raising our full-year revenue guidance from US$30 million to US$32 million to US$34 million to US$35 million.

That said, our work remains cut out for us and our strategy for growth remains consistent. As noted on Slid 24, the keys to our strategy as shown and three of the most important strategies to expand our revenue and profit scales are first, maximize sales of our lead products, EPIAO and TPIAO in Chinese market. Second, acquire an in-license new technology products and/or companies that fits to our strategy. Third, continue to expand beyond the Chinese domestic market. As always, our focus remains on value creation for the business and our shareholders.

Thank you for your time and we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Thank you. The first question comes from Hongbo Lu from Piper Jaffray. Please go ahead.

Hongbo Lu – Piper Jaffray

Thank you. Good morning and good evening everyone. I have two questions. One is on the EPIAO sales. You can – David, Dr. Lou, can you give us a break down of nephrology sales versus oncology?

David Chen

Now, oncology is approximately 40% of the sales right now, and if you look to growth we – the oncology sales has really exceeded our internal expectation and is going very fast and faster than the nephrology. Nephrology, we are seeing the average growth rate around 30% on the volume – on the nephrology side, and more than 50% on the oncology side.

Hongbo Lu – Piper Jaffray

Thank you. And then –

David Chen

For the first half of 2008.

Hongbo Lu – Piper Jaffray

Thank you so much, David. And then for the second quarter would you say (inaudible) is there any impact from the earthquake in the second quarter? What I meant was if there is no earthquake in China would you expect your product sales somewhat actually a little bit higher than what’s reported? Is there any impact at all?

Jing Lou

Go ahead, David.

David Chen

Yeah, I just wanted to comment in general. I think what you are going to see is some fluctuations for the sales on a quarterly – quarter-over-quarter basis given operating environment we are in right now. I mean no geographically it’s very diverse, it’s very fragmented. So, if you look at the – but I think what we – in terms of the time horizon to look at the growth trajectory of EPIAO or even in TPIAO I think looking at half year basis, it makes a lot of sense for us from a planning perspective. So this is just – I just want to give you a general sense of fluctuation on a quarterly basis. And we don’t really see a particular impact on the earthquake.

Hongbo Lu – Piper Jaffray

Okay. And then if I may, I have a second question on the expenses line. On sales and marketing, with your top line revenue growing nicely, should we expect sales and marketing expenses to start to go down as a percentage of revenue in the next couple of year? How should we think about it?

David Chen

Let me take that question, Hongbo, this is David. Again, as we have commented during the last quarter earning call, we are aggressively investing in the sales and marketing activities as we continue to penetrate oncology for both EPIAO and TPIAO. We are creating the market essentially on the oncology front, especially for TPIAO given it’s a very short history. We are two and half years into the market. So both efforts are quite resource intensive. Certainly, growing the organization as well fund prospective empower to continue to build the market position and future for 3SBio. In the meantime, we are certainly mindful of the importance certainly to every investor the balance this level of investment and also being able to manage the cost. To answer your question, I believe we have ways to do it. And we have – and we are very confident to realize operating leverage in coming years starting from next year as our sales continue to ramp up. So you should be able to see some leverage coming – in the coming years and starting from next year.

Hongbo Lu – Piper Jaffray

Thank you so much. I will get back into the queue.

Operator

Thank you. The next question comes from Katherine Lu from Oppenheimer. Please go ahead.

Katherine Lu – Oppenheimer

Hi, good evening. Congratulations on the good quarter. First of all, your EPO sales again had a very strong growth in the second quarter. I am just wondering how would you describe the pricing in the EPO market in the second quarter. And then I have a question regarding on the guidance.

David Chen

Let me take that question. I’d say on a quarter-on-quarter basis we see very minor drops for EPIAO on the pricing – on the per-unit basis. It’s approximately 1% to 2%. If we compare with the first half of 2007, we are seeing around 5% to 7% on average selling price on a per-unit basis, and this is the result of a combination of the product mix change, and also some areas going through the bidding process (inaudible) realize for the first half of this year. The product mix I mean the – we are currently selling majority of our dosage form in 10,000 IU and we know on the 10,000 basis we are selling a little bit discount to the 3000 IT and other format. We currently more than I think around 80% of volume actually come from our high-dose EPIAO of 10,000 IU vial, which are the major advantage we have in the marketplace in terms of – using this dosage to form the penetrating – penetrating the oncology as well as nephrology area right now. So, to answer your question I think roughly 5% to 7% drop year-over-year compared with the first half of 2007.

Katherine Lu – Oppenheimer

Okay. Thank you. Then the second question is regarding guidance and either Kevin, Dr. Lou or David you can address that. First of all, what is the (inaudible) interest rate assumption you build in your guidance? And Kevin, could you also confirm that tax rate assumption for the full year remains at 15%. Then finally, what kind of – thinking about third quarter versus the fourth quarter what kind of seasonality should we be expecting this year? I know you mentioned before that the better inventory management this year can moderate the seasonality between 3Q and 4Q. I am just wondering if the Beijing Olympics will also make some impact on that front.

Kevin Teo

Okay, on the guidance this time we will be using exchange rat of 6.9. That would give us RMB of approximately 235 million to 242 million.

Katherine Lu – Oppenheimer

Okay.

Kevin Teo

On the effective tax rate, for the six months ended June 30th, the effective tax rate was approximately 15% and we do not expect significant fluctuation going forward in 2008. And for the question on seasonality, can I turn it to David?

David Chen

Yeah, let me – on the effective tax rate, let me just give you a little bit more color on this. I think nationwide or the high tech companies are because the (inaudible) are waiting for the new approval process to start that in terms of the qualification we did look at our industry the business we are in and the – as a say high tech industry we have no doubt that we should be in the category in terms of the future tax – resume the future tax benefit. However, the process is a little bit uncertain right now. We don’t know when they are going to start. So we are waiting. But from a qualification perspective, we feel confident that we should be in the category.

Commenting on Olympics on EPIAO sales, domestically I think you probably will see some short-term impact because of the disruptions. And certainly because the restrictions on shipping, the traffic this I think serve to distort some of the balance and have some fluctuation on a quarterly basis. This is on the domestic front. And we did see some impact on the export front given the restrictions on EPO we – for example we won the bid in Egypt and we got EPIAO approved in Pakistan in – for high-dosage and for – during the second quarter but we can't ship the product because of Olympics. So we think we can resume the normal operation during the third and fourth quarter. And so – in – but overall we believe the demand for our product is very strong at the hospital level, and we are very confident that with overall growth trend in the remainder of the year so in that basis we have given you the full-year guidance for the revenue expectation.

Katherine Lu – Oppenheimer

Okay, great. Actually in fact I just want to followup one more question on the export. Export looks very strong this quarter. So, you just mentioned you win the tender in Egypt. So is the current run rate a good number for us to model going forward or you feel there is extra upside to this number?

David Chen

Well, Katherine, we – it’s a regular practice, so we certainly don’t want to go to too much of a detail on the specific component of the business though I think the – it’s a small – it still remains a small segment of our business and I would think it’s going to continue to grow very rapidly on this front. So roughly speaking, single digit still will be the percentage we are looking at, as a percentage of sales.

Katherine Lu – Oppenheimer

Okay, great.

David Chen

The primary driver for the second quarter was – we won the bid in Pakistan and another country on the – can't remember exactly, well I think it’s the – it’s a small amount, but mainly in Pakistan for interferon.

Katherine Lu – Oppenheimer

Okay, great. Thank you very much.

Operator

Thank you. The next question comes from Kim Lee from Pacific Growth Equities. Please go ahead.

Kim Lee – Pacific Growth Equities

Great, congratulation on the quarter. I have several questions here. The first one is what is the market share that EPIAO has now in China?

David Chen

We – Kim, it’s good to hear from you, this is David here – I think we – the latest IMS data showed I think over 40% on the value, I think it was around 41%, on the volume side, I think it’s around 32%.

Jing Lou

33.1

David Chen

33.1 We gained about two percentage points for first quarter of this year.

Jing Lou

So, we will get the second quarter data at the end of this month, early next month. So we don’t have the second quarter data yet (inaudible).

Kim Lee – Pacific Growth Equities

Okay.

David Chen

Well, just bear in mind because we are selling right now a majority of our EPIAO in 10,000 dosage form so if you look to on the volume it’s – the number is – the market share is distorted. It should be much higher.

Kim Lee – Pacific Growth Equities

Okay. Great. Thanks for that clarity. Also on – can you give us any updates on the manufacturing front or your updates on your revisions for your manufacturing – current manufacturing plan and how the new manufacturing plant build is going?

David Chen

Yeah, it’s still progressing according to the plan. We are still into the construction of the plant. We have a complete design of the plant, now we are just constructing the plant, and we still are on track to complete the construction in – end of 2009, and we have validation for the first half 2010.

Kim Lee – Pacific Growth Equities

Okay. Great. And also do you – on the marketing front, do you have plans to expand the sales force any more in 2008?

David Chen

I am sorry, I can't get – I can't hear your question. Can you repeat the question?

Kim Lee – Pacific Growth Equities

Yes. The question is on the marketing front, do you have any plans to expand the sales force for the rest of this year?

David Chen

Dr. Lou, could you comment on that sales force expansion strategy –

Jing Lou

We have done the expansion in the first half of the year for this year. And as we said before, we had a plan to expand again next year around 10%.

Kim Lee – Pacific Growth Equities

Okay.

Jing Lou

Of current sales force.

Kim Lee – Pacific Growth Equities

And how many total sales people do you have right now?

Jing Lou

We have 240.

Kim Lee – Pacific Growth Equities

Okay, great. And a couple of questions on the pipeline and I will get back in the queue. Can you comment on – give us any more detail on exactly what the NuLeusin data shows so far? And also for NuPIAO if you have completed the tox studies yet and what are your plans to initiate in 2009? Thanks.

David Chen

Let me take that and then if you still have questions I think Chief Scientific Officer is on line and she can chime in. On the NuLeusin front, basically this open label single arm study to look at the patients to the late stage – stage III and IV renal cell cancer patients, and basically they have –they look at our NuLeusin (inaudible) injection for two courses of therapy. And we run the I think every course lasts about eight weeks and then at the end of two courses of therapy, we measure CAT scan in terms of looking at their tumor progression. And so we have seen partial response about 11% for those patients and then we have seen one complete response, which are from the date perspective the response rate are very similar to what we have seen on (inaudible) in major markets. Depends on what trials and what route of administration versus doses you are using. So these numbers are in line with what we have seen in the major markets for the clinical trials. So we remain on track to file this for approval during the second half of this year.

Kim Lee – Pacific Growth Equities

Great. And yeah –

David Chen

To answer your question on the Inleusin what – and a specific information you will like to know about this trial?

Kim Lee – Pacific Growth Equities

Yeah, no I think that’s enough granularity. Thank you. And can you give us any updates on NuPIAO and when you expect to initiate a Phase I trial?

David Chen

Yingfei, could you give a quick update on this. I think the last quarter we are targeting to file NDA I think before the end of this year. Are we still on–?

Yingfei Wei

Yeah, I think we are still on track in terms of that timeline.

David Chen

Okay.

Yingfei Wei

Yeah.

Kim Lee – Pacific Growth Equities

You said to file –

Jing Lou

We are still in long-term talks now.

Kim Lee – Pacific Growth Equities

Okay. You said to file an NDA.

Jing Lou

Yeah.

Kim Lee – Pacific Growth Equities

Okay. Great. Thanks a lot.

Operator

Thank you. The next question comes from Chang Wee [ph] from Sunset Capital [ph]. Please go ahead.

Chang Wee – Sunset Capital

Yes, good evening. Kevin, can you give us some idea about our cash flow, future cash flow from operation, CapEx?

Kevin Teo

Cash flow generated or provided by operating activities for the June 30th, 2008 was RMB30.4 million. CapEx was about RMB3 million.

Chang Wee – Sunset Capital

So, CapEx was RMB3 million?

Kevin Teo

Yeah, it was about RMB3 million.

Chang Wee – Sunset Capital

Okay. Yeah, I just tried to understand why the cash and therefore kind of decreased if the cash flow from operation is positive 30.4.

Kevin Teo

Our total cash balance as of 30th June was about US$116 million. And of course depreciation of US dollar against RMB also bear impact on this. And the translation loss was recorded in the shareholders’ equity.

Chang Wee – Sunset Capital

Okay. Yeah, but I – if we de both (inaudible) quarter I used the exchange rate at that time, divided by the exchange rate. And then this quarter end use the exchange rate at this quarter end. And we would get a true different dollar amount. And the dollar amount at this quarter end is less than last quarter end. That’s my question (inaudible).

Kevin Teo

The net cash provided from operating activities 30.4 million and we also use in investing activities whereby net cash used investing activities was about 68.3 million.

Chang Wee – Sunset Capital

Okay, okay.

Kevin Teo

Yeah, and there is an effect of foreign currency exchange rate on cash as well. So that’s why there is a net decrease. But on the whole fund spent in – fund invested in investing activities also translated into the balance sheet whereby cash (inaudible) investment comes back to US$116 million.

Chang Wee – Sunset Capital

Okay, okay, I got it. The other question is for the G&A you mentioned there are some increase. I just wonder can you maybe clarify how much of those increase are one-time or we – should we expect all of them should be carried to the future quarters.

Kevin Teo

Most of it will be recurring. And the – like for example, increase in personnel cost as we expand commitment in handling functions like SOX requirements, human resources, project management team for the construction of new plant, and compliance cost in terms of (inaudible) audit that will be one-time, which will be done this year. And the rest will be recurring like investor relation cost and other legal fees relating to the compliance of listing and regulatory requirements. So the proportion of one-time cost is rather small.

Chang Wee – Sunset Capital

Okay, okay, yeah, also maybe Kevin and David – sorry, go ahead.

David Chen

Well, you are talking about specific SGA line or talked about sales and marketing line? Sorry I cannot –

Chang Wee – Sunset Capital

I addressed the G&A now. I think Kevin already give the good answer.

David Chen

Okay.

Chang Wee – Sunset Capital

Yeah, David, and Jing, maybe you can (inaudible) so more or give us some color regarding your development activities (inaudible) in the – in merger acquisition front or other new initiative side if anything you can discuss.

David Chen

Yes, I think we are regularly assessing the opportunities in – from various different sources on a very regular basis. And certainly we made good progress as evidenced by AMAG deal. But the development M&A still remain a high priority for us. In the same time, we are also very disappointing value in these opportunities both on licensing and M&A front, particularly on the M&A front especially you consider a majority of M&A deals fail to provide shareholder value. So, if you look closely at the (inaudible) transaction we have done and AMAG transaction we have done since we became public Company, they all have very nice fit with our long-term vision and strategy of the Company and have a very clear angle of the deal and that can leverage our strength. So, I can't comment any specifics right now just to keep the regular practice, but we are certainly looking very hard on that. And once we have something material to speak of then we certainly will give you an update on. Again we work very hard (inaudible)

Chang Wee – Sunset Capital

Okay, that’s great. I think it’s always better to be prudent with cash.

David Chen

Exactly. I mean that’s how we look at M&A deals probably 70% of them and if you look at the statistics fail to provide any shareholder value either pay too high or can't create synergies that you will like. So I think for us it’s very important also not only on the pricing side but also – 3SBio is a very unique winning culture. If you look at many companies started 14, 15 years ago when 3SBio just started and where 3SBio is right now I think a lot of it has to do with winning culture, the culture that emphasize quality and Dr. Lou and the Chairman Lou that – has spelt. So we are also very mindful of when we are doing M&A deals how is it going to fit into our overall culture of innovation. So rest assure that we are looking very hard on this and hopefully we have some material information for you when we have something significant.

Chang Wee – Sunset Capital

Okay, thank you.

Operator

Thank you. The next question comes from Jodie Wehner from Global Hunter Securities. Please go ahead. I do apologize, Jodie Wehner has now disconnected. The next question comes from Pat Gallagher [ph] from BBER Research [ph]. Please go ahead.

Pat Gallagher – BBER Research

Hi, gentlemen, thanks for taking my call. I had a couple of question. Kevin, maybe one you can give us an update on the buyback and then David maybe we can talk a little bit more about the ferumoxytol time line and the opportunity there as well as being aligned with a company like that a pretty highly regarded well-run U.S. biotech, does that help you or have you seen that help you in your current negotiations with other people now that you have landed kind of a big visible deal like that? Thank you.

Kevin Teo

I will take the first question first on the share buyback. There was no share buyback carried out during the second quarter this year due to window close for non-public information.

Pat Gallagher – BBER Research

Okay. Will the window reopen next quarter or is it hard to say?

Kevin Teo

Yes, the window will open after the – two days after the earnings call, now, earnings call.

Pat Gallagher – BBER Research

Thank you.

David Chen

Yeah, Pat, this is David, thanks for the question. I think on the ferumoxytol front again we are very excited about the potential of this product. Iron market has just started to take off in China and is growing very rapidly. We are talking about probably 70%, 80% of growth if we are taking the oral iron market and look at the profile of ferumoxytol we had very good – along with AMAG management we have a very good advisory board meeting in May in China and all the (inaudible) very excited about this product. So we are very confident with the potential. As far as execution side, we have secured a very quality CRO and to take this forward. And from timing perspective it’s a little bit too early right now given some of the uncertainties around SFDA but we are so far I think 2011 will be good timing to look at the launch possibility. And certainly in terms of getting the trial started, we are targeting the first half of next year to get trial started.

Pat Gallagher – BBER Research

That's terrific. Thank you.

David Chen

As far as the deal implication for us it is certainly elevated our profile significantly in a domestic Chinese company being able to collaborate with a major biotech that has a potential blockbuster to launch in the United States, and we are able to do it simultaneously in China. This is seemingly very significant for any of the deal makers inside this licensing space. We're going to continue to leverage this and continue to – our effort on the licensing front. We don't have anything material to report yet but we're making progress.

Pat Gallagher – BBER Research

Great. That's helpful. Thank you.

Operator

Thank you. The next question comes from Louis San from Brean Murray, Carret. Please go ahead.

Louis San – Brean Murray, Carret

Hi, thanks for taking my call. I basically just have two follow-up questions. One is regarding tax rate. Could management give us an update on when do you expect to officially get the government's high tech enterprise status? So, going forward will be 15%?

Jing Lou

Okay. Let me answer that question. The relevant (inaudible) authority has issued the management measures of identifying new and high tech enterprises and is (inaudible) key fields of new and high tech supported by the State in April, but the detailed application procedure has not been announced. And status now remains unchanged. So, once we qualify for such an application there will be an upside or a refund for us in terms of the tax paid this year.

Louis San – Brean Murray, Carret

Okay, thank you. My second question is again with regard to the acquisition considering that the Company currently has quite a bit of cash so that is a pretty natural question to ask. My question, my first question in this issue is, what is the management's philosophy in terms of if you are going to be an acquirer of some business, specifically do you – if you're going to buy someone do you expect – do you want to buy a business that is immediately accretive to 3SBio’s earning or are you willing to consider business that are may in the short term might be dilutive but in the long term accretive?

David Chen

That’s a very good philosophical question and I know – this is David here. Obviously we all want to have immediate dilutive – in the accretive transaction and certainly I think it really depends on the nature. If it’s a product that we believe has a substantial potential and has a high growth area that in our hands we can really create some synergy then obviously we don't mind it be dilutive in the first couple of years. Obviously, we want to make – we wanted to do deals that is our – accretive immediately. So, basically we're either looking at – this is on M&A front, we either look at product acquisition from certain products within our therapeutic area we have existing resources and expertise in the area and we can grow products significantly, products such as for example, other products like our TPIAO. And certainly we don't mind to paying a little bit more to grow the product. Or we are looking at companies that have cash flow, that have revenue around $10 million size range to buy and then looking for synergistic opportunities when it’s within our – when it is within our umbrella of 3SBio. So, I hope that helped you with the question.

Louis San – Brean Murray, Carret

Sure, that's helpful. Another follow-up question, since we are talking about acquisitions. From the management's perspective are you only looking to be an acquirer of business or does the management – will the management consider to be an acquiree. I know it is a difficult question to answer.

David Chen

Obviously, we are very confident with the future for 3SBio given where we are and we want to head – where we are heading to – where we are moving towards, given the growth of the Chinese pharmaceutical market, given the therapeutic market that we're in and our competitive position. So far we are very confident to move the Company forward as an independent Company. However, management’s number one priority is certainly to maximize shareholder value. So to keep the regular practice I really don't want to comment on any specific developmental M&A activities. But I think the – overall that feeling is we're going to continue to move the Company forward as an independent Company and again we’re trying to maximize shareholder value.

Louis San – Brean Murray, Carret

Okay, thank you very much.

Operator

Thank you. The next question comes from Joe Aguilera from BioRevolution Capital. Please go ahead.

Joe Aguilera – BioRevolution Capital

Hello, congratulations guys on a good quarter. Quick question on the EPIAO, assuming the Phase III and the approval goes well, what kind of sales are we projecting in the first year or two on EPIAO, if we can get an estimate on that?

David Chen

Are you talking about I'm sorry the–?

Joe Aguilera – BioRevolution Capital

The Phase III?

David Chen

Yeah, are you talking about to high-dose EPIAO?

Joe Aguilera – BioRevolution Capital

In the pipeline?

David Chen

Or you are talking about current – what is –

Joe Aguilera – BioRevolution Capital

The one that you are looking for approval, the EPIAO, the high-dosage EPIAO.

David Chen

High-dosage EPIAO, right. Well, obviously we only provide this guidance for this year. Certainly beyond 2008 it is early – it is too early to tell the impact of the high-dose EPIAO right now, but from a strategy perspective certainly this – we can see it will attract more new patients on the oncology front in terms of given – particularly a lot of these patients are on the outpatient clinic. Now to get a once-weekly injection would be a lot easier for than giving a three times a week. You know, certainly reduction of these injections have increased their compliance. On the existing patient front, we probably are going to expect to see some degree of cannibalization, but it’s just very hard to tell right now given it’s so far down the road in the next couple of years. But, we'reso that’s as far as I can tell the impact, but I believe certainly because of the different label we are going to have and different dosing strength, again during this bidding process we gain another significant advantage and help us to stabilize the price further down the road. So there are many advantages we see for this high-dose EPIAO. I can't give you any specific numbers in terms of what the impact could be.

Joe Aguilera – BioRevolution Capital

Right, and on the NuLeusin, on the 11% partial response, any comments on that? Where you disappointed with that kind of response or–?

David Chen

No, I think it’s in line with our expectation because we used probably two-thirds of the dose of what you are seeing in this phase and it was recommended by our (inaudible) and with this kind of dozing substitute compare with other trials in this space I mean we were in line with the expectation. So – and we see a complete response with the tumors all gone. So, I mean all these are fairly positive in terms of our confidence in getting the approval.

Yingfei Wei

Yeah, and for (inaudible) trial, they got around 15% of partial response. So, we're pretty much in line with that number given we're dosing slightly lower.

Jing Lou

Yeah, those are IV you know so higher, much higher dose.

Joe Aguilera – BioRevolution Capital

Thank you Dr. Wei. On the AMAG partnership, congratulations on that, what are the economics in the AMAG partnership, can you go into that? Where there any economics or–?

David Chen

Certainly we have a news release on this. We think it is a very agreeable sharing of economics between the two parties. We paid $1m upfront for a NDA stage product. It is substantial. We had substantial commercial potential both in this space in China given the stage. We have some undisclosed milestones in this. And we also have royalty to pay based on the sales threshold .But to answer your question, I think what we are able to achieve through the deal structure is one, it’s a long-term relationship where we can recoup for sure our investment. We have 13 years down the road and also once we reach certain milestone we can continue to market ferumoxytol in China automatic renewal. So that gave us good confidence of a good economics in return. And the second is really we're trying to maintain our operating margin in line with our current sales and marketing operating margin. So, I think this is a very agreeable sharing of the economics between the two parties.

Joe Aguilera – BioRevolution Capital

And any word on the –

David Chen

On the operating margin side we are – we see in line with the current margin.

Joe Aguilera – BioRevolution Capital

Understood. Any word on the monoclonal antibody that we expect to file an IND next year 2010 with the TNF, with the–?

Yingfei Wei

Currently we're still working on the preclinical study and also the awareness [ph] of the production cell lines for the antibody. So, this is going on. The filing for IND probably will be in a year or two based on our current schedule.

Joe Aguilera – BioRevolution Capital

Thank you very much.

Operator

(Operator instructions) The next question comes from Jodie Wehner from Global Hunter Securities. Please go ahead.

Jodie Wehner – Global Hunter Securities

Hello Jing, Kevin, David, and Yingfei, thank you for taking my question, finally. My question went back to the price reduction. Do you see that 5% to 7% reduction mainly because of the competition or were you influenced by the government, for example, Beijing Government price potential for the reimbursement side? Do you think current gross margin is sustainable in the future? Do you see any pressure from the cost side?

David Chen

Hi, Jodie, this is David here. Let me take the first question then I will have Kevin answer the gross margin side. I think what you see around 5% to 7% price reduction for this first half of the year were mainly due to the combination of product mix change and also some of the competitive bidding process what we see in certain regions. So the product mix that we're selling majority of our EPIAO right now in 10,000 IU volumes. So, we see some of the product mix impact and some competitive bidding. I can tell you that the specific differences, but overall I think we have factored in around 5% of price reduction into our guidance. Moving forward I think this still holds the ground in terms of what we believe the pricing pack is going to be.

Jodie Wehner – Global Hunter Securities

Okay, could we just say that –

David Chen

Kevin, you want to – on the gross margin?

Kevin Teo

Yes, for the gross margin, I think for this year it has been quite stable at 90% to 91% and going forward we do not expect a significant fluctuation from the current level.

Jodie Wehner – Global Hunter Securities

Okay. David, you just mentioned that the guidance you gave out includes 5% price reduction projection?

David Chen

Correct.

Jodie Wehner – Global Hunter Securities

Okay, thanks. I just got one minor followup; it’s about the seasonality change this year. So, Kevin, do you see third quarter sequentially higher than second quarter or you see there will be Olympic effect, the disruptions and instead the fourth quarter could be stronger? What kind of a seasonality change we are looking at here?

Kevin Teo

Based on the last year's trend, third quarter was higher than second quarter and we would expect that almost a similar trend could happen and maybe David can add more color into the market condition.

David Chen

Yeah, I think we – we obviously are going to see some of the quarter-on-quarter fluctuations and given again the diverse market we competing in and particularly for this year if you look at the Olympics where it could serve to distort some of the patterns we see, but it is not being technically a seasonality. We see very continued, very strong demand for our products at the hospital level. So, if you look at the trend, the second half of the year was always better than the first half. So again I think we are giving you the full year guidance on our revenue we are going to deliver for 2008. So, that says lot of our confidence in the – for the remainder of the year.

Jodie Wehner – Global Hunter Securities

That's good. Thank you very much.

Operator

Thank you. We have a follow-up question from Hongbo Lu from Piper Jaffray. Please go ahead.

Hongbo Lu – Piper Jaffray

Thank you so much. Just two very quick follow up questions. One is we know that ferumoxytol, the PDUFA date is coming up in October 19th. Would a decision for ferumoxytol from FDA change your development plan one way or the other?

David Chen

That is a good question, Hongbo. I think the strategy we are using is called multi-center trial, basically we will get our trial application in before the PDUFA data. So, with that one way or the other, I think it won't impact our launch timeline. I think that if – we are very confident with certainly the after our due diligence confident with the ferumoxytol approval and it is – there is a chance that it won't be approved, I think it won't impact our timeline. Certainly, we think most likely if there is such as case as probably asking for more data, but if you look at our overall planning for clinical studies and application waiting for approval from SFDA, I don't think we have enough time in terms of making it up in the later part and it won't impact our timelines.

Hongbo Lu – Piper Jaffray

Okay, thank you so much, David. And then the second question is with regards to the 36,000 IU high-dose EPIAO. I know there is a limitation with regards to what you can say for competitive reasons but can you actually provide us some color on your pricing strategy when this product finally comes out to the market?

David Chen

I think we have seen the high-dose TPIAO side for 10,000 IU that because the (inaudible) regulation we are seeing the price a little bit actually discount on the per unit basis to 3,000 IU. So, on the per unit basis, it is very difficult to say right now because the pricing authorities change in terms of how they look at the innovative products, how they look at the different products with different quality and we are working with the government to see even whether there is a potential to increase the price. Obviously, it is very early to say about the pricing. So I would rather leave that and when we have a better picture of what the pricing policy is to be like and then we will give you some good direction on that.

Hongbo Lu – Piper Jaffray

Thank you so much.

Operator

Thank you. This concludes the question-and-answer session. I would turn the call back over to Dr. Jing Lou for his closing remarks.

Jing Lou

Thank you again for joining us today and we look forward to updating you on our progress in our near future. Thank you again.

Operator

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.

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Source: 3SBio Inc. Q2 2008 Earnings Call Transcript
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