China Biologic Products, Inc. (CBPO) Q2 2018 Results - Earnings Call Transcript

China Biologic Products, Inc. (NASDAQ:CBPO) Q2 2018 Earnings Conference Call August 6, 2018 7:30 AM ET

Executives

Bill Zuma - Investor Relations, ICR Inc.

David Hui Li - Chairman

Ming Yang - Chief Financial Officer

Analysts

Qi Wen - Bank of America Merrill Lynch

Yolanda Hu - Morgan Stanley

Serena Shao - Credit Suisse

Operator

Hello, and welcome to the China Biologic Products Holdings Second Quarter 2018 Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded.

Now I’d like to turn the conference over to your host today, Bill Zuma. Please go ahead.

Bill Zuma

Thank you, operator. Hello, everyone, and thank you for joining us on today’s call. China Biologic announced its quarterly financial results in August 3, 2018 after the market close. The earnings release is now available on the company’s website.

Today, you will hear from China Biologic’s Chairman, Mr. David Li, who will start off the call with a review of recent company developments, strategies and basic operating results, followed by the company’s Senior Vice President, Mr. Ming Yin, who will address financial results in more detail. The acting CEO, Mr. Zhijun Tong and the CFO Mr. Ming Yang, are also available on the call and will be available during the Q&A session that follows 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 dramatically 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 thoroughly explained and reconciled to the most comparable measures reported 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 biopharmaceutical industry.

That said, I’m pleased to now present Mr. David Li, Chairman of China Biologic Products. David, please go ahead.

David Hui Li

Thank you. Thank you, Bill. Hello, everyone, and welcome to China Biologic’s second quarter 2018 conference call. As the new chairman of China Biologic, I look forward to working together with you in future.

Our second quarter of 2018 continue to be challenging due to the ongoing impact of regulatory changes and intensified competition in the China’s healthcare sector. First, an increasing number of hospitals across various provinces implemented stricter to our purchase budgets by capping drug revenue to no more than 30% of a hospital’s total revenue in response to spending controls by regional government-sponsored medical insurance programs.

This unfortunately led to another high double-digit decline in revenue for our direct sales channel in the quarter. To offset this negative impact, we pursued new growth in the distributor channel and the pharmacy channel.

Second, intensified competition in the distribution market has caused an over 10% year-over-year price declines across all major plasma products, deteriorated payment terms, and increased marketing expenditures across the market.

Third, although our placenta polypeptide product experienced a 70% sales growth in RMB terms, its sales volume declined over 30%, mainly due to the implementation of the two-invoice policy and also because it was excluded from the reimbursement lists of certain provinces as a supplemental drug.

A positive development from the quarter was the performance of our TianXinFu business unit, which have already met our expectations, and we remain conservatively optimistic about its growth in the second-half of the year.

Recently, the Board of Directors implemented certain important personnel changes. As previously disclosed, the Board removed Mr. David Gao as Chairman and Director of the Board, and the CEO and President of the company. Subsequently, the Board also terminated Mr. David Gao’s employment for cause based on the Board’s review of the facts and circumstances of his removal.

Concurrent to Mr. Gao’s removal, two other Directors stepped down from the Board. The Board elected me as the Chairman, and elected two industry veterans, Mr. Qi Ning and Mr. Bing Li to the Board as independent directors. While the Board is conducting search for a new CEO, the Board has appointed Mr. Zhijun Tong as the acting CEO.

Mr. Tong is an experienced entrepreneur and the corporate executive, and has been a Director of the company since 2012. The Board believes that the overhaul of the senior management and the changes at the Board level will greatly improve the company’s governance and management to rejuvenate our business, in particular, in today’s challenging environment.

Despite the challenges we face, we achieved notable operational progress recently. In July, we received the operating permit for our new Feicheng branch plasma collection facility and commenced commercial operations immediately.

We also recently extended our three-year- our strategic collaboration agreement with Xinjiang Deyuan for another three years to purchase at least an additional 500 tonnes of plasma. We believe this extended collaboration is mutually beneficial, as it secures plasma supply to enhance our Guizhou facility’s utilization efficiency.

Looking forward to the second-half of the year, we expect the regulatory headwinds and the market competitive dynamics will persist, and this will impact our guidance for the full-year. However, we remain optimistic about the mid to long-term prospects of our industry. We believe that in the next three to five years, our industry will continue to transition from a market of meeting demand to one of creating demand.

Specifically, we foresee that the industry growth engine will shift from albumin to IVIG and coagulation products. We welcome these changes, because these products have higher margins and greater market potentials. We believe the transition will open doors to many new opportunities for China Biologic, because they will elevate China’s plasma industry into the next stage of development, following the steps of U.S. and Europe.

Currently, due to the lack of awareness among Chinese doctors and medical practitioners, the growth of IG products and high-end premium coagulation products have lagged behind that of albumin, and under-penetration of these products will persist in China’s markets.

To solidify our leading market position in this developing market, our new Board leadership will support executive management team to upgrade our commercial capabilities to expand into new sales channels and to actively market our IG and coagulation products. We will also improve our per liter economics by leveraging our leading R&D capabilities to expedite the launch of the new pipeline products.

We remain optimistic about the long-term, upside of China’s plasma industry and we will continue to develop and execute our strategy to solidify our leadership position and to build on our strategic advantages to transform CBPO into a next-generation global biological company.

This concludes my prepared remarks. I will now turn the call over to Ming Yin, our Senior Vice President, to review the second quarter financial results. Ming, please go ahead.

Ming Yang

Thank you, Dave, and hello, everyone. And now allow me to walk you through key P&L items for the second quarter of 2018 to provide more details.

Total sales in the second quarter of 2018 increased by 25.5% in RMB terms or 34.8% in U.S. dollar terms, to $120.4 million from $89.3 million in the same quarter of 2017. The increase was partly attributable to a $13 million contribution from TianXinFu, which accounted for approximately 10.8% of total sales for the quarter.

Excluding TianXinFu, total sales in the second quarter of 2018 increased by 11.9% in RMB terms, due to an increase in sales of placenta polypeptide products, human albumin products, coagulation factor products, and certain immunoglobulin products, which was partly offset by the decrease in the sales of IVIG products. For plasma products, total sales in the second quarter of 2018 increased by 5% in RMB terms, compared to the same quarter of 2017.

During the second quarter of 2018, human albumin and IVIG products remained our two largest sales contributors. While revenue contribution from our other products continue to grow. Revenue from human albumin increased by 9.6% in RMB terms year-over-year in the second quarter of 2018, while revenue from IVIG products decreased by 11.8%.

As a percentage of total sales, sales from human albumin and IVIG products were 31.7% and 23.4%, respectively, in the second quarter of 2018. Excluding the contribution from TianXinFu, human albumin and IVIG products were 35.5% and 26.2% of total sales, respectively, compared to 36.3% and 33.3%, in the prior year period. This reflects the combined effects of decreased sales volume and sales prices year-over-year.

The sales volume of human albumin products increased by 15.6% for the second quarter 2018 compared to the same quarter 2017, primarily driven by the sales through distributors and the pharmacy channels, which offset the drops in prescription volumes and various hospitals due to the implementation of new healthcare regulatory policy in China.

The sales volume of IVIG products also dropped due to the decreased prescription volumes, falling 9% for second quarter 2018 compared to the same quarter 2017.

The average price for human albumin and IVIG products decreased by 5.2% and 3.1%, respectively, in RMB terms in the second quarter 2018 compared to the same quarter 2017 mainly due to the greater sales volume in distributor channel and further price discount to certain distributors that reflect intensified the market competition for the major plasma products.

Revenue from human albumin immunoglobulin products increased by 12.8% in RMB terms in the second quarter 2018 compared to the same quarter 2017, reaching 12.8% of total sales.

Revenue from coagulation factor products, including human coagulation factor VIII, human prothrombin complex concentrate, and the newly launched human fibrinogen products, increased by 50.9% in RMB terms in the second quarter 2018 compared to the same quarter 2017, representing 7.1% of total sales.

Revenue from placenta polypeptide products increased by 71.6% in RMB terms in the second quarter 2018 compared to the same quarter 2017, reaching reaching 14.1% of total sales. This growth was supported by higher unit selling price due to wider implementation of the two-invoice policy and it was partially offset by the lower sales volume due to the inclusion of placenta polypeptide products in regional supplemental drug lists.

Cost of sales increased by 24.9% to $37.6 million in the second quarter of 2018 compared to the same quarter of 2017. As a percentage of total sales, cost of sales decreased to 31.2% from 33.7% in the same quarter of 2017. The decrease in cost of sales as a percentage of total sales mainly reflect the higher gross margin of TianXinFu. Excluding TianXinFu, cost of sales was 33.6% of total sales, as a result of net impact of higher sales price for our placenta polypeptide products and the lower sales prices for our human albumin and IVIG products.

Gross profit increased by 39.7% to $82.7 million in the second quarter 2018 from $59.2 million in the same quarter 2017. Gross margin was 68.7% and 66.3% in the second quarters 2018 and 2017, respectively.

Selling expense in the second quarter 2018 increased by $20.8 million from $24.4 million from $3.6 million in the same quarter 2017. More than half of the increase was related to sales of placenta polypeptide products with the remainder related to the sales of plasma products and TianXinFu’s sales of its dura mater products.

For placenta polypeptide products and certain hyper-immune products, as certain distribution channel was disqualified due to two-invoice regulation. We implement new sales strategies, including using an internal sales force and engaging third-party contract service organizations to promote our placenta polypeptide products.

And for other plasma products, we incurred additional promotion and marketing costs in order to maximize our competiveness within distribution channel customers. TianXinFu’s selling expense include a $2 million amortization expense for the intangible assets of customer relationships associated with our acquisition of TianXinFu. Excluding this intangible asset amortization expense, selling expense accounted for 18.6% of total sales in the second quarter 2018 compared to 4% of the same quarter 2017.

General and administrative expense in the second quarter 2018 increased by 44.1% to $20.6 million, compared to $14.3 million in the same quarter of. As a percentage of total sales, general and administrative expenses were 17.1% and 16% in the second quarter 2018 and the 2017, respectively.

The increase in general and administrative expense mainly include a $2.7 million increase in share-based compensation expense and $1 million increase of Shandong Taibang’s depreciation expense and property tax for its new facility. Excluding the impact of share-based compensation expenses, non-GAAP general and administrative expenses would have been 8.1% and 6.9% of total sales in the second quarter of 2018 and the same quarter of 2017, respectively.

Research and development expense in the second quarter 2018 remained at $1.9 million compared to the same quarter of 2017. As a percentage of total sales, research and development costs decreased to 1.6% in the second quarter 2018 from 2.1% in the same quarter 2017.

Income from operations for the second quarter 2018 decreased by 15.3% in RMB terms, or 8.9% in USD terms, to $35.9 million from $39.4 million in the same quarter period of 2017. Operating margin decreased to 29.8% in the second quarter of 2018 from 44.1% in the same quarter of 2017. Excluding TianXinFu, income from operations for the second quarter 2018 decreased by 30.3% in RMB terms in the second quarter 2018 over the prior year period.

Net income attributable to the company decreased by 14.1% in RMB terms, or 7.7% in USD terms, to $28.6 million in the second quarter 2018 compared to the net income attributable to company of $31 million in the same quarter of 2017. Net margin decreased to 23.8% from 34.7% in the second quarter 2017.

Diluted net earnings per share decreased to $0.83 in the second quarter 2018, compared to $1.09 in the same quarter 2017. Excluding TianXinFu, net income attributable to the company decreased by 29.7% in RMB terms in the second quarter of 2018 compared to the same quarter 2017.

Non-GAAP adjusted income from operations decreased by 3.7% in RMB terms, or increased by 3.6% in USD terms, to $49.2 million in the second quarter 2018 from $47.5 million in the same quarter 2017. Excluding TianXinFu, non-GAAP adjusted income from operations decreased by 21% in RMB terms in the second quarter 2018 compared to the same quarter 2017.

Non-GAAP adjusted income – net income attributable to the company decreased by 2.8% in RMB terms, or increased by 4.4% in USD terms, to $40.2 million in the second quarter 2018 from $38.5 million in the same quarter 2017. Non-GAAP net margin decreased to 33.4% in the second quarter 2018 from 43.1% in the same quarter 2017.

Non-GAAP adjusted net income per diluted share decreased to $1.17 in the second quarter 2018 from $1.35 in the same quarter of 2017. Excluding TianXinFu, non-GAAP adjusted net income attributable to the company decreased by 19.4% in RMB terms in the second quarter 2018 compared to the same quarter 2017.

Non-GAAP adjusted income from operations for the second quarter 2018 excludes $10.8 million in non-cash employee share-based compensation expense and $2.5 million in intangible assets amortization expense related to the acquisition of TianXinFu.

Non-GAAP adjusted net income and diluted earnings per share for the second quarter 2018 excluded $9.9 million in non-cash employee share-based compensation expense and $1.7 million in intangible assets amortization expense related to the acquisition of TianXinFu.

Now let’s look at our results for first-half 2018. Total sales in the first-half 2018 increased by 19.5% in RMB terms, or 28.8% in U.S. dollar terms to $232.8 million from $180.7 million in the same period of 2017. This results include $24.4 million contribution from TianXinFu, which accounted for approximately 10.5% of total sales for the first-half of 2018.

Excluding TianXinFu, total sales in the first-half 2018 increased by 7% in RMB terms as a result of increases in the sales of placenta polypeptide products and certain immunoglobulin products. For plasma products, total sales in the first-half 2018 increased by 0.8% in RMB terms, or 8.7% in U.S. dollar terms, to $175.3 million from $161.3 million in the same period of 2017.

As a percentage of total sales, sales from human albumin products and IVIG products accounted for 30.9% and 25.7%, respectively, for the first-half of 2018. Excluding the contribution from TianXinFu, human albumin and IVIG products were 34.5% and 28.7% of total sales, respectively.

Gross profit increased by 36.4% to $161.5 million in the first-half 2018 from $118.4 million in the same period 2017. Gross margin was 69.4% and 65.5% in the first-half 2018 and 2017, respectively.

Income from operations for the first-half of 2018 decreased by 11.3% in RMB terms, or 4.3% in U.S. dollar terms, to $74.8 million from $78.2 million in the same period of 2017. Excluding TianXinFu, income from operations for the first-half of 2018 decreased by 24.9% in RMB terms in the first-half 2018 compared to the same period of 2017.

Net income attributable to company decreased by 8.5% in RMB terms, or 1.3% in U.S. dollar terms, to $60.2 million in the first half 2018 from $61 million in the same quarter 2017.

Net margin decreased to 25.9% from 33.8% in the same period of 2017. Excluding TianXinFu, net income attributable to company decreased by 22.8% in RMB terms in the first-half 2018 compared to the same period of 2017.

Non-GAAP adjusted net income from operations decreased by 2.4% in RMB terms, or increased by 5.2% in U.S. dollar terms, to $99.3 million in the first-half 2018 from $94.4 million in the same period of 2017. Excluding TianXinFu, non-GAAP adjusted income from operations decreased by 18.3% in RMB terms in the first-half of 2018 compared to the same period of 2017.

Non-GAAP adjusted net income attributable to the company decreased by 0.4% in RMB terms, or increased 7.5% in U.S. dollar terms, to $81.6 million in the first-half of 2018 from $75.9 million in the same period 2017. Non-GAAP adjusted net income per diluted share decreased to $2.37 in the first-half of 2018 from $2.67 in the same period of 2017.

Excluding TianXinFu, non-GAAP adjusted net income attributable to the company decreased by 15.8% in RMB terms in the first-half of 2018 compared to the same period of 2017.

Non-GAAP adjusted net income from operations for first-half 2018 exclude $19.8 million in non-cash employee share-based compensation expenses and $4.6 million in tangible assets amortization expense related to the acquisition of TianXinFu.

Non-GAAP adjusted net income and diluted earnings per share for the first half 2018 excluded $18.2 million in non-cash employee share-based compensation expense and $3.1 million in intangible assets amortization expense related to the acquisition of TianXinFu.

Now I would like to turn to the balance sheet and the cash flow items. As of June 30, 2018, we had $103.3 million in cash and cash equivalents, primarily consist of cash on hand and demand deposits, $118.3 million in time deposits, and $144.6 million in financial instruments.

Net cash provided by operating activities for the first-half 2018 was $45.5 million, including an $11.6 million contribution from TianXinFu, compared to $36.9 million for the same period 2017. Excluding TianXinFu, net cash provided by operating activities was negatively impacted by a decrease in net income, an increase in accounts receivable, an increase in prepayments and deferred expense, and decrease in accounts payable as well as tax payable, positively – and positively impacted by increase in other payables and accrued liabilities, and a slowdown of increase in inventory compared to the first-half 2017.

Accounts receivable, excluding TianXinFu, increased by $30.3 million during the first-half 2018, compared to $26.1 million in the same period 2017. The accounts receivable turnover days for plasma products increased to 88 days during the first-half 2018 from 51 days in the same period 2017, reflecting longer credit terms to hospitals as a result of the nationwide healthcare regulation change and intensified competition in the distributor channel.

Inventories, excluding TianXinFu, increased by $20.3 million in the first-half 2018. This is lower than $22.8 million in inventory increase in the same period 2017, when Shandong Taibang stockpiled inventory to prepare for the planned temporary production suspension.

Excluding TianXinFu, other payables and accrued liability increased by $15.9 million [sic] [$17.9 million] in the first-half 2018, compared to the decrease of $0.9 million in the first-half 2017. The increase mainly reflect more marketing activities carried out by third-party contract service organizations that we engaged to promote our placenta polypeptide and certain plasma products in compliance with two-invoice policy.

Net cash used in investing activities for the first-half of 2018 was $168.9 million, compared to $16.6 million for same period in 2017. Net cash used in investing activities in the first-half 2018 mainly consist of $529.6 million payment for the purchase of our time deposit and the financial instruments and the $19.1 million payment for the acquisition of property, plant, and equipment, intangible assets, land use rights, which was partly offset by $97.7 million in cash received upon acquisition of TianXinFu and the maturity of $282.1 million in time deposit and financial instruments.

Net cash provided by the financing activities for the first-half 2018 was $0.8 million, which results from proceeds of $0.8 million from stock options exercised. Our working capital as of June 30, 2018 was $611.9 million and our current ratio was 6.3. Total shareholders’ equity was $133.5 million as of June 30, 2018 compared to $664.3 million as of December 31, 2017. This is the outlook for 2018.

Finally, I’d like to update you on the full-year 2018 business outlook. For our full-year forecast., we expect non-GAAP adjusted income from operations to increase by 0% to 2% in RMB terms and non-GAAP adjusted net income to decrease by 2% to 4% in RMB terms over full-year 2017 financial results.

Excluding changing for full-year 2018 non-GAAP adjusted net income from operations is expected to decrease by 16% to 18% in RMB terms and non-GAAP adjusted net income to decrease by 19% to 21% in RMB terms over full-year 2017 financial results.

Our updated full-year 2018 finance – our forecast was lowered to account for worse than expected results for the first-half 2018 and an ongoing challenging outlook in the second-half of the year due to the following factors.

The first factor is a persisting regulatory headwinds, which place downward pressure on sales growth. The second factor is intensified competition in China plasma industry, which continues to drive costs higher and prices lower among plasma products provides – providers in China. The third factor is investments in long-term improvements and upgrades to marketing and sales capabilities, which places additional downward pressure on the bottom line.

And the last factor is one-time provision in connection with the new facility project in Guizhou and certain fixed assets among certain non-operating collection stations. It is priority for the management and Board to increase transparency in our operations. As such, we intend to provide our future financial outlook using non-GAAP adjusted income from operations and the non-GAAP adjusted net income instead of sales.

We believe that providing the outlook using income from operations, while excluding non-GAAP factors such as non-cash employee share-based compensation expenses and amortization expense of intangible assets and land use rights related to the acquisition of TianXinFu, provides greater clarity and understanding of the China Biologic operations, especially in light of price surges for polypeptide products and certain hyper-immune products under the two-invoice policy accompanied by the proportionate increased selling expenses.

This guidance excludes potential acquisitions and necessarily assumes no significant numbers price, product price changes during remainder of 2018. This forecast reflects the company’s current and preliminary views, which are subject to change.

This guidance also does not factor in any potential foreign currency translation impact. Having previously adopted the exchange rate of approximately RMB6.76 equal to US$1 based on the weighted average quarterly exchange rates in 2017 in translating 2017 financial results. The company expects that the total sales in non-GAAP adjusted income in the U.S. dollar terms in 2018 could be affected by foreign currency translation impact.

That concludes our prepared remarks. We will now take questions. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Qi Wen with Bank of America.

Qi Wen

Hi. Thank you for taking my question. This is Qi Wen calling from Bank of America Merrill Lynch in Hong Kong on behalf of Jessica Lee. So my first question is regarding your management change. Now could you please give us an update on your new CEO search? And what qualifications are you looking for? And with new leadership, should we expect any material shift to the company’s strategic direction?

David Hui Li

This is David Li. I’m going to take this question. We’re – that Board is actively seeking a new CEO. While in the meantime, actually, we have appointed Mr. Zhijun Tong as Interim CEO for the time being. We would expect the CEO to have extensive knowledge and the management expertise in the industries we’re in. In addition, we would like the candidates also to be energetic, innovative and responsive to the changes in the market dynamics.

Particularly, I think, the right candidate should be shared the same vision with the Board actually to develop and execute a business plan, focus not only just on the short-term core business, but also I see on the long-term growth drivers that we’ll potentially see transform CBPO into the next-generation global biological company.

Besides the relevant working experience and maybe the academic experience, we think the right candidate shall also have the relevant education and the work background, so as to be able to effectively communicate with our shareholders.

With respect to the – your question regarding whether there will be an other senior management changes? We think actually to maintain the senior management to be stable is actually one very important task for this Board to carry on. Therefore, we do not expect any major changes in the senior management. Although actually, we continue actually to look forward to adding new management talent to the senior management team. That search has always been ongoing. Thank you.

Qi Wen

All right. Thank you. And I do have a follow-up. I think in your news release for Xinjiang Deyuan’s extended three-year purchase agreement. Could you give a little more details on the financing of the extended agreement, that cost relative to the previous agreement and then how it fits into your growth strategy going forward?

Ming Yang

Okay. I can take this question. This is Ming. I think, I want to give you a very – the quick – the high-level review on the first three-year to contract Xinjiang Deyuan signed in 2015. So basically, as of the end of the – the end of the second quarter 2018, Xinjiang Deyuan delivered us about 8% higher the contract volume for the agreement. About 540 tonne of plasma to us. And about approximately 80% of the world plasma delivered from Xinjiang Deyuan under the 2015 agreement has been fractionalized.

And among the total fractionalized plasma, we have sold about 60% of that – the products made from this plasma. So we recently actually, it’s in the 1st of August, the – under the new leadership, we renewed this agreement. So basically, we amended the interest, the rate and the payments terms related to the loan. The – specifically, the – we increased the interest rate by 200 basis point from the 6 point in the back to the 2015 contract to the 8% per annum for the new contract.

And secondly, the payment terms were also made some different – the arrangement. So under the new agreement, each batch of a qualified plasma shipped from Deyuan. We will only pay around three quarters of the total – the purchase cost, which is the cost base actually exactly the same as it was in 2015 contract. And we also –we sold about 25% of the payment as an interest for the loan.

The loan is still – our remaining outstanding is about $300 million. And we – if the interest has been fully paid, the remaining – the future payment will be used as a reduction for the principal for the loan. And also for the new contract, we do actually accounting for the recent change in the market dynamics, which acts as a short-term pressure on the same respective products made from the plasma.

So for the new contract, we recently have secured. Unlike the first three-year contract, we didn’t require the counterparty, which is Xinjiang Deyuan to supply the plasma on the sequential base in the 2015 like 120 tonnes, 180 tonnes and 200 tonnes in three years for this – for such a requirement. We maintain the flexibility to request Deyuan to provide plasma in accordance with the changes in the market demand in the next three years.

And – which – also we believe the execution this – the new agreement will provide us with great – greater – the source of plasma to enhance our Guizhou facility’s planned utilization rate, which can actually give us more time to open the new centers for – our new own new centers at Guizhou, just give us more flexibility. Hopefully, I answered your question.

Qi Wen

Yes, yes. Thanks very much. That answered the question pretty well. And also in your news release, you cited one of the challenging part for 2018 is the one-time provision in connection with new facility in Guizhou. Could you give us a little detail regarding like the, I guess, the absolute dollar amount, as well as when that provision will be recognized in your financial statement, in which period? I assume it’s 2018, but like which quarter?

Ming Yang

Sure. I will provide some background information why such a one-time provision was actually core – the management’s attention recently. So as in previous disclosing, the 2012, the – our Guizhou facility at that time planned to build a new facility. So by starting acquiring new parcel land about approximate 180 acres. But we have been holding up the construction process due to the limited plasma visibility in our Guizhou facility.

And at that time, in accordance with the local government’s land purchase agreement, we made an approximate $4 million initial investment, including the land leveling and the land detach to prevent the local government from recalling the land use right.

And recently, we received a land adjustment notice from the local government notifying us that the land we bought at 2012 is no longer eligible for building our manufacturing facility. Therefore, we will consider making a full provision about $4 million cost incurred so far for the land. Also, we’re prepared to make a provision about $2 million to $3 million for the plasma collection station in Guizhou. We closed out in 2011.

Based on the recent evaluation by the local regulator that this long-emptied facility is no longer meet the government’s requirement for the – operating commission for the plasma collection stations. So that’s my answer to your third question question.

Operator

Thank you. And the next question comes from Yolanda Hu with Morgan Stanley.

Yolanda Hu

Thanks for taking my question. My first question is the guidance. Your guidance pretty significantly explains that your Asia peers appear to be more positive recently. Not only are you accelerating volume growth, but also potential currency increase to like company or overall industry recovery?

May I ask what may cause this difference? Also, can you share with us the inventory levels at the Guizhou plant and Shandong plant respectively? And how long do you think it will take to clean up these inventories and start to see more normalized growth?

My second question is for David Li, if it’s possible. Rumors about the privatization have been circulating for quite a time and it will be great if we can hear from you directly? Regarding the proposal by CITIC Capital, should we expect any decision to be made soon by the Board? And we also hear – heard some rumors about other potential bidders. Do you have any comments? Thank you.

Ming Yang

Hi, Yolanda, let me try to give you some – our key assumption for the revised guidance. So I presume and I think, you already had a chance to look at our first-half financial results. So basically, the first-half performance was far behind the full-year guidance that was provided in – back to you in February, as we underestimate the impact from the policy headwinds we – and the intensity of the market competition.

For the first-half of the 2018, excluding TianXinFu, we achieved 7% year-over-year top line growth within the range of the top line guidance. However, if we back out the impact of two-invoice policy, we experienced over 6% revenue decline in the first-half of 2018 year-over-year. This is the difference of close to 15% of the points between the actual revenue performance in the first-half 2018 and the expected full-year – expected the full-year revenue guidance.

As a result, the worse than expected revenue performance, our non-GAAP operating income decreased 18% in RMB terms, and our bottom line non-GAAP net income decreased about 16% in the first-half 2018 year-over-year. Together with this, close to 20% of the points lower than the prior expectation for 3% to 4%, the net – the bottom line increase for the 2018 guidance.

For the second-half of the year, we haven’t foreseen any improvement in the business operating conditions. And the updated – the 2018 guidance – the guidance was lowered to account for worse than expected result for first-half this year and ongoing challenge for the sales volume price and marketing costs for the majority of products in the second quarter, our second-half of this year due to persistent regulatory headwinds and the intensified competition.

Specifically, the expectation for plasma products in second-half of the year continue to flat year-over-year growth in the first-half for our plasma – the business. For the modeling purpose, I think, both for albumin IG, largest products, we probably model 4% to 3% to 5% price discount in distribution channel on top of second quarter’s ASP for the second-half of the year.

So for PP products, we expect the trend of year-over-year sales volume decline to continue. Without considering the impact of the compliance with two-invoice policy, full-year sales revenue might be in the range of 30% to 40% of decline year-over-year. And for the TianXinFu, the growth in first-half of the year within the expectation.

But we expect the second-half, we remain conservative optimistic for the business, because there are uncertainty related to the two-invoice policy impact to the device sector in the second-half of 2018.

And the second question regarding the inventory, I think, let me give you some of the high-level review of our inventory position. I think that overall, our Shandong and Guizhou have a different – the inventory position. Even the overall inventory 200 days was decreased by 40 days as compared to first quarter. But we do actually experience higher than normal – the inventory – the position at our Guizhou facility.

Guizhou Taibang has comparatively about eight to 10 months of the inventory for the major products. But the Shandong probably only have a less than quarter of inventory as of today’s the inventory position.

So I think, our new management and the Board already has the acting CEO and also the other Senior Executive to form the strategic – the management strategic committee to reevaluate the sales practice to try to expedite our – the inventory destocking capability, especially within the distribution channel. But I think that kind of the action might take sometime.

So today, I cannot give you a very clear answer how soon we can cleanup the inventory. But I think, it’s our priority, for the management priority to clean up the inventory as soon as possible. So I think, hopefully, I answered your questions for the first two questions.

David Hui Li

Okay. I’m actually going to take the question regarding the CITIC offer. Actually, we received – the Board actually received an unsolicited offer from CITIC capital. And I think on the 11th of June, the Board actually came in and discussed the matter. Actually, at the advice of our counsel, the Board actually tasked the Audit Committee to make a contact with CITIC to further explore the details of the offer, because actually, the offer actually – whatever that was presented was quite brief and lacking a lot of details. As you also have noticed, the Board actually had some restructuring over the course of the last couple of weeks. This also had an impact the personnel on the Audit Committee.

Now with the board restructurings are in completion, we have had the updated or the renewed Audit Committee in place. We believe that actually they will engage and explore more details as they have been asked to do, and we’ll come back to the Board actually for a recommendation.

This is regarding the current status of the CITIC offer. With respect to the rumor in the market about some other potential offers, we have noticed actually these rumors. But it is – at the Board level, we have not received any offer made to the company and is our policy not to speculate on the rumors. I hope I have answered your questions, Yolanda?

Yolanda Hu

Yes. That’s very helpful. Thank you, David. Thank you, Ming.

Operator

Thank you. And the next question comes from Serena Shao with Credit Suisse.

Serena Shao

Hello?

Ming Yang

Yes. Hi, Serena.

Serena Shao

Yes. Hi. Yes, thanks for taking my questions there. I actually have two questions here. One is for myself regarding the business. And the other one, I think, is from one of my clients. So for the first question, I would like to ask about the most recent vaccine incident in China. The reason I ask is, because some of our plasma products actually is distributed at the same panel with the vaccine products. So any impact on our sales and the marketing practice of this kind of a product after this incident in the industry? That’s my first question.

And then the second question is from one of my clients. Actually, they were asking Mr. Li, they said they knew Mr. Li has his own private equity fund called Centurium Capital. They were asking whether or not you’re going to participate in the privatization of of CBPO? Thank you.

Ming Yang

All right. Serena, I think, I will quickly answer your question regarding the vaccine impact. Although we’re not that involved in this incident, but we believe the Chinese government might issue new regulator to implement strict – stricter quality control over the entire Biologic-Products industry by supervising the entire production and the distribution process.

In the near-term, we will expect the government to conduct more frequent flying inspections over the product base in order to ensure there are no violation of approved manufacturing procedure. Also, the vaccine incident could result in further regulatory scrutiny within the CDC and the respective distribution channel.

We’re currently evaluating the relevant impact to our rabies immunoglobulin products to the CDC and we’ll make adjustment to our sale practice if we find any – the impact if we deem any practice should be revised according to the new regulation. So hopefully, I answered your question.

David Hui Li

Hey, Serena. With respect to your question about the private equity firm that I was – I have been running, Centurium Capital, there’s – as we currently stand, we have no plan actually to participate into the CITIC offer or any other offer now in the market, although actually we have not heard any or have not received any offer from the market yet.

Serena Shao

Okay. Thank you so much.

Operator

Thank you. And that’s all the time we have for questions at the present time, so I’d like to return the call to management for any closing comments.

David Hui Li

All right. Thank you for the participation and ongoing support of China Biologic. Thank you for all the work that you’ve done, and have a good day. We will conclude the meeting.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may disconnect your lines.