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Mr. Weidong Yin, Chairman, President and CEO, commented, "I am pleased toannounce that we had a record first six months of 2007. Our strong growth insales has translated into profitability as we generated a net income of $US3.5million. This marks an extremely important transition in our development as apublicly listed Company. Our sales organization was able to successfullymaintain the market leading position for our flagship product Healive, theinactivated Hepatitis A vaccine, and capitalize on the phasing-out of thelargest competing product and the increased usage of our lower cost vialpackaging. We are continuing to raise awareness of vaccination benefits andare well positioned to continue to expand sales by further penetrating ourcurrent market and targeting nascent markets in less developed regions acrossChina. We recently announced a promotion agreement with GSK China and havestarted planning for the official launch of Anflu, our split influenza vaccine,which, through this agreement, should provide us with opportunities to moreeffectively reach both the adult and pediatric population. On the R&D front,with the completion of enrollment and preparations at the end of July, we areon track to start to vaccinate volunteers who are enrolled in the clinicaltrials for the H5N1 vaccines. Finally, we would also like to announce thatgoing forward we plan to update the market on our progress quarterly byreleasing unaudited quarterly financial results."
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Financial Results
For the first six months of 2007, sales increased 189% to $13.5 millionfrom $4.7 million for the same period of 2006. The sales growth in the firsthalf of 2007 was primarily attributable to increased sales of Healive,Sinovac's inactivated hepatitis A vaccine, spurred by the positive marketresponse to the government purchasing program for vaccines that significantlyraised awareness of the benefits of vaccination, as well as the phasing out oflargest competing products, the liquid attenuated Hepatitis A vaccines.
Gross profit for first six months of 2007 was $11.6 million with a grossmargin of 85.7%, compared to gross profit for the same period of 2006 of $3.7million with a gross margin of 79.9%. The gross profit increased in line withsales growth and was attributable in part to the greater economies of scalefrom increased production and lower average unit costs. Sinovac has thecapability to produce the vial package at a lower unit cost than the pre-filled syringe package previously used and generate more sales from vialpackaged products.
Total operating expenses for the first six months of 2007 increased 24% to$5.4 million, from $4.4 million in the same period of 2006. Selling, generaland administrative expenses for first half of 2007 were $4.7 million,representing an increase of 18% from $4.0 million in the same period of 2006.The year-over-year change in operating expenses was attributable primarily toincreased selling expenses and operating expenses, primarily professional fees,associated with being a public company, including Sarbanes Oxley compliance.These operating expenses were partially offset by the reduction ofcompensation-related tax expense on the exercise of stock options to nil andlower stock-based compensation expense of $139,000.
Research and development expenses for the first six months of 2007 were$390,000, compared to $94,000 in the same period of 2006. The R&D expenseswere partially offset by research grants received from the PRC government,recognized as $408,000 and $554,000 in research grant income in the first halfof 2007 and 2006, respectively.
Operating income was $6.1 million in first half 2007, c
