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Mr. Weidong Yin, Chairman, President and CEO of Sinovac, commented, "TheShanxi vaccine incident continues to impact the public's confidence in vaccinesafety as it has significantly affected demand across the private pay market.Although we cannot alter the market environment, we are effectively adjustingour marketing and sales strategies to address the market situation and toenhance our capabilities. We increased the size of our sales force to furtherexpand domestic market penetration and to improve the effectiveness of ourpromotion strategies. We are beginning to see results as evidenced by the131% increase in sales in second quarter as compared to the first quarter. Wewill continue to refine and implement our marketing and sales strategies toimprove our competencies and increase our market share."
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Mr. Yin continued, "The 2010 seasonal flu season commenced in the thirdquarter. Our first batch of Anflu has been released by the National Institutefor the Control of Pharmaceutical and Biological Products (NICPBP) andlaunched into the market. Our sales team has already started the promotionactivities in several areas. Although a level of uncertainty surrounds theseasonal flu vaccine market, we remain confident about our ability to advancethe development of flu vaccine market in China."
Mr. Yin continued, "Our capacity expansion project for flu vaccine isprogressing well. Currently the flu production facilities are under design incompliance with WHO GMP standards and the equipments are being selected, whichmeans we are moving forward to meet our target of completing the capacityexpansion for flu vaccines by the end of 2011. We are simultaneouslyevaluating the construction plan of production facilities for our currentpipeline products, such as the EV71 vaccine, at the Changping facility. We arepleased with the progress that is being made at our Dalian joint venture asthe formal business license has been obtained. The application to conductclinical trials for the proprietary mumps vaccine developed by Sinovac Dalianwas submitted to the SFDA in April and the production lines are being upgraded.In order to enhance the market competency of our products and to facilitateentry into international market, the production lines at two facilities arebeing designed and constructed according to the WHO GMP standards."
Mr. Yin continued, "This year the SFDA continues to work closely with theWorld Health Organization (WHO) to improve manufacturing across China inaccordance with GMP standards. In July 2010, Sinovac was selected as one ofthe five companies at which the WHO experts conducted the training for China'sSFDA GMP site inspectors. Although the Chinese vaccine market has beensignificantly affected by unfounded media reports, we believe that the publicappeal to improve the vaccine quality standards represents a significantmarket opportunity for companies, such as Sinovac, that supply high qualityvaccine products."
Mr. Yin concluded, "We appreciate the continued support and understandingof our investors. We are continuing to refine our domestic and internationalsales strategies, expand our manufacturing capacity, and advance our vaccinedevelopment pipeline to build long-term value for our shareholders."
Financial Review for Second Quarter Ended June 30, 2010
Second quarter 2010 results included the consolidation of the financialresults from the 30%-owned joint venture, Sinovac Dalian, following itsformation in January 2010.
Sales for the second quarter of 2010 were $10.3 million, up 131% from $4.4million in the first quarter of 2010 and down 49% from $20.0 million for thesecond quarter of 2009. The second quarter 2010 sales were impacted in partby the continuing weakness in the private pay market following the unfoundedmedia reports about vaccine safety in China's Shanxi province and by vaccinepurchases from the Ministry of Health (MOH) that has not recurred. In thesecond quarter of 2009, the Company sold 2.08 million doses of Healive to MOHas part of the response in connection with a flood relief effort.
Sales of the Panflu.1 (H1N1) vaccine represented 15.5% of total sales forthe three months ended June 30, 2010. The H1N1 vaccine was sold to the Chinesegovernment in accordance with the government purchase program.
Gross profit for the second quarter of 2010 was $8.5 million, with a grossmargin of 82.7%, compared to $16.3 million and a gross margin of 81.2% for thesame period of 2009. The gross margin for the second quarter of 2010increased due to the product mix during the current year quarter. Afterdeducting depreciation of land use rights and amortization of licenses andpermits from gross profit, the adjusted gross margin was 80.7% and 80.2% forthe second quarter of 2010 and 2009, respectively.
Selling, general and administrative expenses for the second quarter of2010 were $4.1 million, compared to $4.9 million in the same period of 2009.SG&A expenses as a percentage of second quarter 2010 sales were 40%, comparedto 24% during the second quarter of the prior year. The higher SG&A expensesas a percentage of revenue resulted from the additional G&A expensesassociated with the 30%-owned joint venture, Sinovac Dalian, partly offsettingthe lower selling costs associated with the second quarter 2010 revenues.
Net research and development expenses for the second quarter 2010 were$1.5 million, compared to $550,000 in the same period of 2009. The increasedR&D expenses in the second quarter of 2010 were primarily related to thecontinued development of EV71 vaccine, pneumococcal conjugated vaccine, rabiesvaccines for human and animals, along with the mumps vaccine, which iscurrently under development at Sinovac Dalian.
Depreciation of property, plant and equipment and amortization of licenseand permits for the second quarter of 2010 rose to $507,000, compared to$167,000 for the same period of last year. The increase was primarilyattributable to depreciation expense at Sinovac Dalian that was included inthe second quarter 2010 consolidated results.
Total operating expenses for the second quarter of 2010 were $6.1 million,compared to $5.6 million in the comparative period in 2009.
The operating income for the three months ended June 30, 2010 was $2.4million, compared to $10.7 million for the same period of the prior year. Thelower operating income in the second quarter of 2010 was attributable to theincreased administrative expenses from Sinovac Dalian, reduced sales andhigher R&D expenses.
Net income for the second quarter of 2010 included $423,000 of interestand financing expenses, $458,000 of interest and other income and $891,000 ofincome tax expense. Net income for the same period of 2009 included $199,000of interest and financing expenses, $73,000 of interest and other income, and$2.2 million of income tax expenses. Net income attributable to shareholdersfor second quarter of 2010 was $1.0 million, or $0.02 per diluted share, ascompared to net income attributable to shareholders of $5.8 million, or $0.14per diluted share, in the same period of 2009.
As of June 30, 2010, Sinovac's cash and cash equivalents totaled $94.6million, compared to $75.0 million as of December 31, 2009. The increase incash and cash equivalents primarily reflected the contribution ofapproximately $62.0 million in net proceeds from the public offering of commonshares, which was closed in February 2010.
Financial Review for Six-Month Period Ended June 30, 2010
Results for the six-month period of 2010 included the consolidation of thefinancial results from the 30%-owned joint venture, Sinovac Dalian, followingits formation in January 2010.
Sales for the six-month period of 2010 were $14.7 million, down 45% from$26.6 million for the same period of 2009. The lower sales in the first halfof 2010 were attributable to adverse impact of the unfounded media reports inthe Shanxi province on the domestic vaccine market and the absence ofgovernment purchases in the current year for disease control in the floodregion.
Sales of the Panflu.1 (H1N1) vaccine represented 19.8% of total sales forthe six months ended June 30, 2010. The H1N1 vaccine was sold to the Chinesegovernment in accordance with the government purchase program.
Gross profit for the six-month period of 2010 was $12.0 million, with agross margin of 81.9%, compared to $21.4 million and a gross margin of 80.4%for the same period of 2009. The gross margin for the first half of 2010increased due to the product mix during the current year. After deductingdepreciation of land use rights and amortization of licenses and permits fromgross profit, adjusted gross margin was 81.2% and 80.0% for the six-monthperiod of 2010 and 2009, respectively.
Selling, general and administrative expenses for the first six months of2010 were $7.2 million, compared to $8.4 million in the same period of 2009.SG&A expenses as a percentage of six-month period 2010 sales were 49%,compared to 32% for the same period of the prior year. The higher SG&Aexpenses as a percentage of revenue resulted from the additional G&A expensesassociated with the 30%-owned joint venture, partly offsetting the lowerselling costs associated with the first half 2010 revenues.
Net research and development expenses for the first six months of 2010were $2.4 million, compared to $1.3 million in the same period of 2009. Theincreased R&D expenses in the six-month period of 2010 were primarily relatedto the continued development of EV71 vaccine, pneumococcal conjugated vaccine,rabies vaccines for human and animals, along with the mumps vaccine, which iscurrently under development at Sinovac Dalian.
Depreciation of property, plant and equipment and amortization of licenseand permits for the six-month period of 2010 rose to $932,000, compared to$332,000 for the same period of last year. The increase was primarilyattributable to depreciation expense at Sinovac Dalian that was included inthe second quarter 2010 consolidated results.
Total operating expenses for the first six months of 2010 were $10.5million, compared to $10.0 million in the comparative period in 2009.
The operating income for the six months ended June 30, 2010 was $1.6million, compared to $11.3 million for the same period of the prior year. Theoperating income in the first half of 2010 was attributable to the increasedadministrative expenses from Sinovac Dalian, reduced sales and higher R&Dexpenses.
Net income for the six-month period of 2010 included $547,000 of interestand financing expenses, $35,000 of interest income and other expenses and$622,000 of income tax expense. Net income for the same period of 2009included $325,000 of interest and financing expenses, $166,000 of interest andother income, and $2.6 million of income tax expenses. Net income attributableto shareholders for first six months of 2010 was $738,000, or $0.01 perdiluted share, as compared to net income attributable to shareholders of $5.8million, or $0.14 per diluted share, in the same period of 2009.
Recent Clinical Developments
In follow-up to the clinical trial application that was submitted to theSFDA in December 2009, Sinovac sent three batches of its enterovirus 71 (EV 71)vaccine to the National Institute for the Control of Pharmaceutical andBiological Products (NICPBP) for comprehensive testing and received aqualified report on the vaccines tests in May. In late June, the SFDA held theEV 71 vaccine evaluation conference and Sinovac participated. The Company iscurrently preparing supplementary documents for the SFDA's further evaluation.The Company anticipates that the SFDA will grant approval of its clinicaltrial application within the year.
The clinical trials for the animal rabies vaccine have been completed.The application for the new drug certificate was submitted to the Ministry ofAgriculture on June 29, 2010. The Company has commenced construction of aGMP-certified production line for animal rabies vaccine at its Tangshan Yianfacility. The Company is on track to launch its animal rabies vaccine in 2011.
The R&D process for pneumococcal conjugated vaccine is progressing onschedule. Sinovac has produced the vaccine doses for clinical trial use. TheCompany is conducting the stability study, and evaluating the vaccineeffectiveness and safety in animal models and expects to file the clinicaltrial application by end of 2010.
In April, Sinovac received approval from the SFDA for its clinical trialapplication for the hepatitis B vaccine, Euvax B, in-licensed for LG LifeSciences. Pursuant to the distribution agreement with LG Life Sciences,Sinovac was granted an exclusive right to market and distribute Euvax B inmainland China for five years from the date Sinovac obtains regulatoryapproval for the sale of the product in China. Sinovac is currentlyevaluating the potential market opportunity and preparing to commence clinicaltrials later this year.
In April, Sinovac received approval from the SFDA for its clinical trialapplication for its inactivated Japanese encephalitis vaccine. Sinovac iscurrently evaluating the potential market opportunity for this vaccinecandidate.
Recent Management Change
The Company announced the appointment of Mr. Jacob Chik Keung Ho as actingChief Financial Officer to replace Ms. Jinling Qin and as the Company's ChiefFinancial Officer after the probationary period. Mr. Ho brings over twelveyears of accounting and financial reporting experience to Sinovac, which willenhance the Company's financial management, internal control, risk managementand communications with investors. Mr. Ho will be on position and start workfrom September 1, 2010.
Mr. Ho has extensive experience in accounting and international businessworking with companies in China and the U.S. He previously served as a SeniorManager in Deliotte Touche Tohmatsu's Beijing office and as a Manager inPricewaterhouseCoopers Beijing office, where he provided financial reporting,accounting, internal auditing, risk management and accounting services toChinese companies. Prior to that, he held positions at Deloitte & Touche andPricewaterhouseCoopers, in which he served as a team leader for implementingSarbanes-Oxley compliance programs at U.S. companies. Earlier in his career,Mr. Ho served as an internal auditor at Texaco and as sales position at OxfordHealth Plans.
Mr. Ho received an M.S. in Japanese Business Studies from ChaminadeUniversity of Honolulu, an MBA in International Business in BusinessAdministration from Baruch College, City University of New York, and a B.S. inAccounting from Morgan State University in Maryland. He is Certified PubicAccountant.
Mr. Jiansan Zhang has resigned from his position as Vice General Managerof Sinovac Biotech and the Deputy Manager of Tangshan Yian due to personalreasons. At Sinovac, he oversaw the production, engineering, research anddevelopment and quality assurance departments and at Tangshan Yian, he oversawthe vaccine research and development laboratory. The duties have been takenover by the director in charge of the quality control and assurance departmentand the director in charge of production and engineering, both of whom wererecently promoted. Sinovac is actively seeking a senior manager with hightechnology and pharmaceutical industry experience.
2010 Guidance
The Company reiterates its previously provided total 2010 salesexpectations. The Company continues to expect 2010 sales to be in the rangeof approximately $60.0 million to $67.0 million as it anticipates the lastingeffects from the unfounded media reports that adversely impacted publicperceptions of vaccine safety will gradually diminish.
In 2010, the Company expects to advance the clinical development of itspipeline products as follows: (i) to commence clinical trials in China for itsenterovirus 71 (EV 71) vaccine (clinical trial application on file with SFDA)along with the hepatitis B vaccine in-licensed from LG Life Sciences (clinicaltrial applications approved by SFDA); (ii) to file the clinical trialapplication with the SFDA for its pneumococcal conjugate vaccine; and (iii) tocommence clinical trials in China for the mumps vaccine under development atSinovac Dalian upon receiving approval for its clinical trial application fromthe SFDA. The Company intends to continue executing its business plan at theSinovac Dalian and the Changping facilities to increase production capacity ofits commercialized vaccines and prepare for the commercialization of itspipeline products.
Conference Call Details
The Company will host a conference call on Monday, August 16, 2010 at 8:00a.m. EDT (August 16, 2010 at 8:00 pm China Standard Time) to review theCompany's financial results for the second quarter ended June 30, 2010 andprovide an update on recent corporate developments. To access the conferencecall, please dial 1-877-407-4018 (USA) or 1-201-689-8471 (international). Areplay of the call will be available from 11 a.m. ET on August 16, 2010 toAugust 30, 2010 at midnight. To access the replay, please dial 1-877-870-5176(USA) or 1-858-384-5517 (international) and the replay pin number 354766.
A live audio webcast of the call will also be available from the Investorssection on the corporate web site at http://www.sinovac.com . A webcast replaycan be accessed on the corporate website beginning August 16, 2010 and thereplay will remain available for 30 days.
About Sinovac
Sinovac Biotech Ltd. is a China-based biopharmaceutical company thatfocuses on the research, development, manufacture and commercialization ofvaccines that protect against human infectious diseases. Sinovac'scommercialized vaccine products include Healive(R) (hepatitis A), Bilive(R)(combined hepatitis A and B), Anflu(R) (seasonal influenza), Panflu(TM)(pandemic influenza (H5N1)), and Panflu.1(TM) (pandemic influenza A (H1N1)).Sinovac is developing vaccines for enterovirus 71, universal pandemicinfluenza, pneumococcal infection, Japanese encephalitis, and human rabies.Its wholly owned subsidiary, Tangshan Yian, has completed the clinical trialsfor its independently developed inactivated animal rabies vaccine . Its30%-owned joint venture, Sinovac Dalian, focuses on the research, development,manufacturing and commercialization of vaccines, such as rabies, chickenpox,mumps and rubella vaccines for human use.
Safe Harbor Statement
This announcement contains forward-looking statements. These statementsare made under the "safe harbor" provisions of the U.S. Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements can beidentified by words or phrases such as "will," "expects," "anticipates,""future," "intends," "plans," "believes," "estimates" and similar statements.Among other things, the business outlook and quotations from management inthis press release contain forward-looking statements. Statements that are nothistorical facts, including statements about Sinovac's beliefs andexpectations, are forward-looking statements. Forward-looking statementsinvolve inherent risks and uncertainties. A number of important factors couldcause actual results to differ materially from those contained in anyforward-looking statement. Sinovac does not undertake any obligation to updateany forward-looking statement, except as required under applicable law.Financial Highlights -- Second quarter sales increased 131% to $10.3 million on a sequential quarter basis and decreased by 49% year-over-year -- Sales for the six-month period declined 45% to $14.7 million, compared to same period last year -- Net income attributable to shareholders for the second quarter was $1.0 million, with net income per diluted share of $0.02 -- Net income attributable to shareholders for the six-month period was $738,000, with net income per diluted share of $0.01 -- Cash and cash equivalents at June 30, 2010 was $94.6 million Business Highlights -- In May 2010, Sinovac was selected by the Beijing Centers for Diseases Control and Prevention (Beijing CDC) to supply the Company's hepatitis A vaccine, Healive, to the Beijing Expanded Program of Immunization (EPI). Based on the comprehensive score following the Beijing CDC's evaluation of potential suppliers, Sinovac was selected as one of the two suppliers and was allocated a greater share of the total purchase order. The total ordered quantity allocated to Sinovac was approximately 477,000 doses. -- In June 2010, Sinovac participated at the 2010 Shanghai CPHI Exhibition. At the exhibition, Sinovac showcased its commercialized products, including its Healive, Anflu, Panflu and Panflu.1 vaccines. The Company met with several prospective distribution partners aimed at commercializing Sinovac's vaccines in targeted international markets. -- In August 2010, Sinovac received the GMP Inspection Report from the Government of Nepal's Ministry of Health and Population. The report stated that Sinovac's production facilities are qualified for registering its hepatitis A vaccine, Healive, for importation to Nepal. The favorable inspection report represents a key step towards obtaining the product registration certificate from the Nepalese Government. It is anticipated that Sinovac will be granted the product registration certificate later this year.
SOURCE Sinovac Biotech Ltd.
