Sinovac Biotech's sales for first-quarter 2010 decrease 32% to $4.4M

Sinovac Biotech Ltd. (Nasdaq: SVA), a leading China-based vaccine manufacturer, announced today its unaudited financial results for the three-month period ended March 31, 2010.

First Quarter 2010 Financial Highlights (comparisons to First Quarter 2009) -- Sales for the first quarter decreased 32% to $4.4 million -- Operating loss for the first quarter was $865,000, compared to operating income of $646,000 -- Net loss attributable to shareholders for the first quarter was $307,000, with loss per diluted share of $0.01 -- Cash and cash equivalents at March 31, 2010 increased to $118.9 million, reflecting the closing of the common share public offering in February 2010 Business Highlights -- In April 2010, Sinovac's joint venture, Sinovac Dalian, submitted an application to China's State Food and Drug Administration (SFDA) to commence human clinical trials for its mumps vaccine. The proprietary mumps vaccine developed by Sinovac Dalian represents not only the first live attenuated vaccine for which Sinovac Dalian has filed a clinical trial application, but also the first candidate from the joint venture's pipeline for which a clinical trial application has been submitted to and accepted by the SFDA since the formation of the joint venture in January 2010. -- In May 2010, Sinovac Biotech, through its wholly owned subsidiary Sinovac Biotech (Hong Kong) Ltd, made an initial cash contribution of 60 million RMB, or approximately $8.8 million, to Sinovac Dalian, the Company's 30%-owned joint venture that was established in January 2010.

Mr. Weidong Yin, Chairman, President and CEO of Sinovac, commented, "As we indicated in early April, the demand for the vaccinations in the private pay market across China was unfortunately impacted by the product safety media reports that the SFDA subsequently determined to be unfounded. As a leading supplier of hepatitis A and seasonal influenza vaccines to the private pay and public markets, our first quarter 2010 sales were impacted by the reduced industry demand. Our domestic sales and marketing strategy is being augmented to reflect the current landscape. We are expanding our geographic reach by focusing on the rural markets and are providing physician education programs to drive growth in the private pay market. We continue to collaborate with our local distribution partners to obtain requisite approvals in targeted international markets, including India, Mexico and the Philippines."

Mr. Yin continued, "Given our long term expectations for increasing demand for our vaccines products, initiatives are underway to bring on additional capacity that will enable us to both expand production of our commercialized vaccines and commence production of our pipeline vaccines in a condensed timeframe upon receipt of production licenses. At our 300,000 square foot production facility in the Changping District, Beijing, we are targeting completion of the build-out of two new production lines in the second half of 2010. These new production lines will have a combined annual capacity of approximately 40 million doses and will be utilized to manufacture our currently marketed flu vaccines and our pipeline EV71 vaccine. At Sinovac Dalian's 200,000 square foot production facility, two vaccine production lines are operational -- one for animal cell cultured vaccines and one for live attenuated vaccines."

Mr. Yin concluded, "Advancing our research and development pipeline of proprietary vaccines continues to be a critical component of our growth strategy. Through our Sinovac Dalian joint venture, we have already submitted a clinical trial application for the mumps vaccine to the SFDA, exemplifying our commitment to building our pipeline and expanding our portfolio of commercialized vaccines. During the quarter, we further strengthened our R&D team, adding specialists both at our headquarters and at our joint venture. Through our in-house development and in collaboration with domestic and international partners, we are advancing our robust pre-clinical development pipeline that encompasses pneumococcal conjugated vaccine, rabies vaccine, HIB vaccine, meningitis vaccine, chickenpox (varicella) vaccine, and rubella vaccine."

Financial Review for Three Months Ended March 31, 2010

First quarter 2010 results included the consolidation of the financial results from the 30%-owned joint venture, Sinovac Dalian, following its formation in January 2010.

Sales for the first quarter of 2010 were $4.4 million, down 32% from $6.6 million for the first quarter of 2009. The lower sales in the first quarter 2010 were attributable to the lower demand in the private pay market based on concerns over product safety given the recent media reports linking the improper storage of vaccines by a distributor to a few cases of serious adverse events in China's Shanxi province. The media reports, which were not related to Sinovac and its products, impacted the entire vaccine industry in China and were subsequently proven to be unfounded based on the government's investigation.

Sinovac's sales breakdown by product was as follows. Three months ended March 31 2010 2009 Sales Healive $2,539,634 $4,902,315 Bilive 541,059 1,196,177 Anflu 31,796 467,607 Panflu.1 (H1N1) 1,331,410 -- Total $4,443,899 $6,566,099

Sales of the Panflu.1 (H1N1) vaccine represented 29.96% of total sales for the three months ended March 31, 2010. The H1N1 vaccine was sold to the Chinese government in accordance with the government purchase program.

Gross profit for the first quarter of 2010 was $3.6 million, with a gross margin of 80%, compared to $5.1 million and a gross margin of 78% for the same period of 2009. The gross margin for the first quarter of 2010 increased due to the product mix during the current year quarter.

Selling, general and administrative expenses for the first quarter of 2010 were $3.1 million, compared to $3.5 million in the same period of 2009. SG&A expenses as a percentage of first quarter 2010 sales were 70%, compared to 54% during the first quarter of the prior year. The higher SG&A expenses as a percentage of revenue resulted from the additional G&A expenses associated with the 30%-owned joint venture, partly offsetting the lower selling costs associated with the first quarter 2010 revenues.

Net research and development expenses for the first quarter 2010 were $908,000, compared to $759,000 in the same period of 2009. The increased R&D expenses in the first quarter of 2010 were primarily related to the continued development of EV71 vaccine, pneumococcal conjugated vaccine, rabies vaccines for human and animals, along with the mumps vaccine, which is currently under development at Sinovac Dalian.

Depreciation of property, plant and equipment and amortization of license and permits for the first quarter of 2010 rose to $425,000, compared to $165,000 for the same period of last year. The increase was primarily attributable to depreciation expense at Sinovac Dalian that was included in the first quarter 2010 consolidated results.

Total operating expenses for the first quarter of 2010 were $4.4 million, compared to $4.5 million in the comparative period in 2009.

The operating loss for the three months ended March 31, 2010 was $865,000, compared to operating income of $646,000 for the same period of the prior year. The operating loss in the first quarter of 2010 was attributable to the increased administrative expenses from Sinovac Dalian, reduced sales and higher R&D expenses.

Net income for the first quarter of 2010 included $124,000 of interest and financing expenses, $493,000 of interest and other expenses and $269,000 of income tax recovery. Net income for the same period of 2009 included $126,000 of interest and financing expenses, $93,000 of interest and other income, and $482,000 of income tax expenses. Net loss attributable to shareholders for first quarter of 2010 was $307,000, or $0.01 loss per diluted share, as compared to net income attributable to shareholders of $25,000, or $0.00 per diluted share, in the same period of 2009.

As of March 31, 2010, Sinovac's cash and cash equivalents totaled $118.9 million, compared to $75.0 million as of December 31, 2009. The increase in cash and cash equivalents primarily reflects the contribution of approximately $62.0 million in net proceeds from the public offering of common shares, which closed in February 2010.

Recent Developments

Sinovac's 30%-owned joint venture, Sinovac Dalian, submitted an application to the SFDA to commence human clinical trials for its mumps vaccine. The proprietary mumps vaccine developed by Sinovac Dalian represents not only the first live attenuated vaccine for which Sinovac has filed a clinical trial application, but also the first candidate from the joint venture's pipeline for which a clinical trial application has been submitted to and accepted by the SFDA since the formation of the joint venture in January 2010.

After receiving regulatory approval from China's State Administration of Foreign Exchange, Sinovac Biotech, through its wholly owned subsidiary Sinovac Biotech (Hong Kong) Ltd, made an initial cash contribution of 60 million RMB, or approximately $8.8 million, to Sinovac Dalian. Dalian Jin Gang Group, the other party, made an asset contribution, inclusive of its manufacturing facilities, production lines and land use rights, with an appraised value of 140 million RMB, or approximately $20.5 million. Equity interest is currently divided 30% and 70% between Sinovac and Dalian Jin Gang Group, respectively. Pursuant to the agreement executed between Sinovac and Dalian Jin Gang Group, Sinovac intends to increase its equity shares to 55%, in exchange for a cash contribution of 50 million RMB, or approximately $7.3 million, on or before December 31, 2010.

2010 Guidance

Sinovac anticipates that the impact of the unfounded Shanxi media reports on the vaccine industry will gradually diminish as the SFDA has clarified that the fatalities were not connected to the vaccines; however it may take some time for public perceptions of vaccine safety to recover. As such, the Company has adjusted its total 2010 sales expectations to the range of approximately $60.0 million to $67.0 million. It is anticipated that the 2.15 million doses of Panflu.1 purchased by the government will be delivered to the local CDC and the remaining 8.74 million doses of Panflu.1 will be stockpiled by the government in the Company's warehouse facility in 2010. The revenue from the 2.15 million H1N1 vaccine doses, which are expected to be delivered this year, is included in the 2010 sales guidance. The Company expects that the revenue from the 8.74 million H1N1 vaccine doses will be recognized in 2011, if they have not been delivered before the shelf life of the vaccine expires.

In 2010, the Company expects to advance the clinical development of its pipeline products as follows: (i) to commence clinical trials in China for its enterovirus 71 (EV 71) vaccine and Japanese encephalitis vaccine upon receiving approval of its clinical trial applications from SFDA; (ii) to file the clinical trial application with the SFDA for its pneumococcal conjugate vaccine; and (iii) to commence clinical trials in China for the mumps vaccine under development at Sinovac Dalian upon receiving approval for its clinical trial application from the SFDA The Company intends to continue executing its business plan at the Sinovac Dalian and the Changping facilities to increase production capacity of its commercialized vaccines and prepare for the commercialization of its pipeline products.