Sinovac third quarter sales decrease 7% to $9.6 million

Nov 15 2010

Sinovac Biotech Ltd. (Nasdaq: SVA), a leading provider of biopharmaceutical products in China, announced today its unaudited financial results for the three-month and nine-month periods ended September 30, 2010.

Business Highlights

• In October 2010, Sinovac was selected by the Beijing Centers for Disease Control and Prevention (Beijing CDC) as one of the five manufacturers to supply seasonal influenza vaccine in conjunction with a vaccination campaign to provide up to a total of 2.8 million doses for free to the elderly and school age children. Based on the first contract with the Beijing CDC, Sinovac supplied 375,000 doses of its seasonal influenza vaccine, Anflu^®, valued at RMB 8.8 million, or approximately $1.3 million.
• In October, the Company's wholly owned subsidiary Sinovac Biotech (Hong Kong) Ltd. received the Certificate of Drug/Product Registration from the Hong Kong Department of Health for its seasonal influenza vaccine Anflu^®.  

Dr. Weidong Yin,Chairman, President and CEO of Sinovac, commented, "We are continuing to face a challenging domestic market for vaccine sales as demand has declined subsequent to the unfounded media reports in the Shanxi province that have a lingering impact on patient confidence in vaccine safety.  We are ramping up our sales and marketing initiatives to leverage opportunities across our limited commercialized product portfolio.  To address the situation, our in-house research and development team is advancing our clinical vaccine pipeline.  Our growth plan is based on maximizing our strengths in research, production and quality management, while pursuing international collaboration opportunities."

Dr. Yin continued, "One of our long term growth strategies is to invest in research and development of new vaccines.  Our eleven R&D programs are advancing on schedule. We are waiting for approval to commence clinical trials for the EV71 vaccine.  The preclinical studies for the pneumococcal conjugated vaccine are nearing completion and the clinical trial application is on track to be filed with the SFDA before the end of 2010. The approval application for our animal rabies vaccine is progressing per our timetable and the production license is expected to be granted in 2011."

Dr. Yin concluded, "In terms of capacity expansion, we have completed the conceptual design, with the assistance of a European professional engineering firm, at our Changping facility, which was purchased earlier this year. We will build a filing and packaging line to WHO standards on this site that is expected to be operational by early 2012."

Mr. Jacob Ho, Acting Chief Financial Officer, stated, "In the third quarter, our sales team commenced the promotion campaign for our seasonal flu vaccine Anflu.  Based on preliminary data, our seasonal flu sales are expected to be in line with our revised full year sales guidance.  We are optimistic about ability to deliver long term growth as we deploy our financial and operational resources to expand our manufacturing capacity and advance the development of our pipeline vaccines."

Financial Review for Third Quarter Ended September 30, 2010

Third 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 third quarter of 2010 were $9.6 million, down 7% from $10.3 million in the second quarter of 2010 and down 55% from $21.2 million for the third quarter of 2009.  Excluding one-time sales to the Ministry of Health and Beijing Center for Disease Control, adjusted sales for the third quarter 2009 were $18.3 million, which yielded a 47.8% decline in quarterly sales when comparing 2010 to 2009.  The third quarter 2010 sales were impacted in part by the continuing weakness in the vaccine market in China following the unfounded media reports about vaccine safety in China's Shanxi province and by a large-scale measles campaign conducted in September 2010 that delayed administration of routine vaccinations.

Sinovac's sales breakdown by product was as follows.

Sales of the Panflu.1 (H1N1) vaccine represented 1.7% of total sales for the three months ended September 30, 2010. The H1N1 vaccine was sold to the Chinese government in accordance with the government purchase program.

Gross profit for the third quarter of 2010 was $6.5 million, with a gross margin of 68.3%, compared to $17.5 million and a gross margin of 82.7% for the same period of 2009.  The gross margin for the third quarter of 2010 decreased due to the product mix consisting of a greater portion of seasonal flu vaccine that has a lower gross margin compared to the hepatitis A vaccine. After deducting depreciation of land use rights and amortization of licenses and permits from gross profit, the adjusted gross margin was 67.2% and 82.2% for the third quarter of 2010 and 2009, respectively.

Selling, general and administrative expenses for the third quarter of 2010 were $4.4 million, compared to $3.5 million in the same period of 2009. SG&A expenses as a percentage of third quarter 2010 sales were 46.2%, compared to 16.6% during the third 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 third quarter 2010 revenues.

Net research and development expenses for the third quarter 2010 were $2.5 million, compared to $1.4 million in the same period of 2009. The increased R&D expenses in the third 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 third quarter of 2010 were $334,000, compared to $180,000 for the same period of last year.  The increase compared to 2009 was primarily attributable to the Sinovac Dalian assets acquired in 2010.

Total operating expenses for the third quarter of 2010 were $7.3 million, compared to $5.1 million in the comparative period in 2009.

The operating loss for the three months ended September 30, 2010 was $737,000, compared to net income of $12.4 million for the same period of the prior year.  The lower operating income in the third quarter of 2010 was primarily attributable to the lower sales, increased administrative expenses from Sinovac Dalian, and higher R&D expenses.

Net loss for the third quarter of 2010 included $156,000 of interest and financing expenses, $555,000 of interest and other income and $199,000 of income tax expense. Net income for the same period of 2009 included $246,000 of interest and financing expenses, $77,000 of interest and other income, and $3.8 million of income tax expenses. Net loss attributable to shareholders for third quarter of 2010 was $298,000, or $0.01 per diluted share, as compared to net income attributable to shareholders of $5.2 million, or $0.12 per diluted share, in the same period of 2009.

As of September 30, 2010, Sinovac's cash and cash equivalents totaled $84.5 million, compared to $75.0 million as of December 31, 2009.

Financial Review for Nine-Month Period Ended September 30, 2010

Results for the nine-month period of 2010 included the consolidation of the financial results from the 30%-owned joint venture, Sinovac Dalian, following its formation in January 2010.

Sales for the nine-month period of 2010 were $24.3 million, down 49% from $47.8 million for the same period of 2009.  Excluding one-time sales to the Ministry of Health and Beijing Center for Disease Control, adjusted sales for the first nine months of 2009 were $34.2 million, which yielded a 29.0% decline in nine month sales when comparing 2010 to 2009.  The lower sales in the first nine months of 2010 were primarily attributable to adverse impact of the unfounded media reports in the Shanxi province on the domestic vaccine market and the absence of government purchases in the current year for disease control in the flood region.

Sinovac's sales breakdown by product was as follows.

Sales of the Panflu.1 (H1N1) vaccine represented 18.6% of total sales for the nine months ended September 30, 2010. The H1N1 vaccine was sold to the Chinese government in accordance with the government purchase program.

Gross profit for the nine-month period of 2010 was $18.6 million, with a gross margin of 76.5%, compared to $38.9 million and a gross margin of 81.4% for the same period of 2009.  The gross margin for the first nine months of 2010 decreased due to different product mix in the current year.  After deducting depreciation of land use rights and amortization of licenses and permits from gross profit, adjusted gross margin was 75.2% and 80.8% for the nine-month period of 2010 and 2009, respectively.

Selling, general and administrative expenses for the first nine months of 2010 were $11.6 million, compared to $11.9 million in the same period of 2009. SG&A expenses as a percentage of nine-month period 2010 sales were 47.9%, compared to 24.9% for the same period 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 nine month 2010 revenues.

Net research and development expenses for the first nine months of 2010 were $4.9 million, compared to $2.8 million in the same period of 2009. The increased R&D expenses in the nine-month period 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 nine-month period of 2010 were $1.3 million, compared to $512,000 for the same period of last year.  The increase was primarily attributable to depreciation expense at Sinovac Dalian.

Total operating expenses for the first nine months of 2010 were $17.8 million, compared to $15.2 million in the comparative period in 2009.

The operating income for the nine months ended September 30, 2010 was $815,000, compared to $23.7 million for the same period of the prior year.  The lower operating income in the first nine months of 2010 was primarily attributable to the reduced sales, increased administrative expenses from Sinovac Dalian, higher R&D expenses.

Net income for the nine-month period of 2010 included $703,000 of interest and financing expenses, $521,000 of interest income and other expenses and $821,000 of income tax expense. Net income for the same period of 2009 included $571,000 of interest and financing expenses, $243,000 of interest and other income, and $6.4 million of income tax expenses. Net income attributable to shareholders for first nine months of 2010 was $440,000, or $0.01 per diluted share, compared to $11.0 million or 0.26 per diluted share in the same period of 2009.

2010 Guidance

The Company reconfirmed its revised total 2010 sales expectations in the range of approximately $40 million to $45 million. The Company has provided the revised outlook based on the following factors:

1. The vaccine market in China is experiencing a much longer than originally expected demand weakness in the market following the unfounded media reports about vaccine safety in China's Shanxi province.
2. A large-scale measles vaccination campaign was conducted in September 2010 that delayed administration of routine vaccinations, including the seasonal influenza vaccine. The campaign concluded in September 2010.

SOURCE Sinovac Biotech Ltd.