ShangPharma third quarter net revenue increases 16.6% to $23.1 million

Nov 23 2010

ShangPharma Corporation (NYSE:SHP) ("ShangPharma" or the "Company"), a leading China-based pharmaceutical and biotechnology research and development outsourcing company, today announced its financial results for its third quarter ended September 30, 2010.

“Reconciliation of GAAP and non-GAAP Financial Data”

To assist management and investors in gaining a better understanding of the Company's operating performance for the third quarter ended September 30, 2010 and for the full year 2010 guidance, the Company is presenting certain non-GAAP measures, each of which excludes expenses relating to or the effect of share-based compensation. See "About Non-GAAP Financial Measures" and "Reconciliation of GAAP to Non-GAAP Financial Data" below for more information about the non-GAAP financial measures included in this press release.

Third Quarter 2010 Highlights

• Net revenues increased by 16.6% year-over-year to $23.1 million.
• GAAP diluted earnings per ADS increased by 28.3% year-over-year to $0.22.
• Non-GAAP diluted earnings per ADS, increased by 34.5% year-over-year to $0.24.

Full Year 2010 Guidance

For the full year 2010¹, the Company expects:

• Net revenues to be approximately $89.6 - $91.1 million, which represents growth of approximately 24% - 26% compared with full year 2009.
• GAAP gross profit to be approximately $29.6 - $30.5 million, which represents growth of approximately 24% - 28% compared with full year 2009.
• Non-GAAP gross profit to be approximately $30.8 - $31.7 million, which represents growth of approximately 28% - 32% compared with full year 2009.
• Non-GAAP gross margin to be approximately 34.4% - 34.8%, which represents an increase of approximately one to two percentage points from non-GAAP gross margin of 33.2% in 2009. The increase is expected to be driven by favorable service mix, better labor cost control, efficient material usage and improved operational efficiency.

Management Comment

Michael Xin Hui, founder and Chief Executive Officer of ShangPharma, commented, "We are very pleased with our third quarter financial results as we achieved record quarterly revenues, which was a direct result of strong customer demand and high customer satisfaction. Today, we work with the majority of the top 20 global pharmaceutical companies as well as many biotechnology and specialty pharmaceutical companies around the world. As a leading China-based contract research organization, we are well positioned to be a significant participant in the rapid growth of the global outsourcing market."

"We achieved double-digit year-over-year revenue and EPS growth driven by strong performance across all of our business divisions. We are expanding our platform of integrated services to help our customers achieve efficiency and deliver good results in their research and development activities. Consequently, we are seeing strong new customer acquisition and increased revenues from our top customers. The solid third quarter performance gives us confidence that we will achieve our 2010 full year targets for revenue growth and gross margin improvement."

"Lastly, we are also making good progress in building our capabilities in research manufacturing and biologics services. With regard to research manufacturing services, we are on target to open our cGMP-quality multi-purpose facility in Fengxian, Shanghai, during the first quarter of 2011. With regard to biologics services, we have already initiated customer services this year and we are seeing strong demand for such services going forward."

Kevin Chen, Chief Financial Officer and Chief Operating Officer of ShangPharma, added, "We achieved solid top-line growth and stable gross margin for the third quarter of 2010. Moreover, we successfully completed several high margin projects at the end of September 2010. The revenues for these projects were recorded in October 2010 due to changes in delivery schedules initiated by customers and delays in customer acceptance of our deliverables. As a result, we expect to see acceleration in revenue growth in the fourth quarter, and are well on our way to deliver year-over-year revenue growth of approximately 26% - 33% in the fourth quarter of 2010."

"We are also confident that we will achieve significant non-GAAP gross margin expansion of approximately one to one and half percentage points for the full year 2010 compared with 2009 as a result of favorable service mix, better labor cost control, efficient material usage and improved operational efficiency."

Third Quarter 2010 Results

Net revenues were $23.1 million, an increase of 16.6% from $19.8 million in the third quarter of 2009, primarily due to a larger customer base, higher revenues from the Company's top customers, broader service offerings and higher average rate from favorable service mix.

Net revenues from full-time-equivalent (FTE)-based services were $16.7 million, an increase of 11.6% from $15.0 million in the third quarter of 2009, primarily due to higher FTE numbers and FTE rate.

Net revenues from fee-for-service-based services were $6.4 million, an increase of 32.2% from $4.8 million in the third quarter of 2009, primarily due to broader service offerings. The nature of most of the Company's newer offerings is fee-for-service-based. The higher growth in fee-for-service-based revenues reflects the Company's ability to cross-sell newer services to existing customers as well as strong demand from new customers.

Gross profit was $7.5 million, an increase of 15.0% from $6.5 million in the third quarter of 2009, primarily due to the increase in revenues, though partially offset by a deferral in revenue of certain high margin projects to October 2010 and higher share-based compensation expenses.

Non-GAAP gross profit was $7.7 million, an increase of 17.1% from $6.6 million in the third quarter of 2009.

Gross margin declined slightly to 32.5% from 32.9% in the third quarter of 2009, primarily due to a deferral in revenue of certain high margin projects to October 2010 and higher share-based compensation expenses.

Non-GAAP gross margin increased slightly to 33.3% from 33.2% in the third quarter of 2009.

Operating expenses (selling, marketing, general and administrative) were $4.4 million, an increase of 23.7% from $3.6 million in the third quarter of 2009, primarily due to a build-up of corporate managerial, sales and supporting infrastructure and higher share-based compensation.

Non-GAAP SG&A expenses were $4.3 million, an increase of 22.2% from $3.5 million in the third quarter of 2009.

Profit from operations was $3.1 million, an increase of 4.5% from $3.0 million in the third quarter of 2009, primarily due to the higher gross profit, though partially offset by higher SG&A expenses.

Non-GAAP profit from operations was $3.4 million, an increase of 11.1% from $3.0 million in the third quarter of 2009

Operating margin declined to 13.4% from 15.0% in the third quarter of 2009, primarily due to a deferral in revenue of certain high margin projects, higher operating expenses and higher share-based compensation.

Non-GAAP operating margin declined to 14.6% from 15.4% in the third quarter of 2009.

Net income was $3.6 million, an increase of 32.7% from $2.7 million in the third quarter of 2009, primarily due to the higher profit from operations and higher other income.

Other income was $1.0 million, primarily due to a mark-to-market gain on foreign exchange forward contracts.

Non-GAAP net income was $3.9 million, an increase of 39.2% from $2.8 million in the third quarter of 2009.

Diluted earnings per ADS were $0.22, an increase of 28.3% from $0.17 in the third quarter of 2009.

Non-GAAP diluted earnings per ADS were $0.24, an increase of 34.5% from $0.18 in the third quarter of 2009.

Financial Position

As of September 30, 2010, the Company had cash and cash equivalents of $8.5 million and short term debt of $0.8 million. The cash balance does not include the over $44 million (after underwriting discounts and commissions, before expenses) proceeds from the Company's initial public offering of its American depositary shares, which took place in October 2010.