Sinovac reports fourth quarter net sales of $9.1 million

Mar 31 2011

Sinovac Biotech Ltd. (Nasdaq: SVA), a leading provider of biopharmaceutical products in China, announced today its fourth quarter and full year financial results periods ended December 31, 2010.

Business Highlights

• In March 2011, Sinovac reported positive preliminary Phase I clinical trial results in adults for its proprietary EV71 inactivated vaccine against hand, foot and mouth disease.  Sinovac received approval from China's SFDA (State Food and Drug Administration) to commence the EV71 study on December 23, 2010 and initiated the Phase I clinical trial on December 30, 2010. Sinovac completed enrollment, inoculations and safety observation in the adult group of 36 healthy volunteers in two months. The preliminary Phase I results for the EV71 vaccine in adults showed a good safety profile and preliminary immunogenicity profile. Sinovac subsequently initiated the inoculations in the young children and infant groups. The Company expects to announce the results in the coming months.
• In March 2011, Sinovac submitted the application to the SFDA to commence clinical trials for its 13-valent pneumococcal conjugate vaccine (PCV).  Sinovac is aiming to develop an affordable PCV vaccine to reach the estimated 34 million infants under the age of two in China and to pursue international opportunities as the SFDA vaccine regulatory system passed the WHO's evaluation.
• In January 2011, Sinovac filed the applications to the SFDA to commence clinical trials for its proprietary 23-valent and 24-valent pneumococcal polysaccharides vaccines (PPV).  Sinovac has expanded its R&D capabilities to include both bacterial and virus vaccines with the submission of the first application for a bacterial vaccine.

Dr. Weidong Yin, Chairman, President and CEO of Sinovac, commented, "Vaccine demand in China is beginning to recover after being impacted by external factors in 2010. We have refocused our sales strategy in 2011 to strengthen our public market presence and to maintain our market share in the private market. We have reorganized the sales team and implemented a special task force focusing on the EPI sales.

Dr. Yin continued, "We are implementing an expanded R&D strategy by strengthening our R&D capabilities to include both virus and bacterial vaccines and by focusing on the development of both generic and novel vaccines. We commenced Phase I clinical trial for our proprietary EV71 vaccine soon after obtaining the approval from SFDA. In just three months, we completed the Phase I clinical trial in the adult group with positive results. In early 2011, we filed applications to commence clinical trials for our two pneumococcal polysaccharides vaccine candidates and our 13-valent pneumococcal conjugate vaccine candidate, representing our entry into bacterial vaccine development. We have several vaccine candidates in our pipeline, which represents a solid foundation for further development."

Dr. Yin concluded, "Meanwhile, we are continuing the expansion of our manufacturing capabilities with the construction at our Changping facility.  A filling and packaging line with WHO-GMP standard will be built in our Changping site, along with a EV71 vaccine production line and other supporting infrastructures."  

Mr. Jacob Ho, Chief Financial Officer, stated, "Our full year 2010 sales were in line with the adjusted range we provided in early January.  As we discussed at that time, the challenging external market contributed to weak market demand in 2010 for our hepatitis A and seasonal influenza vaccines. However, we have sufficient financial resources to fund the developments for our pipeline vaccine candidates and to expand our manufacturing capacity, which will contribute to our future growth"  

Financial Review for Fourth Quarter Ended December 31, 2010

Sales for the fourth quarter 2010 were $9.1 million, down 4.3% from $9.6 million in the third quarter 2010 and down 74.8% from $36.4 million for the fourth quarter of 2009.  Excluding sales of H1N1 vaccines, adjusted sales for the fourth quarter 2010 and 2009 were $6.5 million and $8.3 million respectively, which yielded a 21.4% decline in quarterly sales when comparing 2010 to 2009.  The fourth quarter 2010 sales were impacted in part by the continuing weakness in the vaccine market in China following the negative external factors.

Sinovac's sales breakdown by product was as follows.

Sales of the Panflu.1 (H1N1) vaccine represented 29% of total sales for the three months ended December 31, 2010. The H1N1 vaccine was sold to the Chinese government in accordance with the government purchase program.

The Company's cost of sales exceeded revenues in the fourth quarter of 2010 by $1.88 million with a negative gross margin of 20.6%, compared to a gross profit of $25.2 million and a gross margin of 69.3% for the same period of 2009.  The Company recorded a $6.6 million inventory write down and inventory provision in cost of sales in the fourth quarter 2010 to reflect primarily the expiration of 3.95 million doses of the influenza vaccine that were not sold in 2010 and took an inventory provision for total 1.1 million doses of hepatitis A and hepatitis A&B vaccines. The gross margin for the fourth quarter of 2010 decreased due to the inventory write-down recorded in cost of sales, lower production volume of hepatitis vaccines that contributed to higher unit cost and different product mix in the current quarter. After deducting depreciation of land use rights, amortization of licenses, permits, the gross margin was negative 23.2% and 69.0% for the fourth quarter of 2010 and 2009 respectively. The inventory write-down and provision included in the cost of sales reduced the gross margin by 71.8% and 1.6% for the fourth quarter of 2010 and 2009, respectively. The amortization of H5N1 license was $149,000 and the royalty payment included in the cost of goods sold for recognizing H5N1 vaccine revenue was $214,000.  

Selling, general and administrative expenses for the fourth quarter 2010 were $9.1 million, compared to $6.3 million in the same period of 2009. SG&A expenses as a percentage of fourth quarter 2010 sales were 99%, compared to 17.4 % during the fourth 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 Dalian joint venture that was 30%-owned for most of 2010, the 100%-owned research and development Company, and a bad debt provision of $1.92 million.

Net research and development expenses for the fourth quarter 2010 were $3.4 million, compared to $1.7 million in the same period of 2009. The increased R&D expenses in the fourth quarter of 2010 were primarily related to the continued development of 10 vaccines, including EV71 vaccine, pneumococcal conjugated vaccine, and rabies vaccines for human and animals, along with the mumps vaccine that is currently under development at Sinovac Dalian.

Depreciation of property, plant and equipment and amortization of license and permits for the fourth quarter of 2010 were $525,000, compared to $181,000 for the same period of last year.  The change compared to 2009 was primarily attributable to the Sinovac Dalian assets acquired in January 2010 and Changping facility acquired in February 2010.

Total operating expenses for the fourth quarter of 2010 were $13.0 million, compared to $8.2 million in the comparative period in 2009.

The operating loss for the three months ended December 31, 2010 was $14.9 million, compared to net income of $17.1 million for the same period of the prior year.  The operating loss in the fourth quarter of 2010 was primarily attributable to the lower sales, the inventory provision, increased administrative expenses from Sinovac Dalian, and higher R&D expenses.

Net loss for the fourth quarter of 2010 included $475,000 of interest and financing expenses, $1.4 million of interest and other income, and $1.5 million of income tax recovery. Net income for the same period of 2009 included $37,000 of interest and financing income, $1.1 million of interest and other income, and $4.7 million of income tax expenses. Net loss attributable to shareholders for fourth quarter of 2010 was $8.9 million, or $0.17 per diluted share, as compared to net income attributable to shareholders of $8.9 million, or $0.21 per diluted share, in the same period of 2009.

As of December 31, 2010, Sinovac's cash and cash equivalents totaled $101.6 million, compared to $75.0 million as of December 31, 2009.

Financial Review for Twelve-Month Period Ended December 31, 2010

Sales for the full year 2010 were $33.4 million, down 60.3% from $84.2 million for the full year 2009.  Excluding one-time sales to the Ministry of Health and H1N1 vaccine sales, adjusted sales for the full year 2010 and 2009 were $26.2 million and $42.4 million respectively, which yielded a 38.2% decline in full year sales when comparing 2010 to 2009.  The lower sales in 2010 were primarily attributable to adverse impact of the negative external factors on the domestic vaccine market and the absence of government purchases of hepatitis A vaccine in the current year for disease control in the flood region and lower H1N1 vaccine sales.

Sinovac's sales breakdown by product class was as follows.

Sales of the Panflu.1 (H1N1) vaccine represented 21.5% of total sales for the twelve months ended December 31, 2010, as compared to 35.3% in 2009. The H1N1 vaccine was sold to the Chinese government in accordance with the government purchase program.

Gross profit for the full year 2010 was $16.7 million, with a gross margin of 50.0%, compared to $64.1 million, with a gross margin of 76.2%, for the same period of 2009.  The Company recorded a $6.8 million inventory write down in cost of sales in 2010 to reflect primarily the expiration of 3.95 million doses of the influenza vaccine that were not sold in 2010 and inventory provision for total 1.1 million doses of hepatitis A and hepatitis A&B vaccines.  The gross margin for 2010 decreased due to different product mix in the current year and the inventory write-down recorded in cost of sales.  After deducting depreciation of land use rights, amortization of licenses, permits, the gross profit was 48.3% and 75.7% for 2010 and 2009, respectively. The inventory write down included in the cost of sales reduced the gross profit margin by 20.4% and 0.7% for 2010 and 2009, respectively. The amortization of H5N1 license was $149,000 and the royalty payment included in the cost of goods sold for recognizing H5N1 vaccine revenue was $214,000.

Selling, general and administrative expenses for the full year 2010 were $20.7 million, compared to $18.2 million in 2009. SG&A expenses as a percentage of full 2010 sales were 61.9%, compared to 21.6% 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 Dalian joint venture that was 30%-owned for most of 2010 and a bad debt provision of $1.92 million, partly offsetting the lower selling costs associated with the 2010 revenues.

Net research and development expenses for 2010 were $8.6 million, compared to $4.4 million in 2009. The increased R&D expenses in the full year 2010 were primarily related to the continued development of 10 programs including 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 2010 were $1.4 million, compared to $693,000 for the same period of last year.  The increase was primarily attributable to the investment on Sinovac Dalian and the purchase of Changping facilities.

Total operating expenses for the full year 2010 were $30.7 million, compared to $23.3 million in 2009.

The operating loss for the twelve months ended December 31, 2010 was $14.9 million, compared to operating income of $40.9 million for the same period of the prior year.  The lower operating income in 2010 was primarily attributable to the reduced sales, higher R&D expenses, the inventory write down and provision, and increased administrative expenses from Sinovac Dalian.

Net income for the twelve-month period of 2010 included $1.2 million of interest and financing expenses, $1.9 million of interest income and other income and $704,000 of income tax recovery. Net income for the same period of 2009 included $534,000 of interest and financing expenses, $1.2 million of interest income and other income, and $11.1 million of income tax expenses. Net loss attributable to shareholders for full year 2010 was $8.5 million, or $0.16 per diluted share, compared to net income of $20.0 million, or $0.46 per diluted share, in the same period of 2009.

Capacity Expansion

Construction is underway at the Changping facility, which will house a new filling and packaging line with WHO GMP standard, the production line for EV71 vaccine, and other supporting infrastructures. The Company completed construction of the cold storage facility, which was put into use by year-end. The concept design for the new filling and packaging line has been completed and currently the construction drawings are being revised.

The construction of animal rabies vaccine production line in Tangshan has been completed. The facility recently passed the first site inspection which was conducted under the non-production situation by Ministry of Agriculture. The pilot production for animal rabies vaccine has been commenced.

Management Changes

Mr. Ming Xia was promoted to Vice President of Sales and Marketing in March 2011.  Mr. Ming Xia has over 15 years' experience in vaccine sales and marketing in China.  He joined Sinovac in 2002 and has served as Regional Sales Manager, National Sales Manager and Sales Director at Sinovac. Mr. Xia obtained his bachelor degrees in Biochemistry at Anhui University and in International Trade at Shanghai Institute of Foreign Trade. Mr. Xia has made significant contributions to the Company's sales revenue growth in previous years with outstanding leadership and performance results. He kept his top record of generating sales revenue for many years after joining Sinovac. He is a leader with creativities who developed the sales strategy of our existing products; and who organized the reform on sales strategy to meet the change of the market situation. Mr. Changjun Fu, who previously served as the Company's Vice President of Sales and Marketing, resigned from the Company for personal reasons.  

Mr. Jacob Ho was named Chief Financial Officer in March 2011, after joining Sinovac as the Acting Chief Financial Officer in September 2010.  Ms. Jinling Qin, the former Acting Chief Financial Officer formally retired from the Company the end of 2010.