ShangPharma first quarter net revenues increase 25.6% to $24.8 million

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 first quarter ended March 31, 2011.

To help management and investors gain a better understanding of ShangPharma's operating performance, the Company presents 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.

First Quarter 2011 Highlights

• Net revenues increased by 25.6% year-over-year to $24.8 million, driven by an 18.1% increase in full-time-equivalent ("FTE") services and a 51.3% increase in fee-for service-based services.
• The total number of customers increased to 282 from 237 as of December 31, 2010, mainly due to an increase in China-based customers.
• China-based net revenues increased 185.9% year-over-year to $2.3 million
• GAAP gross profit increased by 15.3% year-over-year to $8.0 million. GAAP gross margin was 32.3%, compared with 35.2% in the first quarter of 2010, primarily due to higher share-based compensation expenses.
• Non-GAAP gross profit increased by 21.7% year-over-year to $8.6 million. Non-GAAP gross margin was 34.7% compared with 35.8% in the first quarter of 2010, and 34.5% for the full year of 2010.
• GAAP net income increased by 10.2% year-over-year to $3.0 million. GAAP diluted earnings per ADS were $0.16, compared with $0.18 in the first quarter of 2010, primarily due to higher share-based compensation expenses.
• Non-GAAP net income increased by 50.7% year-over-year to $4.4 million.  Non-GAAP diluted earnings per ADS were $0.23, compared with $0.19 in the first quarter of 2010.
• The Company reconfirms its guidance for the full year of 2011.

Management Comment

Michael Xin Hui, founder and Chief Executive Officer of ShangPharma, commented, "We are pleased to report our first quarter 2011 results, which came in line with our expectations. We saw strong growth across all of our businesses, especially from discovery biology and preclinical development services as well as biologics services as we continue to expand our integrated service platform and add new capabilities. During the quarter, in particular, we saw strong revenue growth from customers based in China.  The 185.9% year-on-year increase from these customers validates a continuing and encouraging trend in China-based outsourcing needs moving forward."

"Progress on our new state-of-the art manufacturing facilities in Fengxian, Shanghai, remained on track during the quarter.  We successfully started the first phase of our new c-GMP-quality multi-purpose facility and continued construction on our laboratory service building. Our increased capabilities in research manufacturing should further strengthen our overall integrated service platform and allow us to capture more promising opportunities in research manufacturing."  

"In April, 2011, Chengdu Chempartner Co., Ltd., our subsidiary in Chengdu in southwest China, moved into a 68,000 square foot new lab and office building which replaced the original 36,000 square foot facility. This new facility now gives us a cutting edge laboratory and expanded office space from which we can conduct a greater amount of business in an important and growing region of China.   In addition, with a large supply of fresh graduates and lower costs, we are looking forward to further expansion at this subsidiary as it becomes a bigger part of our business with greater operational efficiencies in the coming years."

"Looking ahead, our scientific expertise, significant cost savings and operational flexibility position us well to capitalize on the growing trends in pharmaceutical R&D outsourcing. We are confident that we will be able to meet our annual guidance for 2011."

William Dai, Chief Financial Officer, added, "Our first quarter 2011 results met our expectations as we continued to achieve solid top and bottom line growth on a non-GAAP basis. One of our top priorities in 2011 is to manage our expenses. During the first quarter, despite the continued appreciation of Renminbi against the U.S. dollar and higher material costs as a percentage of total revenues due to change in service mix resulting from our growing portfolio of research projects, we were able to closely manage our headcount and control our capital expenditures.   Looking forward, we continue to focus on controlling costs while we improve employee productivity.  With a strong balance sheet and sound financial position, we believe we are well positioned to make targeted investments when opportunities arise."

First Quarter 2011 Results

Net revenues were $24.8 million, an increase of 25.6% from $19.7 million in the first quarter of 2010, primarily due to higher volumes from the Company's top customers, a larger customer base, expanded service offering and higher average FTE rates.  

During the quarter, the Company increased its customer base to 282 customers, an increase from 237 customers as of December 31, 2010. In particular, revenue from customers based in China rose by 185.9%.  This included both domestic customers and the R&D centers in China of major biotech and pharmaceutical multinationals. The Company believes that the strong year-on-year rise demonstrates a continuing and encouraging trend in China-based outsourcing needs moving forward.  Revenue from China-based customers increased to 9.3% of total revenues due to strong demand from the local market.  Over the next few years, the Company anticipates that its China business will continue to grow strongly and will become an increasingly important contributor of total revenues given the Chinese government's rising support of locally-developed drugs and more investment into China by global pharmaceutical and biotech companies. .

Revenue from the top-10 customers increased by 20% compared with the same period last year and accounted for 61% of the total revenue, which demonstrated continued strong growth from the Company's top customers along with ongoing diversification of the sales base.

Net revenues from full-time-equivalent ("FTE")-based services were $18.1 million, an increase of 18.1% from $15.3 million in the first quarter of 2010, primarily due to an increase in FTE numbers and higher FTE rates.  

Net revenues from fee-for-service-based services were $6.7 million, an increase of 51.3% from $4.4 million in the first quarter of 2010.  The rise was primarily driven by the Company's service offerings including discovery biology, preclinical development, biologics and pharmaceutical development services. The higher growth in fee-for-service-based revenues reflects the Company's ability to cross-sell more services to existing customers as well as strong demand from new customers.  The Company is also seeing strong demand from customers that use multiple services.

Gross profit was $8.0 million, an increase of 15.3% from $6.9 million in the first quarter of 2010, primarily due to the increase in revenues and operational efficiency improvements, and in particular, improvements in employee productivity.  The increase was partially offset by the continued appreciation of the Renminbi, higher material costs as percentage of total revenues as a result of service mix, and higher share-based compensation expenses.

Non-GAAP gross profit was $8.6 million, an increase of 21.7% from $7.1 million in the first quarter of 2010, primarily due to the increase in revenues and operational efficiency improvements, and in particular, improvements in employee productivity. The increase was partially offset by the continued appreciation of the Renminbi and higher material costs as percentage of total revenues as a result of service mix.

Gross margin was 32.3%, compared with 35.2% in the first quarter of 2010.  The operational efficiency improvements were offset by higher share-based compensation expenses, continued Renminbi appreciation, and higher material costs as percentage of total revenues as a result of service mix.  

Non-GAAP gross margin was 34.7%, compared with 35.8% in the first quarter of 2010.  The decline was primarily due to continued Renminbi appreciation and higher material costs as percentage of total revenues as a result of service mix, and was partially offset by operational efficiency improvements.

Operating expenses (selling, marketing, general and administrative) were $5.5 million, an increase of 44.7% from $3.8 million in the first quarter of 2010, primarily due to a build-up of corporate managerial and supporting infrastructure during the full year of 2010 and higher share-based compensation expenses.

Non-GAAP operating expenses were $4.8 million, an increase of 26.2% from $3.8 million in the first quarter of 2010, primarily due to a build-up of corporate managerial and supporting infrastructure in 2010.

The build-up of corporate managerial and supporting infrastructure is near completion.  The management team believes that the current infrastructure will be sufficient to support the future growth of the Company in the coming years.

Profit from operations was $2.5 million, a decrease of 20.7% from $3.1 million in the first quarter of 2010, primarily due to higher share-based compensation expenses and a build-up of corporate managerial and supporting infrastructure in 2010.  The decline was partially offset by the increase in gross profit.  

Non-GAAP profit from operations was $3.8 million, an increase of 16.5% from $3.3 million in the first quarter of 2010.  The rise was primarily due to higher gross profit and was partially offset by a build-up of corporate managerial and supporting infrastructure in 2010.

Operating margin was 10.0%, compared with 15.8% in the first quarter of 2010.  The operational efficiency improvements were primarily offset by higher share-based compensation expenses.

Non-GAAP operating margin was 15.5%, compared with 16.7% in the first quarter of 2010.  The decline was primarily due to a build-up of corporate managerial and supporting infrastructure in 2010, and was partially offset by the increase in gross profit.

Net income increased 10.2% year-over-year to $3.0 million, primarily due to higher other income, including income from government grants, interest income and a gain recognized on foreign exchange forward contracts, and was partially offset by lower profit from operations.

Non-GAAP net income was $4.4 million, an increase of 50.7% from $2.9 million in the first quarter of 2010, primarily due to higher non-GAAP profit from operations and higher other income.  

Diluted earnings per ADS were $0.16, which compares with $0.18 in the first quarter of 2010.  

Non-GAAP diluted earnings per ADS were $0.23, an increase of 21.1% from $0.19 in the first quarter of 2010.

Financial Position  

As of March 31, 2011, the Company had cash and cash equivalents of $48.5 million and short term debt of $0.8 million. During the quarter, capital expenditures totaled $4.3 million, which demonstrates the Company's efforts to control capital expenditures.  With a strong balance sheet and sound financial position, the Company is well positioned to make targeted investments when opportunities arise.  

Full Year 2011 Guidance

The Company reconfirms its guidance for full year 2011.  The Company expects:

• Net revenues to be approximately $111.1 – $115.6 million, which represents growth of approximately 23.0% – 28.0% compared with full year 2010.  
• Non-GAAP gross margin to be approximately 33.5% – 35.5%, which is within the same range as non-GAAP gross margin of 34.5% in 2010.
• Capital expenditure to be $28 - $32 million, including $6 million rolling payment lag impact carried forward from 2010.