Sinovac second quarter sales increase 52.5% to $15.7 million

Sinovac Biotech Ltd. (NASDAQ: SVA), a leading provider of biopharmaceutical products in China, announced today its unaudited second quarter financial results for the period ended June 30, 2011.

Second Quarter 2011 Financial Highlights

• Sales increased 52.5% year-over-year to $15.7 million, compared to $10.3 million.
• Net income attributable to shareholder reached $1.32 million and EPS was $0.02 per share.
• Cash and cash equivalents and short-term investments, which the principal and income were guaranteed, totaled $92.7 million at June 30, 2011, compared to $103.1 million at December 31, 2010.

Recent Business Highlights

• In July 2011, Sinovac was selected by the Xinjiang Centers for Disease Control and Prevention (Xinjiang CDC) to supply 568,700 doses of Healive, its inactivated hepatitis A vaccine. The bidding result was subject to a public notification period from August 1 to August 8, and the delivery is anticipated to be commenced before the end of this year.
• In April and July 2011, Sinovac received the official bidding notices from the Hunan Department of Health that it was selected to supply 100,000 doses of Anflu, its seasonal flu vaccine and 40,000 doses of Healive, respectively.
• In August 2011, Sinovac obtained the GMP certificate for both of its Healive and Anflu from COFEPRIS, the regulatory authority of Mexico's Ministry of Health.
• In May 2011, Sinovac unblinded the Phase I clinical trial results for its proprietary inactivated vaccine against human enterovirus 71 (EV71), which causes hand, foot, and mouth disease (HFMD). The safety observation results for the EV71 vaccine for all three age groups (adult, children and infant) showed good safety and tolerance profiles and the preliminary immunogenicity study results showed the vaccines can induce good immune responses.
• In June 2011, Sinovac commenced the Phase II clinical trial for its proprietary inactivated EV71 vaccine against hand, foot and mouth disease. The Phase II clinical trial is designed as a single center, randomization, double blinded, and placebo controlled study.  The objective of the Phase II clinical trial is to determine the dosage level by evaluating the immunogenicity and safety with different level of dosages of Sinovac's EV71 vaccine candidate, and to provide reference data for Phase III clinical trial.

Dr. Weidong Yin, Chairman, President and CEO of Sinovac, commented, "Demand for our hepatitis vaccines is rebounding in China as demonstrated by our second quarter sales.  We are gaining traction in the public market as we recently received two provincial government orders in additional to our ongoing public market sales activity in Beijing, Shanghai, Tianjin and part of Jiangsu. This shows that our revised sales strategy focused on the public market and restructured sales team is producing favorable results. We will continue to strengthen our efforts in public market presence, and stabilize sales in the private market."

Dr. Yin continued, "Over the past quarter, we have made substantial progress with our vaccine development pipeline. Our Phase II trial for our EV71 vaccine is progressing on schedule as dosing is underway and is on track to be completed within the year as planned.  We are optimistic about the potential for this vaccine as inquiries are increasing across Asia in the face of the current epidemic in Vietnam.  The registration for animal rabies vaccine is moving forward on schedule, which is anticipated to be launched within the year."

Dr. Yin continued, "We are excited to obtain the Mexico GMP certificate for our seasonal flu and hepatitis A vaccines.  This is the significant milestone as we advance our global commercialization strategy to register our vaccines. We anticipate that the Certificate of Approval for Anflu will be granted in the coming months as we prepare for the commercial launch of the vaccine in Mexico."

Dr. Yin concluded, "We are encouraged by the second quarter sales activity and public market orders received in recent months.  We believe that the ongoing execution of our revised sales strategy and seasonal flu vaccine sales that typically take place in the second half of the year will enable continued revenue growth. We look forward to updating you on the continued progress across our vaccine development pipeline."

Financial Review for the Second Quarter Ended June 30, 2011

Sales for the second quarter 2011 were $15.7 million, up 52.5% from $10.3 million for the second quarter of 2010. During the second quarter 2011, Sinovac recorded $7.7 million in pandemic influenza vaccine sales on prior year order.

Sinovac's sales breakdown by product was as follows.

Gross profit for the second quarter 2011 was $10.8 million, with a gross margin of 68.8%, compared to $8.5 million and a gross margin of 82.7% for the same period of 2010.  After deducting depreciation of land use rights and amortization of licenses and permits, the gross margin was 67.9% and 81.7% for the second quarter of 2011 and 2010, respectively. The gross profit margin was adversely affected by the revenue recognition in the second quarter 2011 of the prior pandemic flu vaccine order that had a lower gross margin than other vaccine products.

Selling, general and administrative expenses for the second quarter 2011 were $5.0 million, compared to $4.0 million in the same period of 2010. SG&A expenses as a percentage of second quarter 2011 sales were 31.8%, compared to 38.9% during the second quarter of the prior year. Excluding pandemic flu vaccine sales, SG&A as a percentage of sales were 62.5% and 46.0% for the current quarter and prior year quarter, respectively. The increased SG&A was mainly related to the sales team expansion and increased spending on sales promotion in the private pay market.  

Net research and development expenses for the second quarter 2011 were $2.3 million, compared to $1.7 million in the same period in 2010. The increased R&D expenses in the second quarter 2011 were primarily related to the continued development of the pipeline vaccines, including the expenses for the EV71 vaccine with the Phase II clinical trial underway, the trial production of the animal rabies vaccine and mumps vaccine, and other R&D projects.

Depreciation of property, plant and equipment and amortization of license and permits for the second quarter 2011 were $462,000, compared to $262,000 for the same period of last year.  The change compared to 2010 was primarily attributable to amortization on the Changping production facility, which started to amortize in September 2010 and higher depreciation for Tangshan Yian's new animal production line.

Total operating expenses for the second quarter of 2011 were $7.6 million, compared to $5.9 million in the comparative period in 2010.

The operating income for the three months ended June 30, 2011 was $3.1 million, compared to $2.6 million for the same period of the prior year.  The increased operating income in the second quarter of 2011 was primarily attributable to the revenue recognition for the prior order on pandemic flu vaccine in current reported quarter.

Net income for the second quarter 2011 included $510,000 of interest income, $343,000 of interest and financing expenses, $41,000 gain on disposal of equipment, $14,000 of other income and $1.5 million of income tax expenses. Net income for the same period of 2010 included $374,000 of interest income, $423,000 of interest and financing expenses, $132,000 loss on disposal of equipment, $38,000 of other income and $891,000 of income tax expense.  Net income attributable to stockholders for the second quarter of 2011 was $1.3 million, or $0.02 per diluted share, as compared to $1.0 million, or $0.02 per diluted share, in the same period of 2010.

As of June 30, 2011, Sinovac's cash and cash equivalents totaled $70.3 million, compared to $101.6 million at December 31, 2010.  Short-term investments were $22.4 million, compared to $1.5 million at December 31, 2010. The Company invests in short-term investments with principal and income guaranteed.

Financial Review for the Six Months Ended June 30, 2011

Sales for the six-month period of 2011 were $20.3 million, up 38.3% from $14.7 million for the same period quarter of 2010. During the six-month period of 2011, Sinovac recorded $7.7 million in pandemic influenza vaccine sales on prior year order.  

Sinovac's sales breakdown by product was as follows.

Gross profit for the six month period of 2011 was $13.9 million, with a gross margin of 68.2%, compared to $12.0 million and a gross margin of 81.9% for the same period of 2010.  After deducting depreciation of land use rights and amortization of licenses and permits, the gross margin was 66.9% and 80.5% for the six-month period of 2011 and 2010, respectively. The gross profit margin was adversely affected by the revenue recognition in the six-month period of 2011 of the prior pandemic flu vaccine order that had a lower gross margin than other vaccine products.

Selling, general and administrative expenses for the six-month period of 2011 were $9.1 million, compared to $7.1 million in the same period of 2010. SG&A expenses as a percentage of sales for the six-month period of 2011 were 44.7%, compared to 48.3% during the same period of the prior year.  Excluding pandemic flu vaccine sales, SG&A as a percentage of sales were 71.9% and 60.2% for the first half year and prior year same period, respectively. The increased SG&A was mainly related to the expansion of sales team and increased spending on sales promotion on the private pay market.  

Net research and development expenses for the six-month period of 2011 were $4.4 million, compared to $2.8 million in the same period of 2010. The increased R&D expenses in the six-month period of 2011 were primarily related to the continued development of the pipeline vaccines, including the expenses for the EV71 vaccine with the Phase II clinical trial underway, the trial production of the animal rabies vaccine and mumps vaccine, and other R&D projects.

Depreciation of property, plant and equipment and amortization of license and permits for the six-month period of 2011 were $846,000, compared to $511,000 for the same period of last year. The change compared to 2010 was primarily attributable to amortization on the Changping production facility, which started to amortize in September 2010 and higher depreciation for Tangshan Yian's new animal production line.

Total operating expenses for the six-month period of 2011 were $14.2 million, compared to $10.3 million in the comparative period of 2010.

The operating loss for the six months ended June 30, 2011 was $300,000, compared to an operating income of $1.8 million for the same period of the prior year. The year over year change was primarily attributable to the lower gross margin due to the product mix. Excluding the recognition of revenue coming from pandemic flu vaccines of prior order, the year over year change was primarily attributable to the increased R&D expenses, SG&A expenses and depreciation of property, plant and equipment.

Net loss for the six-month period of 2011 included $655,000 of interest income, $413,000 of interest and financing expenses, $34,000 of gain on disposal of equipment, $22,000 of other income and $1.8 million of income tax expenses. Net income for the same period of 2010 included $505,000 of interest income, $547,000 of interest and financing expenses, $819,000 of loss on disposal of equipment, $50,000 of other income and $621,000 of income tax expense.  Net loss attributable to stockholders for the six-month period of 2011 was $1.5 million, or $0.03 per diluted share, as compared to net income of $738,000, or $0.01 per diluted share, in the same period of 2010.