ShangPharma fourth quarter net revenues increase 19.0% to $30.5 million

Mar 12 2012

ShangPharma Corporation (NYSE: SHP) ("ShangPharma" or the "Company"), a leading China-based pharmaceutical and biotechnology research and development outsourcing company, today announced its unaudited financial results for the fourth quarter and the fiscal year ended December 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 and IPO bonuses. 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.

Fourth Quarter 2011 Highlights

• Net revenues increased by 19.0% year-over-year to $30.5 million.
• Net revenues from China-based customers increased by 208.7% year-over-year to $4.0 million, accounting for 13.0% of total revenues, up from $1.3 million in the fourth quarter of 2010.
• GAAP gross margin was 32.7%, compared with 32.3% in the fourth quarter of 2010. Non-GAAP gross margin was 34.4%, remaining stable from the fourth quarter of 2010.
• GAAP operating margin was 7.5%, compared with 3.6% in the fourth quarter of 2010. Non-GAAP operating margin was 13.1% compared with 16.7% in the fourth quarter of 2010, primarily due to higher listed-company related professional fees and increased operating costs related to our expanded facilities.
• Revenue per employee increased 8.8% year-over-year.

Full Year 2011 Highlights

• Net revenues increased by 23.6% year-over-year to $111.6 million, which is within our previously released annual guidance.
• Net revenues from China-based customers increased by 169.1% year-over-year to $12.1 million.
• Average revenue per customer for the top-10 customers increased to $6.9 million, compared with $5.7 million in 2010, while revenue from top-10 customers accounted for 61.8% of total revenue, compared with 63.0% in 2010. This was a result of continued efforts to become a preferred business partner of leading global pharmaceutical and biotech companies as well as increased customer-base diversification.
• GAAP gross margin was 32.3%, compared with 33.4% in 2010. Non-GAAP gross margin was 34.3%, compared with 34.5% in 2010.
• GAAP operating margin was 8.7%, compared with 11.5% in 2010. Non-GAAP operating margin was 14.2% compared with 15.9% in 2010, primarily due to the continued appreciation of the Renminbi, increased operating costs related to our expanded facilities as well as higher listed company-related professional fees.
• Revenue per employee increased 12.9% year-over-year.

Management Comment

"I am pleased to report that ShangPharma maintained steady top-line growth in the fourth quarter of 2011," said Michael Xin Hui, founder and Chief Executive Officer of ShangPharma. "Our strategic investments in facilities and service quality in 2011 should improve ShangPharma's competitiveness going forward and position us to take a market-leading position in areas such as biologics, biology and integrated drug discovery services projects."

Mr. Hui continued, "During the year, we continued to diversify our revenue base, with China-based customers growing particularly rapidly. As we expand our offering, we look forward to broadening our existing relationships with multinational clients through cross-selling opportunities. In addition, upgrades to our facilities and staff should help us to win more higher value-added projects."

William Dai, Chief Financial Officer, added, "While the investments we made in 2011 to upgrade ShangPharma's services offering will bring increased facility related expenses in the near term, greater employee productivity should help reduce pressure on margins. These investments are critical for our strategy to position ShangPharma at the center of China's burgeoning CRO market for the long term, and in 2012, our focus on managing costs and lowering capital expenditures should help ensure positive free cash flow for the full year."

Fourth Quarter 2011 Results

Net revenues were $30.5 million, an increase of 19.0% from $25.6 million in the fourth quarter of 2010. Higher volumes from the Company's top customers and greater cross-selling of services were major drivers of this growth.    

Revenue from customers based in China rose by 208.7%.  The growth came both from local pharmaceutical companies and smaller domestic laboratories, as well as major multinational biotech and pharmaceutical companies' China-based R&D centers.

Revenue from the Company's top-10 customers increased by 16.6 % compared with the same period last year, and accounted for 62.0% of  total revenue, compared with 63.3% in the same quarter last year. The growth was a result of multinational pharmaceutical companies expanding their scope of work with the Company.

Net revenues from full-time-equivalent ("FTE")-based services were $22.2 million, an increase of 24.7% from $17.8 million in the fourth quarter of 2010. This was primarily due to higher volumes from the Company's top customers, a larger customer base and expanded service offerings, as well as higher average FTE rates.

Net revenues from fee-for-service-based services were $8.3 million, an increase of 6.1% from $7.8 million in the fourth quarter of 2010.  This was primarily driven by a continued strong increase in demand from China-based companies, successful service cross-selling and rapid increased demand for services including discovery biology, preclinical development and biologics.

Gross profit was $10.0 million, an increase of 20.5% from $8.3 million in the fourth quarter of 2010. This was primarily due to an increase in revenues, operational efficiency improvements and lower share-based compensation expenses as a result of the one-time restricted share unit ("RSU") costs charged upon completion of the Company's IPO in the fourth quarter of 2010. These were partially offset by continued appreciation of the Renminbi, changes in service mix, and facility expansion costs, which include less than full utilization of our Fengxian manufacturing facility and the increased rental, depreciation and utility costs related to a new building dedicated to one of our major customers, which was put into use in December 2011, as well as the assumed facilities lease from Charles River as part of the asset acquisition in November 2011.

Non-GAAP gross profit was $10.5 million, an increase of 18.7% from $8.8 million in the fourth quarter of 2010, primarily due to an increase in revenues and operational efficiency improvements. These were partially offset by the continued appreciation of the Renminbi, changes in service mix and facility expansion costs.

Gross margin was 32.7%, compared with 32.3% in the fourth quarter of 2010, primarily due to lower share-based compensation expenses as a result of the absence of the one-time restricted share unit ("RSU") costs charged upon completion of the Company's IPO in the fourth quarter of 2010. 

Non-GAAP gross margin was 34.4%, remaining stable from the fourth quarter of 2010. Operational efficiency improvements were offset by the continued appreciation of the Renminbi, changes in service mix and facility expansion costs. The investments and upgrades to our facilities, such as Fengxian, a new building devoted to one of our major customers and the Charles River asset acquisition are critical in positioning us for future growth and moving up the value chain. Excluding the added facility expansion costs, our non-GAAP gross margin would have been approximately 36.4%, a 200 basis points improvement despite the continued appreciation of the Renminbi.

Operating expenses (selling and marketing, general and administrative) were $7.7 million, an increase of 4.3% from $7.3 million in the fourth quarter of 2010. This was primarily due to higher listed company-related professional fees and increased operating expenses related to facility expansion costs. These were partially offset by lower share-based compensation expenses as a result of the one-time RSU costs charge upon completion of the Company's IPO in the fourth quarter of 2010 and IPO bonuses accrued in the fourth quarter of 2010.

Non-GAAP operating expenses were $6.5 million, an increase of 42.4% from $4.6 million in the fourth quarter of 2010. This was primarily due to higher listed company-related professional fees and facility expansion costs.

Profit from operations was $2.3 million, an increase of 150.1% from $0.9 million in the fourth quarter of 2010, primarily due to an increase in revenues, lower share-based compensation expenses as a result of the absence of the one-time RSU costs charged upon completion of the Company's IPO in the fourth quarter of 2010, and operational efficiency improvements. These were partially offset by the continued appreciation of the Renminbi, changes in service mix, facility expansion costs, and higher listed company-related professional fees. 

Non-GAAP profit from operations was $4.0 million, a decrease of 6.5% from $4.3 million in the fourth quarter of 2010.  Higher gross profits were offset by higher listed company-related professional fees and increased expenses related to our expanded facilities.

Operating margin was 7.5%, compared with 3.6% in the fourth quarter of 2010.  This was primarily due to lower share-based compensation expenses as a result of the absence of the one-time restricted share unit ("RSU") costs charged upon completion of the Company's IPO in the fourth quarter of 2010 and operational efficiency improvements. These were partially offset by the continued appreciation of the Renminbi, changes in service mix, facility expansion costs, and higher listed company-related professional fees.

Non-GAAP operating margin was 13.1%, compared with 16.7% in the fourth quarter of 2010, primarily due to the continued appreciation of the Renminbi, changes in service mix, facility expansion costs, and higher listed company-related professional fees. If the impact of facility expansion costs had been excluded, our non-GAAP operating margin would have been 15.9% despite the continued appreciation of the Renminbi.

Net income decreased 10.4% year-over-year to $2.3 million. Higher profit from operations was offset by lower other income, such as lower government subsidies, smaller gain on foreign exchange forward contracts and lower investment income.

Non-GAAP net income was $4.0 million, a decrease of 32.5% from $5.9 million in the fourth quarter of 2010. This was primarily due to lower non-GAAP profit from operations and lower other income。 

Diluted earnings per ADS were $0.12, which compares with $0.14 in the fourth quarter of 2010.

Non-GAAP diluted earnings per ADS were $0.21, which compares with $0.32 in the fourth quarter of 2010.

Fiscal Year 2011 Results

Net revenues were $111.6 million, an increase of 23.6% from $90.3 million in 2010. This was primarily due to higher volumes from the Company's top customers, greater cross selling of services and growth of the Company's customer-base.    

Revenue from China-based customers increased by 169.1% to $12.1 million. This was primarily due to increased drug development activities from domestic pharmaceutical and biotech companies and increased R&D investment into China by global pharmaceutical and biotech companies. 

Revenue from the Company's top-10 customers increased by 21.2% compared with last year, and accounted for 61.8% of total revenue, compared with 63.0% in 2010. This was a result of continued efforts to become a preferred business partner of leading global pharmaceutical and biotech companies as well as increased customer-base diversification.

Net revenues from full-time-equivalent ("FTE")-based services were $80.7 million, an increase of 23.4% from $65.4 million in 2010. This was primarily due to higher volumes from the Company's top customers, a larger customer base and higher average FTE rates.

Net revenues from fee-for-service-based services were $30.9 million, an increase of 24.3% from $24.9 million in 2010.   This was primarily driven by a continued strong increase in demand from China-based companies, successful service cross-selling and rapid increased demand for services including discovery biology, preclinical development and biologics.

Gross profit was $36.1 million, an increase of 19.9% from $30.1 million in 2010. This was primarily due to an increase in revenues and operational efficiency improvements, which were partially offset by continued appreciation of the Renminbi, higher materials costs as a result of changes in service mix and higher share-based compensation expenses.

Non-GAAP gross profit was $38.2 million, an increase of 22.9% from $31.1 million in 2010. This was primarily due to an increase in revenues and operational efficiency improvements, which were partially offset by the continued appreciation of the Renminbi and higher materials costs as a result of changes in service mix.

Gross margin was 32.3%, compared with 33.4% in 2010, primarily due to the continued appreciation of the Renminbi, higher material costs as a result of changes in service mix and higher share-based compensation expenses, which were partially offset by operational efficiency improvements. 

Non-GAAP gross margin was 34.3%, compared with 34.5% in 2010.  Operational efficiency improvements were offset by the continued appreciation of the Renminbi and higher material costs as a result of changes in service mix.

Operating expenses (selling and marketing, general and administrative) were $26.4 million, an increase of 34.0% from $19.7 million in 2010. This was primarily due to the continued appreciation of the Remnimbi, increased expenses related to expanded facilities, higher share-based compensation expenses and higher listed company-related professional fees.

Non-GAAP operating expenses were $22.4 million, an increase of 33.5% from $16.7 million in 2010. This was primarily due to the continued appreciation of the Remnimbi, increased expenses related to expanded facilities and higher listed company-related professional fees.

Profit from operations was $9.7 million, a decrease of 7.0% from $10.4 million in 2010.  An increase in revenues and operational efficiency improvements were offset by the continued appreciation of the Renminbi, increased expenses related to expanded facilities, higher share-based compensation expenses and higher listed company-related professional fees.

Non-GAAP profit from operations was $15.9 million, an increase of 10.6% from $14.4 million in 2010. Higher gross profits were partially offset by the continued appreciation of the Renminbi, increased expenses related to expanded facilities and higher listed company-related professional fees.

Operating margin was 8.7%, compared with 11.5% in 2010.  This was primarily due to lower gross margin, continued appreciation of the Renminbi,  increased expenses related to expanded facilities, higher share-based compensation expenses and higher listed company-related professional fees. These were partially offset by operational efficiency improvements.

Non-GAAP operating margin was 14.2%, compared with 15.9% in 2010, primarily due to lower non-GAAP gross margin, the continued appreciation of the Renminbi, increased operating expenses related to expanded facilities and higher listed company-related professional fees.

Net income decreased 13.5% year-over-year to $11.2 million. This was primarily due to lower profit from operations and lower other income, including smaller gain on foreign exchange forward contracts and lower income from government subsidies. These factors were partially offset by higher interest income.

Non-GAAP net income was $17.5 million, an increase of 2.9% from $17.0 million in 2010. This was primarily due to higher non-GAAP profit from operations and was partially offset by lower other income. 

Diluted earnings per ADS were $0.60, which compares with $0.78 in 2010. 

Non-GAAP diluted earnings per ADS were $0.93, which compares with $1.07 in 2010.

Financial Position 

As of December 31, 2011, the Company had cash and cash equivalents of $38.6 million and no debt.  During the quarter, capital expenditures totaled $7.8 million, primarily due to costs related to the assumed facilities lease from Charles River as part of the asset acquisition, and investment on renovation of a new building dedicated to one of our major customers. During full year 2011, capital expenditures totaled $31.2 million, in line with our annual guidance released in previous quarters.

For the full year 2012, the Company expects:

• Net revenues to be approximately $131.7 – $136.2 million, which represents growth of approximately 18.0% – 22.0% compared with full year 2011. 
• Non-GAAP gross margin to be approximately 31.5% – 33.5%, which is slightly lower than non-GAAP gross margin of 34.3% in 2011, based on the consideration of the increased costs related to our expanded facilities such as rental, utility and depreciation, and continued appreciation of the Renminbi.
• Capital expenditures to be $20.0 - $24.0 million.

SOURCE ShangPharma Corporation