Image source: The Motley Fool.
China Biologic Products Inc (CBPO)
Q3 2019 Earnings Call
Nov 14, 2019, 7:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the China Biologic Products Third Quarter 2019 Earnings Call. [Operator Instructions] .
I would now like to turn the conference over to Sam Martin from The Foote Group. Please go ahead.
Samuel Martin -- Senior Account Executive
Thank you, operator. Hello, everyone, and thank you for joining us on today's call. China Biologic announced its third quarter 2019 financial results on November 13, 2019 after the market closed. An earnings release is available on the Company's website. Today, you will hear from China Biologic's Chairman and CEO, Mr. Joseph Chow, who will start off the call with a review of the Company's basic operating results and report recent developments for the company. He will be followed by Mr. Ming Yang, Senior Vice President of China Biologic, who will give a detailed account of the Company's financial results. China Biologic's CFO, Mr. Ming Yang, will be available during the Q&A session following the prepared remarks.
Before we proceed, I would like to remind you of our Safe Harbor statement. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in China Biologic is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The Company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. The Company will also discuss non-GAAP measures, which are more thoroughly explained and reconciled to the most comparable measures reported under Generally Accepted Accounting Principles in the Company's earnings release and filings with the SEC.
You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measures, and that non-GAAP measures are not uniformly defined by all companies, including those in the biopharmaceutical industry.
Now, I'm pleased to present Mr. Joseph Chow, Chairman and CEO of China Biologic.
Joseph Chow -- Chairman and Chief Executive Officer
All right. Thank you, Sam. Hello, everyone, and welcome to China Biologic's Third Quarter 2019 Conference Call. We are pleased [Technical Issues] another quarter of solid financial results. Along with healthy sales growth across most of our products, we were particularly encouraged to see a strong rebound of IVIG sales, which were up over 50% on a year-over-year basis.
IVIG sales performance is a strong validation of our effort to enhance China Biologic's sales and marketing capabilities over the past quarter, particularly in the distributor channel. Our new promotional strategy has been very well received by distributors and has allowed us to reclaim market shares from our competitors.
Improving China Biologic's marketing effort to lower our higher inventory of IVIG has been one of my key focus since I was appointed as CEO. I have worked closely on this, with our newly reorganized and stabilized sales and marketing team. We have launched vigorous moves to solidify relationships with existing distributors and build relationships with new distributors.
During the third quarter, we hosted a national conference for distributors and I subsequently led a team to visit all our major distributors across China. These efforts enhanced the existing distributors' confidence in us and also convinced the multiple new distributors, including large-scale distributors based in first-tier cities, to switch from competitors to China Biologic. I am pleased to report that these efforts successfully lowered our historically high IVIG inventory significantly from 11 months of sales as of end of June to seven months as of end of September. However, given that these new distributors may need time to digest their newly purchased inventories of IVIG, we do not anticipate this strong sales growth to continue into the fourth quarter and beyond, in early 2020.
Our inventory position for IVIG is still higher than normal. But given the progress we have made so far, we are confident that we will be able to succeed in turning the situation around. With a stable and experienced sales team in place, we will look to further pursue medical marketing strategies to enhance doctors' awareness about the benefits of IVIG together with PCC and other coagulation factor products in treating chronic diseases.
Looking to our other products, sales growth of our both albumin and hyper-immunoglobulin products in the third quarter also exceeded expectations. In particular, the extra growth in albumin sales largely resulted from our efforts to convince new distributors to buy IVIG from China Biologic rather than from our competitors, where such distributors required albumin to be bundled with IVIG in sales through them.
These additional demand for albumin over the third quarter has started our production schedule as we look to the fourth quarter. We now have less than a month of albumin's inventory remaining, much less than the two to three months of inventory we normally keep to maintain our albumin production schedule. We have had to allocate a proportion of next year's albumin supply to this year and are working to increase production volume in order to maximize our ability to fulfill orders in the fourth quarter.
However, albumin's available volume is still limited and we anticipate a material increase of albumin's sales volume during the fourth quarter. As anticipated, sales revenue of our placenta polypeptide products continue to decrease as planned during the third quarter as we continue to optimize our marketing, pricing and promotion policies. Going forward, we anticipate that our PP product may be included in the National Key Drug List for Monitoring and Prescription Control. Also, the product has been excluded from the National Reimbursement Drug List or NRDL in 2017 and has only been included in a few provincial reimbursement lists instead. According to a notice from the National Healthcare Security Administration in August, each province must strictly follow the national list for reimbursement coverage and local revisions are prohibited. The central government has set a three-year transition period for drugs only covered by provincial list. So, our PP product may lose coverage if access to the NRDL is not granted during this period, which would have a further negative impact on its sales.
During the third quarter, we were pleased to see the effect of our reevaluation of our credit terms with certain distributors and increased the collection efforts to control credit exposure, which began last quarter. While our accounts receivable balance continued to increase alongside our sales growth, we have seen improvement in turnover rates over prior quarter, which was an average AR turnover days on plasma products shortened to 99 days in the third quarter from 106 days in the second quarter. This transformation of our credit terms did not have a significant negative impact on sales as we had expected, probably due to our effort to solidify relationships with distributors. In the fourth quarter and beyond, we will continue to implement further measures in the next phase of our accounts receivable management, putting quality over quantity of growth.
I am sure, you have seen in the release that we are raising our guidance for the full year 2019. This decision is primarily due to three factors; stronger-than-expected albumin sales over the first nine months of the year, a rebound in IVIG sales in the third quarter, and the higher-than-anticipated interest income for the full year.
I have already explained the dynamics behind the unexpected resilience in albumin sales growth and the quick impact our sales and marketing efforts had on reinvigorating IVIG to meet expectations after a sluggish beginning of the year, neither of which we had visibility into the last quarter. The higher-than-expected interest income resulted from the fact that Company had previously intended to allocate a significant amount of capital toward potential strategic acquisitions.
However, after an extended period of search of attractive acquisitions opportunities. At present, we have not been able to come to agreement on an acquisition target at a satisfactory price. In summary, our work to transform China Biologic has already begun to pay off in terms of improved distributor relationships and the reclaiming of market share from competitors. But we're still at the beginning stage of our efforts to transform the Company.
Looking ahead, we will continue to enhance our sales and marketing capabilities, improve operating efficiencies and explore business expansion opportunities to achieve our vision of creating a world-class biopharmaceutical and biotechnology company.
This concludes my prepared remarks. I will now turn the call over to Mr. Ming Yang, our Senior Vice President, to review financial results for the third quarter of 2019. Ming, please go ahead.
Ming Yang -- Chief Financial Officer
Thank you, Joseph, and hello, everyone. Now, I'll walk you through the key P&L items for the third quarter 2019. Total sales during Q3 2019 increased by 17.5% in RMB terms or 14.3% in US dollar terms to $136.1 million from $119.1 million in the same quarter of 2018. Total sales for biopharmaceutical products including plasma products and the placenta polypeptide products increased by 18.8% in RMB terms or 15.5% in US dollar terms to $124.3 million from $107.6 million in Q3 2018 as a result of increased sales of most plasma products including human albumin and IVIG, which was partly offset by decreased sales of placenta polypeptide products. For plasma products, total sales in the third quarter increased by 39.3% in RMB terms or 35.5% in US dollars terms to $119.8 million from $88.4 million in Q3 2018.
Total sales for biomaterial products increased by 5.7% in RMB terms or 2.6% in US dollar terms to $11.8 million from $11.5 million in Q3 2018, as a result of higher sales concentration of higher-unit-price artificial dura mater products. Human albumin and IVIG products remained our two largest sales contributors during the quarter. Revenue from human albumin increased by 24.6% in RMB terms or 21.1% in US dollar terms from $38.8 million in Q3 2018 to $47 million in Q3 2019. Revenue from IVIG products increased by 51.9% in RMB terms or 47.9% in US dollar terms from $24.2 million in Q3 2018 to $35.8 million in Q3 2019.
As a percentage of total sales, sales from human albumin and IVIG products in Q3 2019 were 34.6% and 26.3% respectively. The sales volume of human albumin products increased by 24.4% in third quarter, with growth primarily in direct sales to hospitals and inoculation centers, supplemented by growth in the distributor channels. The sales growth of IVIG products increased by 55.6% over quarter, with growth primarily in distributor channels, supplemented by growth in direct sales channel.
The average price for human albumin over the quarter remained stable in RMB terms compared to Q3 2018. The average price for IVIG product decreased by 2.4% in RMB terms compared to Q3 2018, because of a higher sales volume in distributor channel and a lower price to certain distributors to enhance our sales volume in US dollar terms. Average price for human albumin and IVIG products in Q3 2019 decreased by 2.6% and 5.1% respectively compared to same quarter 2018.
Revenue from other immunoglobulin products in Q3 2019 increased by 34.5% in RMB terms or 30.9% US dollar terms compared to Q3 2018, reaching 17.1% of total sales as compared to 14.9% of total sales in Q3 2018. The revenue increase was mainly attributable to increased sales volume of human rabies immunoglobulin and human tetanus immunoglobulin products.
Revenue from other plasma products including human coagulation factor VIII, human prothrombin complex concentrate, and human fibrinogen products increased by 85.4% in RMB terms or 80.3% in USD terms compared to Q3 2018, representing 10.1% of total sales over the quarter. The growth was mainly due to increased sales through distributor channel.
Revenue from placenta polypeptide products in Q3 2019 decreased by 75.9% in RMB terms or 76.6% in US dollar terms as compared to Q3 2018, accounting for breakthrough 3.3% of total sales compared to 16.1% of total sales in Q3 2018, mainly because of the product was included in the drug list for monitoring and prescription control in many regions, which put a downward pressure on its sales volume.
Cost of sales increased by 25.3% to $47.5 million in Q3 2019 from $37.9 million in the same quarter of 2018. As a percentage of total sales, cost of sales increased to 34.9% from 31.8% in same quarter of 2018, mainly due to decreased sales price for most of the plasma products and increased plasma collection costs.
Gross profit increased by 9.1% to $88.6 million in Q3 2019 from $81.2 million in Q3 2018.
Gross margin was 65.1% and 68.2% in third quarter of 2019 and 2018 respectively.
Total operating expense in third quarter of 2019 decreased by $16.9 million or 32.2% to $35.6 million from $52.5 million in same quarter of 2018. This decrease mainly consisted of the increase of $9.7 million in selling expense, $7 million in general and administrative expense, and a $0.2 million in research and development expense. As a percentage of total sales, total operating expense decreased to 26.2% in third quarter of 2019 from 44.1% in same quarter of 2018.
Selling expense in third quarter of 2019 decreased by $9.7 million or 35.4% to $17.7 million from $27.4 million for third quarter 2018. The decrease is primarily due to decrease in marketing and in promotion expense related to placenta polypeptide products, which is partly offset by increased selling expense for plasma products. As a percentage of total sales, selling expense decreased to 13% in Q3 2019 from 23% in Q3 2018.
General and administrative expense in Q3 2019 decreased by $7 million or 31.5% to $15.2 million from $22.2 million in same quarter of 2018. As a percentage of total sales, general and administrative expense decreased to 11.2% for Q3 2019 from 18.6% for Q3 2018. The decrease in general and administrative expense was mainly due to decrease in legal fees, one-time provision, and a share-based compensation expense.
Research and development expense in third quarter of 2019 decreased by $0.2 million or 6.9% to $2.7 million from $2.9 million in same quarter of 2018. As a percentage of of total sales, research and development expense decreased to 2% in Q3 2019 from 2.4% in Q3 of 2018.
Income from operations in third quarter 2019 increased by 89.9% in RMB terms or 84.7% in US dollar terms to $53 million from $28.7 million in the same quarter 2018. Operating margin increased to 38.9% in Q3 2019 from 24.1% in Q3 of 2018.
Income tax expense in the third quarter of 2019 was $7.6 million compared to income tax benefit of $3.6 million in the same quarter 2018. During the third quarter 2018, we reversed $7.5 million U.S. corporate income tax based on deemed repatriation to United States of the Company's accumulated earnings mandated by U.S. Tax Reform, according to new regulation and rules issued by U.S. Department of Treasury in August 2018. Excluding the tax reversal impact, the effective tax rate was 12.4% and 11.5% for third quarter 2019 and 2018, respectively.
Net income attributable to Company increased by 48.6% in RMB terms or 42.9% in US dollar terms to $47 million in third quarter of 2019 from $32.9 million in the same period of 2018. Net margin increased to 34.5% in the third quarter of 2019 from 27.6% in same period of 2018. Diluted net earnings per share increased to $1.21 in Q3 2019 compared to $0.94 in Q3 2018.
Non-GAAP adjustment income from operations increased by 64.1% in RMB terms or 59.7% in US dollar terms to $61.5 million in Q3 2019 from $38.5 million in same period of 2018.
Non-GAAP adjusted net income attributable to Company in Q3 2019 increased by 66% in RMB terms and 61.4% in US dollar terms to $54.4 million from $33.7 million in same period of 2018. Non-GAAP net margin increased to 40% in Q3 2019 from 28.3% in same period of 2018. Non-GAAP adjusted net earnings per diluted share increased to $1.40 in third quarter of 2019 from $0.96 in the same period of 2018.
Non-GAAP adjusted income from operations for the third quarter of 2019 excludes $6.5 million in non-cash employee share-based compensation expense and $2 million in amortization of assets and land use rights related to the acquisition of TianXinFu.
Non-GAAP adjusted net income and net earnings per diluted share for third quarter of 2019 exclude $5.8 million in non-cash employee share-based compensation expense and $1.6 million in amortization expense of intangible assets and land use rights related to the acquisition of TianXinFu.
Now, I would like to turn to the balance sheet and the cash flow items. As of September 30, 2019, we have $220.8 million in cash on hand and demand deposits, $465.5 million in time deposits and $155 million in short-term investments. Net cash provided by operating activities for the third quarter -- for nine months of 2019 was $156.4 million as compared to $71 million for same period of 2018. The $85.4 million in net cash provided by operating activities
was combined result of the increase in net income and a slowdown of increase in accounts receivable and inventories compared to the first nine months of 2018.
Accounts receivable increased by $19.2 million during the first nine months of 2019 as compared to $47.7 million during the same period of 2018. The accounts receivable turnover days for plasma products increased to 100 days during the first nine months of 2019 from 94 days during the same period of 2018, reflecting longer credit terms to hospitals as a result of nationwide implementation of healthcare reform measures and intensified competition in
distributor channel.
Inventories increased by $8.9 million in first nine months of 2018, which was relatively modest compared to the increase of $34.7 million in the same period of 2018. This reflected a lower level of albumin inventory attributable to higher-than-expected albumin sales, which was partially offset by higher IVIG inventory due to sluggish IVIG sales.
Net cash used in investing activities for first nine months of 2019 was $37.6 million as compared to $686.2 million for the same period 2018. During the first nine months of 2019, we paid $21.3 million for acquisition of property, plant, equipment, intangible assets and land use right and also purchased time deposit and short-term investment in amount of $1,824.2 million. This was partly offset by maturity of the time deposits and short-term investment of $1,806.3 million, and the proceeds from sale of property, plant, equipment, and land use right and intangible assets of $1.6 million. Net cash used in financing activities for first nine months of 2019 was $238.7 million compared to net cash provided by financing activities of $581.3 million for the same period of 2018.
In the first nine months 2019, we paid $118.9 million for acquisition of minority interest in TianXinFu. $110 million was remitted to investment bank by us to execute the previously approved share repurchase program on behalf of us. During this period, 1,196,228 shares was repurchased at a total amount of $111 million. In addition, our subsidiary paid $10.1 million dividend to the non-controlling interest shareholders.
Financial outlook. Finally, I would like to turn -- I'd like to update you on full year 2019 business outlook. For the full year 2019, the Company is raising its full-year forecast of growth of non-GAAP adjusted income from operations to 11% to 13% from 4% to 6% and non-GAAP adjusted net income growth to 16% to 18% from 4% to 6% in RMB terms over the Company's full year 2018 financial results. The raising of guidance was primarily due to the combined effect of stronger-than-expected albumin sales for first nine months of the year, a rebound of IVIG sales in third quarter, and a higher-than-anticipated interest income for the full year.
This guidance does not factor in any potential foreign currency translation impact. Having previously adopted an exchange rate of approximately RMB6.59 = $1 based on the weighted average quarterly exchange rate in 2018 in translating 2018 financial results, the Company expects the total sales and non-GAAP
adjusted net income in US dollar terms in 2019 could be affected by the foreign currency translation impact.
That concludes our prepared remarks. Operator, we're now ready to take some questions.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Stephanie Hanna with Dealreporter. Please go ahead.
Stephanie Hanna -- Dealreporter -- Analyst
Hi, I've got a two-part question. Just wondering with respect to the take private proposal, if there's been any discussions between the Special Committee on the buyer consortium so far? And the second part of the question is, to what extent does today's positive result from the upgraded guidance sort of influence the Company's negotiations with the buyer consortium?
Joseph Chow -- Chairman and Chief Executive Officer
Okay. I will try to answer your question to the best of my ability, even though this is a earning call. Your question is about the privatization effect. We have disclosed, per all the requirements and the regulations, the proper contents of this discussion. And the only thing I could've commented without giving much more details is, the Company has formed a Special Committee and the Company has also retained the service of independent financial advisor, Duff & Phelps, LLC and Duff & Phelps Securities; and also the service of legal advisor, Davis Polk & Wardwell LLP. And the Special Committee is evaluating the proposals and we're not privileged to discuss, and that is ongoing as we speak now.
Stephanie Hanna -- Dealreporter -- Analyst
Sure. And in terms of, I guess, today's results. Kind of quite strong. And it's -- I think it's been the first time in a while that the Company has actually upgraded guidance. Do you think that will have a bearing on how things pan out? With the...
Joseph Chow -- Chairman and Chief Executive Officer
To be honest with you, I cannot comment. Typically, as Company Management, we do not speculate on speculations. And I'm sure all the relevant facts will be taken into consideration in their negotiation or discussion with all parties involved, and the Management remains focused on delivering the operational results and that's what we're here for.
Stephanie Hanna -- Dealreporter -- Analyst
Okay, thank you.
Operator
[Operator Instructions] At this time, there are no further questions. This concludes our question-and-answer session.
I would like to turn the conference back over to Joseph Chow, Chairman and Chief Executive Officer, for any closing remarks.
Joseph Chow -- Chairman and Chief Executive Officer
Okay, thank you for your participation and ongoing support of China Biologic Products. Have a great day. Thank you, everyone. Goodbye.
Operator
[Operator Closing Remarks]
Duration: 33 minutes
Call participants:
Samuel Martin -- Senior Account Executive
Joseph Chow -- Chairman and Chief Executive Officer
Ming Yang -- Chief Financial Officer
Stephanie Hanna -- Dealreporter -- Analyst
