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China Biologic Products Inc (NASDAQ:CBPO)
Q4 2019 Earnings Call
Mar 13, 2020, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the China Biologic Products Holdings 2019 Q4 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to your host today, Sam Martin. Please go ahead, sir.

Samuel Martin -- Senior Account Executive

Thank you, operator. Hello, everyone, and thank you for joining us on today's call. China Biologic announced its fourth quarter and fiscal year 2019 financial results on March 12, 2020 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 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 Yin, Senior Vice President of China Biologic, who will give a detailed account of the Company's financial results. China Biologic 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 statements. 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.

Joseph Chow -- Chairman and Chief Executive Officer

Thank you, Sam, and hello, everyone and welcome to China Biologic's fourth quarter and fiscal year 2019 conference call. We are pleased to report that China Biologic exceeded our upwardly revised guidance for the full year 2019. As anticipated, we saw a year-over-year decline in the fourth quarter after exceptionally strong results over the first nine months in 2019. 2019 was an extraordinary year for China Biologic. The year's business environment was characterized by a unique set of challenges; continued macro level slowdown, increasingly strict industry regulations, and intensified competition in the market. These persistently unfavorable market and regulatory conditions continued to pose challenges to our sales and promotional operations in the fourth quarter.

Revenue from placenta polypeptide products continued to decline as a result of the monitoring and prescription controls within regional drug lists and is exclusive from national and regional reimbursement drug list. TianXinFu has also began to be impacted by these healthcare reforms as they begin to be applied to medical device products in addition to pharmaceutical products. However, rather than buckle under the weight of this pressure, China Biologic's management team and employees choose to adapt in the face of adversity and embarked on various initiatives to transform our business, including launching comprehensive strategic review of the Company's operation, centralizing key management functions to enhance overall efficiency, optimizing our distribution networks, as well as improving earning quality and credit policy management.

During the fourth quarter, we saw encouraging progress in several areas, including distribution channel consolidation, plasma collection expansion, and improving accounts receivable turnover. In 2019, the total volume of plasma collected by CBPO's own collection stations surpassed 1,000 tonnes [Phonetic] for the first time, achieving a 10-year -- 10% year-over-year growth, with new stations in operation for less than three years having contributed the majority of this organic growth. The expansion of our plasma collection stations has been a resounding success, with significant improvement made in management standards. We obtained operating permits for two stations in the mid-2019 and early 2020, respectively and recently received approval for the building of two additional collection stations in the regions of Shandong and Xinxing respectfully. We have also been granted additional collection territories in certain existing collection stations in Shandong province. The approval we have received for this new collection territory coverage and new stations underscore the efforts we've made to focus on the organic growth by sustainably increasing our plasma collection volume.

Less fortunately, all sorts of plasma volume supplied by our collaboration partner in Xinjiang province, as a subsequent to our own collection plasma declined over 20% in 2019 due to issues surrounding a possible funding deficit situation at Xinjiang Deyuan. We will explore all practical measures to minimize any negative impact this situation could have on our collaboration.

Furthermore, we were also pleased to see effects of the reevaluation of our credit terms with distributors and increased collection efforts to control credit exposure. Our accounts receivable balance as of December 31, 2019 decreased by approximately 30% compared to September 30, 2019. The average account receivable turnover days for plasma products were shortened to 95 days in the fourth quarter from 99 days in the third quarter and 106 days in the second quarter. With a focus on improving earnings growth, quality, we tilted to collaboration with Tier 1 distributors to ensure our products' penetration into top tier hospitals and ceased to cooperate with a number of small and credit dependent distributors, which caused a certain level of temporary slowdown in our top line growth in the past quarter.

Further successes over the year included our enhancement of production efficiency, our continued research and development of new products, our maintaining of high levels of product quality control, and a wholescale reorganization of our sales and marketing functions. We have also strengthened our relationship with key distributors and China Biologic's brand image and reputation have continued to rise. These achievements have consolidated China Biologic's leading position in China's plasma industry.

As China grapples with the coronavirus outbreak since the start of 2020, the economic damage is mounting around China. Businesses are dealing with loss revenue and disruptive supply chains, as nationwide factory delayed opening after the Lunar New Year and workers stayed at home to help curb the spread of the virus. We're fortunate to see a less significant impact on us compared to other industries, since our IVIG product is listed as supplemental treatment for critical virus conditions, which has created a short-term substantial demand for IVIG and cleaned most of our prior inventory. Nevertheless, our business operation beyond IVIG sales, have been actively impacted. Plasma collection in the first quarter fell behind planning and the recovery in the remaining quarters of 2020 will depend on when the coronavirus outbreak will be fully contained. Sales of products other than IVIG are anticipated to be under great pressure since a substantial amount of public healthcare funding has been spend in the treatment of infected patients.

Due to the sudden outbreak of the coronavirus and its related ripple effects, our choice of sales formats and channels, customer management methods, sales strategy adjustment with hospital customers, brands, and supply chains will face new opportunities and challenges. In addition to the already existing complexities of the macroeconomic situation and intensified market competition that will persist in the near future, 2020 will be a year in which we further improve our operations, a year in which we implement our strategies, and a year in which we improve our overall management. We have a talented team to achieve those goals, and we're confident about the future.

This concludes my prepared remarks. I will now turn the call over to Mr. Ming Yin, our Senior Vice President, to review financial results for the fourth quarter and fiscal year 2019. Ming, please go ahead.

Ming Yin -- Senior Vice President

Thank you, Joseph, and hello everyone. Now, I'll walk you through the key P&L items for the fourth quarter for the fiscal year 2019. Fourth quarter 2019 financial performance. Total sales in fourth quarter 2019 decreased by 9.6% in RMB terms or 11.1% in U.S. dollar terms to $102.2 million from $114.9 million in fourth quarter 2018. Total sales for plasma products increased by 2.7% in RMB terms or 1% in U.S. dollar terms to $91.2 million from $90.3 million in fourth quarter 2018, as a result of increased sales of special immunoglobulin and coagulation factor products, which was partly offset by decreased sales of human albumin and IVIG products. Human albumin and IVIG products remained our two largest sales contributors this quarter, accounting for 34.3% and 24.4%, respectively of total sales.

Total sales for placenta polypeptide products decreased by 77.5% in RMB terms, or 77.8% in U.S. dollar terms, to $3.5 million from $15.8 million in the fourth quarter of 2018. Combining plasma products and placenta polypeptide products, total sales for biopharmaceutical products decreased by 9.3% in RMB terms, or 10.7% in U.S. dollar terms, to $94.7 million from $106.1 million in the fourth quarter 2018.

Total sales for biomaterial products in the fourth quarter of 2019 decreased by 13.5% in RMB terms, or 14.8% in U.S. dollar terms, to $7.5 million from $8.8 million in the fourth quarter 2018, as a result of decreased sales of artificial dura mater products.

Cost of sales increased by 1.6% to $38.2 million in fourth quarter of 2019 from $37.6 million in the fourth quarter 2018. As a percentage of total sales, cost of sales increased to 37.4% from 32.7% in the fourth quarter 2018, mainly because of $3.2 million cost provision for plasma provided by Xinjiang Deyuan that was estimated not to be put into production due to lack of subsequent quarantine information.

Gross profit decreased by 17.2% to $64 million in the fourth quarter of 2019 from $77.3 million in the fourth quarter of 2018. Gross margin was 62.6% and 67.3% in the fourth quarter 2019 and fourth quarter 2018, respectively.

Total operating expenses in the fourth quarter of 2019 increased by $10.6 million, or 30.5%, to $45.4 million from $34.8 million in the fourth quarter 2018. This increase mainly consisted of increases of $14.2 million in general and administrative expense and $1.3 million in research and development expense, offset by a decrease of $4.9 million in selling expense. As a percentage of total sales, total operating expense increased

To 44.4% in the fourth quarter 2019 from 30.3% in fourth quarter 2018.

Income from operations in fourth quarter of 2019 decreased by 55.7% in RMB terms, or 56.2% in U.S. dollar terms, to $18.6 million from $42.5 million in the fourth quarter of 2018. Operating margin decreased to 18.2% in the fourth quarter of 2019 from 37% in fourth quarter 2018.

Income tax expense in fourth quarter of 2019 was $4.4 million compared to $8.2 million in the fourth quarter 2018. The effective income tax rate was 21% and 17.5% for the fourth quarter 2019 and 2018, respectively.

Net income attributable to the Company decreased by 63.7% in RMB terms, or 64.1% in U.S. dollar terms, to $12.5 million in the fourth quarter of 2019 from $34.8 million in fourth quarter of 2018. Net margin decreased to 12.2% in fourth quarter 2019 from 30.3% in fourth quarter 2018. Diluted earnings per share decreased to $0.32 in fourth quarter 2019 compared to $0.87 in the fourth quarter 2018.

Non-GAAP adjusted income from operations decreased by 28.9% in RMB terms, or 30.2% in U.S. dollar terms, to $27.8 million in fourth quarter of 2019 [Phonetic] from $39.8 million in the fourth quarter of 2018.

Non-GAAP adjusted net income attributable to the Company decreased by 31.2% in RMB terms and 32.6% in U.S. dollar terms, to $20.7 million in the fourth quarter 2019 from $30.7 million in the fourth quarter 2018. Non-GAAP net margin decreased to 20.3% in fourth quarter 2019 from 26.7% in fourth quarter 2018. Non-GAAP adjusted earnings per diluted share decreased to $0.53 in fourth quarter 2019 from $0.76 in the same quarter 2018.

Non-GAAP adjusted income from operations for the fourth quarter 2019 excludes $7.3 million in non-cash employee share-based compensation expenses, and $2 million in amortization expense of intangible assets and land use rights relating to acquisition of TianXinFu.

Non-GAAP adjusted net income and earnings per diluted share for fourth quarter 2019 exclude $6.6 million in non-cash employee share-based compensation expense, and $1.7 million in amortization expense of intangible assets and land use rights related to acquisition of TianXinFu.

Fiscal Year 2019 Financial Performance. Total sales in 2019 increased by 12.3% in RMB terms, or 7.9% in U.S. dollar terms, to $503.7 million from $466.9 million in 2018.

Total sales for biopharmaceutical products increased by 12.9% in RMB terms, or 8.4% in U.S. dollars terms, to $457.7 million in 2019 from $422.2 million in 2018, as a result of increases in the sales of most of the plasma products, including human albumin, IVIG, hyper-immunoglobulin and coagulation factor products, which was partly offset by decrease in the sales of placenta polypeptide products. For plasma products, total sales in 2019 increased by 26.7% in RMB terms, or 21.7% in U.S. dollar terms, to $430.7 million from $354 million in 2018.

During 2019, human albumin and IVIG products remained our two largest sales contributors. Revenue from human albumin increased by 30.6% in RMB terms, or 25.7% in U.S. dollar terms, from $149.4 million in 2018 to $187.8 million in 2019. Revenue from IVIG products increased by 7.8% in RMB terms, or 3.2% U.S. dollar terms, from $113.5 million in 2018 to $117.1 million in 2019. As a percentage of total sales, sales from

Human albumin and IVIG products were 37.3% and 23.2%, respectively, in 2019.

The sales volume of human albumin products increased by 31.5% in 2019, primarily due to temporary shortage of albumin supply in the market related to the lower import volume in the first quarter of 2019. The sales volume of IVIG products increased by 10.6% in 2019, reflecting our efforts to enhance sales and marketing capabilities.

The average price for human albumin declined slightly by 0.7% in RMB terms in 2019 compared to 2018. The average price for IVIG products decreased by 2.5% in RMB terms compared to 2018, because of higher sales volume in distributor channel and lower prices to certain distributors to enhance sales volume in response to intensified market competition. In U.S. dollar terms, the average price for human albumin and IVIG products decreased by 4.4% and 6.7%, respectively, in 2019 compared to 2018. Revenue from other immunoglobulin products increased by 26.4% in RMB terms, or 21.2% in U.S. dollars terms in 2019 compared to 2018, representing 14.3% of total sales as compared to 12.7% of total sales in 2018. The revenue increase was mainly attributable to the increased sales volume of human rabies immunoglobulin and human tetanus immunoglobulin products.

Revenue from other plasma products increased by 76.6% in RMB terms, or 69.9% U.S. dollar terms, in 2019 compared to 2018, with growth in revenue from all three other plasma products, namely human coagulation factor VIII, human prothrombin complex concentrate and human fibrinogen products, reaching 10.7% of total sales in 2019 compared to 6.8% of total sales of 2018.

Revenue from placenta polypeptide products decreased by 59% in RMB terms, or 60.4% in U.S. dollars terms in 2019 as compared to 2018, accounting for 5.4% of total sales compared to 14.6% of total sales in 2018. The main reason for this decrease is that this product was included in the drug lists for monitoring and prescription control in many regions, which put downward pressure on the sales volume.

Total sales for biomaterial products in 2019 increased by 7.4% in RMB terms, or 2.9% in USD terms, to $46.0 million from $44.7 million in 2018, mainly due to increases in sales of artificial dura mater products.

Cost of sales increased by 18.9% to $174.6 million in 2019 from $146.8 million in 2018. As a percentage of total sales, cost of sales increased to 34.7% in 2019 from 31.4% in 2018, as a combined result of a lower percentage of higher-margin placenta polypeptide products in total sales, decreased sales prices for our major plasma products and increased plasma collection costs.

Gross profit increased by 2.8% to $329.1 million in 2019 from $320.1 million in 2018. Gross margin was 65.3% and 68.6% in 2019 and 2018, respectively.

Total operating expenses in 2019 decreased by $8.5 million, or 4.9%, to $165.4 million from $173.9 million in 2018. This decrease mainly consisted of a decrease of $15.3 million in selling expenses, which was partly [Phonetic] offset by increase of $4.6 million in general and administrative expense and $2.2 million in research and development expense. As a percentage of total sales, total operating expenses decreased to 32.8% in 2019 from 37.3% in 2018.

Selling expenses in 2019 decreased by $15.3 million, or 16%, to $80.3 million from $95.6 million for 2018. The decrease is primarily due to the decrease in marketing and promotion expenses related to placenta polypeptide products, whose sales revenue decreased significantly in 2019. This decrease is partly offset by increased selling expense for plasma products. As a percentage of total sales, selling expenses decreased to

15.9% in 2019 from 20.5% in 2018.

General and administrative expense in 2019 increased by $4.6 million, or 6.7%, to $73.4 million from $68.8 million in 2018, mainly due to the increase of $3.5 million in share-based compensation expenses. As a percentage of total sales, general and administrative expense remained relatively stable at 14.6% in 2019 compared to 14.8% in 2018.

Research and development expense in 2019 increased by $2.2 million, or 23.2%, to $11.7 million from $9.5 million in 2018. As a percentage of total sales, research and development expense increased to 2.3% in 2019 from 2% in 2018.

Income from operations in 2019 [Phonetic] increased by 16.4% in RMB terms, or 11.9% in U.S. dollar terms, to $163.6 million from $146.2 million in 2018. Operating margin increased to 32.5% in 2019 from 31.3% in 2018.

Income tax expense in 2019 was $28.1 million, compared to $18 million in 2018. During third quarter of 2018, according to new regulations and rules issued by the U.S. Department of the Treasury in August 2018, we reversed U.S. corporate income tax of $7.5 million based on deemed repatriation to United States of our accumulated earnings mandated by U.S. tax reform. Excluding tax reversal impact, the effective income tax rate was 14.7% and 15.4% for 2019 and 2018, respectively.

Net income attributable to the Company increased by 12.4% in RMB terms, or 8.4% U.S. dollars terms, to $138.8 million in 2019 from $128.1 million in 2018. Net margin increased to 27.6% in 2019 from 27.4% in 2018. Diluted earnings per share remained stable at $3.53 in 2019 as compared to 2018.

Non-GAAP adjusted income from operations for 2019 increased by 16.6% in RMB terms or 11.6% U.S. dollars terms to $198.3 million in 2019 from $177.7 million in 2018. Non-GAAP adjusted net income attributable to the Company increased by 20.5% in RMB terms, or 15.4% U.S. dollars terms, to $168.4 million in 2019 from $145.9 million in 2018. Non-GAAP net margin increased to 33.4% in 2019 compared to 31.2% in 2018. Non-GAAP adjusted earnings per diluted share was $4.28 and $4.02 respectively, in 2019 and 2018.

Non-GAAP adjusted income from operations for 2019 excludes $26.6 million in non-cash employee share-based compensation expenses, and $8.1 million in amortization expense of intangible assets and land use rights related to the acquisition of TianXinFu. Non-GAAP adjusted net income and earnings per diluted share for 2019 exclude $23.5 million in non-cash employee share-based compensation expense, and $6.1 million in amortization of intangible assets and land use rights related to acquisition of TianXinFu.

As of December 31, 2019, we had $161.8 million in cash on hand and demand deposits, $497.7 million in time deposits, and $267.8 million in short-term investments. Net cash provided by operating activities for 2019 was $229.3 million as compared to $103.9 million for 2018. The $125.4 million increase in net cash provided by operating activities was mainly because of decrease in accounts receivable and a slowdown of increase in inventories compared to 2018. Accounts receivable decreased by $22.1 million during 2019 as compared to an increase of $53.9 million during 2018. The accounts receivable turnover days for plasma products shortened to 89 days during 2019 from 95 days during 2018, reflecting our success in shortening credit terms of some distributors and the increased collection efforts to control credit exposure in 2019.

Inventories increased by $14.8 million in 2019, which was relatively modest compared to the increase of $42.6 million in 2018. This reflect lower level of albumin inventory attributable to higher-than-expected sales volume of albumin, which was partially offset by a higher IVIG inventory due to sluggish sales of IVIG in 2019.

Net cash used in investing activities for 2019 was $180.1 million compared to $558.9 million in 2018. During 2019, we paid $24.4 million for acquisition of property, plant and equipment, intangible assets, and we also purchased time deposits and short-term investments in the amount of $2,606.5 million. This was partly offset by the maturity value of time deposits and short-term investments of

$2,446.2 million, and proceeds from the sale of property, plant and equipment, land use rights and intangible assets of $4.6 million.

Net cash used in financing activity for 2019 was $229.5 million as compared to net cash provided by financing activities of $571.3 million for 2018. In 2019, we paid $118.9 million for acquisition of the remaining 20% of equity interest in TianXinFu. We remitted $110.0 million to investment bank for the share repurchases under the previously approved share repurchase programs, and $9 million was refunded from the investment bank. In 2019, 1,196,228 shares were repurchased under the share repurchase programs at an aggregate amount of $111.0 million. In addition, our subsidiaries paid dividends of $10.1 million to the non-controlling interest shareholders.

Financial outlook. Finally, I would like to discuss our outlook for the 2020. The recent coronavirus outbreak has impacted various aspects of China Biologic's operation, including plasma collection, production of certain products, and sales and marketing activities. We're actively evaluating overall the impact on our business. We have decided to postpone the release of financial guidance for the full year 2020. We will provide financial guidance to the market when it has better visibility.

That concludes our prepared remarks. Operator, we're now ready to take some questions.

Questions and Answers:

Operator

Yes, thank you. Yes. We will now begin the question-and-answer session. [Operator Instructions] All right. There are no questions at the present time. So, I would like to return the floor to management for any closing comments.

Joseph Chow -- Chairman and Chief Executive Officer

Thank you for your participation and ongoing support for China Biologic [Phonetic]. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Samuel Martin -- Senior Account Executive

Joseph Chow -- Chairman and Chief Executive Officer

Ming Yin -- Senior Vice President

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