Katherine Knight - IR, ICR, Inc. Helen Yang - Investor Relations Director Weidong Yin - Chief Executive Officer

Isabella Zhao - Morgan Stanley

Greetings and welcome to the Sinovac Biotech Limited Fourth Quarter and 2014 Full Year Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Katherine Knight of ICR. Please go ahead.

Thank you, operator, and good day, everyone. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words or phrases such as will, expect, anticipate, future, intends, plans, believes, estimates, and similar statements. These statements that are not historical facts, including statements about Sinovac’s beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Sinovac does not undertake any obligation to update any forward-looking statements except as required under applicable laws. On the call today we have Mr. Weidong Yin, CEO; Ms. Nan Wang, CFO; Ms. Helen Yang, Investor Relations Director; and Mr. Shuo He, Finance Director. I will now turn the call over to Helen Yang. Go ahead, Helen.

Thank you, Katherine and hello, everyone. Thank you for joining us today. On today's conference call, I will provide an update on Sinovac's business and operations during the fourth quarter and discuss our operational highlights from 2014. Then, I will review our fourth quarter and full-year financials for last year on behalf of our CEO and CFO. The total sales in 2014 were $63.1 million, a decrease of 13% from $72.5 million. Excluding the impact from one-time H5N1 sales in 2013, the company's annual sales of regular products increased by 1.8% year-over-year. As we discussed over the past few quarters, 2014 was a challenging year in China's private-pay vaccine market due to the negative impact of the investigation into GSK and the effect of the hepatitis B vaccine incident. And for Sinovac, since over 80% of our sales are in the private-pay market in China, our performance was negatively impacted for the year. With that said however, we did see the private-pay market pick up in the second half of the year and we also achieved a double-digit growth in our sales to the public-pay market in 2014. Overall sales generated from the private-pay market decreased by 1% year-over-year or $0.63 million, while sales to the public-pay market increased by 24.3% or $2 million, which offset the decrease in the private-pay market. The increase in sales to the public market was driven by several tender awards. We were selected by the Tianjin Centers for Disease Control to be the sole supplier of inactivated hepatitis A vaccine in pre-filled syringe through the city's expanded immunization program for 2015 through 2017. We were also selected again to be a supplier of the seasonal influenza vaccine in Beijing and we were able to increase our shares of this tender as well. Now looking at the sales by product, for the full year, we were able to maintain our regular sales level from 2013, even saw a slight decrease of 1.8% year-over-year. This increase was mainly due to sales from Bilive, our hepatitis A&B combo vaccine in the private-pay market, which contributed $21.9 million into the total revenue. And these represent a 5.5% increase in the Bilive sales year-over-year. For our hepatitis A vaccine, Healive, overall sales remained stable from 2013 to 2014. A decrease in sales in the private-pay market was offset by the increased sales into the public market. Sales of our seasonal flu vaccine, Anflu also remained consistent with 2013 level. Revenue from the Mumps vaccine increased by 28% in 2014, contributing $2.2 million to total sales for the year. Turning to the progress we've made on our EV71 vaccine, we have submitted supplementary documentation to the China Food and Drug Administration or CFDA at the end of January this year, as required following the review of the new drug application by an expert panel in November last year. The CFDA has begun its review of supplementary document we submitted and we maintain regular communication with the CFDA, so that we are able to be prepared for the next step as soon as we receive the notification of an onsite inspection. Once the onsite inspection and sample testing are successfully completed, we will receive the new drug certificate production license and GMT license to begin commercial production of the EV71 vaccine. While there is still some uncertainty on the exact timing of commercialization of our EV71 vaccine as we wait on the final stages of the approval processes, we are confident that it will be a significant growth catalyst for Sinovac once it is on the market. The target market in China for EV71 is about 80 million children with each child required two doses. While full market penetration may take about five years and we estimate that we could see a demand of up to 10 million to 20 million doses eventually. In addition, we are considering a variety of channels through which we could be able to tap into international markets for this vaccine as well. As for other vaccine pipeline programs, we have continued to make progress in other R&D projects as well. We have obtained a clinical trial license for our pneumococcal polysaccharide vaccine or PPV as of May last year. And we began our clinical trial for PPV this month. For our pneumococcal conjugate vaccine or PCV, we obtained the clinical trial license in January of this year and we also completed preclinical studies for our proprietary hepatitis B vaccine and filed a clinical trial application in December 2014. Simultaneously, we are developing a new generation of hepatitis A&B combo vaccine based on our individual hepatitis A and hep B vaccine. The new generation of these combo vaccines will contain a higher level of dosage for hepatitis B component to enhance the vaccine’s immunogenicity. The clinical trial application for the combined vaccine was also submitted in December 2014. With that, I would now like to review our unaudited financial results for the fourth quarter and full year 2014. Quarterly sales were $20.3 million, a decrease of 11.4% from $22.9 million in the fourth quarter of 2013. Excluding revenue of the company’s H5N1 vaccine under the government stockpiling program, regular sales were $20.2 million in the fourth quarter of 2014, an increase of 28.2% over $15.8 million in the prior year period. The increase was primarily driven by increased sales of the company’s hepatitis vaccines, due to increased demand in the private-pay market, as well as increase in average selling price. Gross profit was $15.1 million, an increase of 2.9% from $14.7 million in the prior-year period. Excluding the impact from H5N1 vaccine revenue, gross margin was 75.3%, compared to 60.4% in the prior-year period. The increase in gross margin was primarily driven by the improved efficiency in the company’s manufacturing processes, which resulted in lower unit costs, as well as increased selling price of some of the company’s products. Selling, general and administrative expenses for the fourth quarter of 2014 were $9.9 million, compared to $7.9 million in the same period of 2013. The increase was primarily due to the trial production of EV71 as well as foreign exchange loss due to the appreciation of the US dollar against the Chinese yuan. R&D expenses for the fourth quarter of 2014 were $3.5 million, a $1.1 million increase over the same period of 2013. This increase was attributable to the continued advancement of Sinovac’s pipeline products, including preclinical development and milestone payment of sIPV and trial production of PPV. Net income attributable to common stockholders was $1.3 million or $0.02 per basic and diluted share, compared to $5.8 million or $0.10 per basic and diluted share for the fourth quarter of 2013. And now turning to our full year results. Total sales in 2014 were $63.1 million, a decrease of 13% from $72.5 million. Excluding the impact from one-time sales from H5N1 recognized in 2013, the company’s annual sales of regular products increased by 1.8% year-over-year. The growth was mainly due to the sales of hepatitis A&B vaccine in the private-pay market, as well as the sales of hepatitis A vaccine and the seasonal influenza vaccine in the public-pay market. Gross profit of 2014 was $46.6 million, a decrease of 9.1% from $51.3 million in 2013. Gross margin was 73.9%, compared to 70.7% in the prior-year period. Excluding the impact from H5N1 vaccine, gross margin was 74.2% in 2014, compared to 72.6% in 2013. The increase in gross margin was primarily driven by the improved efficiency in the company’s manufacturing processes, which resulted in lower unit costs. Selling, general and administrative expenses for 2014 were $34.8 million, consistent with expenses of $34.5 million in 2013. R&D expenses for 2014 were $11 million, compared to $8.4 million in 2013. The increase in the R&D expenses was primarily related to the continued development of the company’s pipeline vaccine candidates, including the preclinical development and milestone payment for sIPV and trial production of PPV. Net loss attributable to stockholders in 2014 was $0.9 million or $0.02 per basic and diluted share, compared to net income of $7.4 million or $0.13 per basic and diluted share in 2013. And now I would like to turn over your attention to the balance sheet. As of December 31, 2014, cash, cash equivalents totaled $90 million compared to $107.2 million as of December 31, 2013. Net cash used in operating activities was $8.6 million in 2014. Net cash used in investing activities was $12.5 million, which was primarily used for payment of property, plant and equipment for the company's PPV and varicella production facilities. Net cash provided by financing activities was $5.2 million in 2014, including proceeds from loans of $17.8 million, which were offset by the repayment of loans of $16.6 million, as well as $3.5 million in government grants received. As of December 31, 2014, the company had $47.4 million of bank loans due within one year. Sinovac’s cash and cash equivalents and time deposit position of $91.5 million are sufficient to meet both these loan repayment obligations and the company’s operational requirements. When appropriate, the company will seek new commercial bank loans to finance the commercialization of pipeline products. With that, I would like to turn the call back to the operator for questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Isabella Zhao with Morgan Stanley. Please proceed with your questions.

Thank you for taking my question. [Foreign Language] I will translate my question to English. The first question is about the guidance for 2015. I would like to – if we can get more color from Mr. Yin and Ms. Wang, what’s our expectation for sales growth and net profit growth for 2015? If we can, can we get more color by the segment of the market between the public market and the private market also by the product segment. And the second question is regarding the sales projection for the EV71. If we assume the successful launch of EV71 in 2015, what’s the sales contribution we expect for 2016 and 2017?

[Foreign Language]

So, Mr. Yin, I will just briefly translate Mr. Yin’s comments. He thinks this is a very good question. For overall market, actually in 2014, we believe that we were facing a very big challenge – as well as the other vaccine market in China and we see some of their performance reported. Some of them are maintaining a very minimal sales growth or even having a decrease of sales. However, under this external environment, Sinovac keep executing its sales strategy to maintain the sales in to the private-pay market. For example, for our Bilive sales which is 100% sold into the private-pay and this actually contribute significant amount of revenue for 2014. And also at the same time, we increased the sales in to the public-pay market as well. For the overall market environment for 2015, we think there won’t be any significant changes from 2014, but the company will keep executing our sales strategy, which has been proved to be successful in the past year.

[Foreign Language]

So for 2015, we think there are some potential growth catalyst, for example, from the private-pay market, we will keep penetrating into some central part of China in order to drive up the sales from the private-pay. And also for our public-pay market, we have been making some efforts to enter into other provinces for the EPI market. However, there are still some uncertainties for the achievement from these different -- these new strategies. That's why we are not giving a guidance for year 2015 sales growth comparing to 2014.

[Foreign Language]

And the other growth potential may come from the overseas market, because the company has already filed registration for our vaccines in over ten countries, and also, we passed the GMP inspection conducted by some countries that we are registering the vaccine and we believe that the company has a very strong competitive advantage in terms of the vaccine price as well as the good quality. So, the company will still be making efforts in order to realize even bigger sales from the overseas market.

[Foreign Language]

And also the company, all the management team are expecting the commercialization of our EV71 vaccine. So, to answer your second question, actually the company was in regular contact with CFDA, particularly on the technical communication. We have been discussing with them on various aspects of how to evaluate a vaccine as well as how to set up the standards for the quality control for this vaccine after it's commercialized. We believe that we made a good progress on these and we will also be making whatever effort we need in order to commercialize this vaccine as soon as we can.

[Foreign Language]

So, the company will also keep updating the market and investors about every significant progress we made in -- certainly the progress of registering this vaccine in China. And regarding to your question about the financial contribution of this vaccine, Mr. Yin is going to explain from different aspects.

[Foreign Language]

So, actually the company has already made plans for the sales and marketing of EV71 vaccine and this plan was adjusted from time to time depending on the dynamic factors from the external market and the team has already lined up the actions, which for - of selling this vaccine including the price level -- including, for example price level, because we have made a lot of analysis from the existing vaccine market and we have seen that there are some relationship between the price level and the sales volume and the company will adjust the ex-manufacturing price of EV71 depending on the size of volume that we can supply to the market even though the price level is not fixed at this moment. And also, the company is in contact with some of our customers, i.e., the Centers for Disease Control, to discuss about how to use this vaccine after its launch into the market. The company is also making the plans, including the medical marketing plans, including how to conduct the Phase IV, i.e., the post-licensure clinical studies after the vaccine is launched.

[Foreign Language]

And also the sales team is very confident about selling this vaccine into the market. They believe that once the vaccine is approved, they will be able to create a market and create a demand, and also they believe that, in fact they will bring a very good cash flow after it's launched into the market as well.

[Foreign Language]

Even though it's still very difficult to tell when this vaccine can be launched into the market, either this year or 2016, however that -- we think that sales is -- sales team is very confident that they believe the revenue from this vaccine will give a significant contribution to the company's sales growth in the coming years.

[Foreign Language]

Is it okay?

Yes, thank you for answering my questions. Thank you, yes.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Frank Hu [ph] with Heng Ren Investments. Please proceed with your question.

[Foreign Language] Now, I will translate my questions. The first question is, when will Sinovac come to the U.S. and discuss the new exciting developments in the pipeline? And the second question is, if EV71 is approved, what is the timeline for commercial production and what is the volume? And the third question is, why is the fourth quarter's financial results still unaudited? Thanks.

[Foreign Language]

So firstly, Mr. Yin said, his schedule to visit U.S. is not confirmed yet, but the management team is making plans to visit investors in the U.S. in the coming months. Once we confirm it, we will disclose it to the market.

[Foreign Language]

For the EV71 vaccine, our maximum capacity is about 20 million doses, and we think you can take that number as a guidance for your future forecast. So to also answer your question about once the vaccine is approved, how long it will take to sell the first dose of the vaccine to the market, after we receive the approval, we need to first do the commercial production of the first batch of the vaccine, and then this vaccine needs to be submitted to the national laboratory for the lot release testing. Combining these two processes, we think the vaccine can be launched in about four to five months after the approval is received. To answer your third question, why the numbers still unaudited, actually if you see our disclosure in the past years, we normally will disclose our fourth quarter and 12 year [ph] numbers as unaudited because the audited report is not finally signed out at this moment, but normally there won't be any significant change from this audit number. We do so -- it's also a market practice in order to provide investors with some data early on.

Okay, thank you.

Thank you. Ladies and gentlemen, we'll pause another moment to allow for any further questions. [Operator Instructions] Thank you. There are no further questions. At this time, I would like to turn the floor back over to management for any final remarks.

Thank you, operator and we thank you all for participating into this call, and we're looking forward to speaking to you in the following announcement of our first quarter results. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.