China Biologic Products Holdings, Inc. (NASDAQ: CBPO) Q3 2020 earnings call dated Nov. 25, 2020.
Corporate Participants:
Philip Lisio — Investor Relations, The Foote Group
Joseph Chow — Chairman and Chief Executive Officer
Ming Yin — Senior Vice President
Analysts:
Jason Liu — Credit Suisse — Analyst
Stephanie Hanna — Dealreporter — Analyst
Presentation:
Operator
Good day and welcome to the China Biologic Products Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Philip Lisio. Please go ahead.
Philip Lisio — Investor Relations, The Foote Group
Thank you, operator. Hello everyone and thank you for joining us on today’s call. China Biologic announced its third quarter 2020 financial results on November 24th, 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 off the call with a review of the Company’s basic operating results and report recent developments. He will be followed by Mr. Ming Yin, Senior Vice President 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 discuss non-GAAP measures, which are more thoroughly explained and reconciled to the most comparable measures reported under Generally Accepted Accounting Principles in the GAAP — 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
Thank you, Phil. Hello, everyone, and welcome to China Biologic’s third quarter 2020 conference call. Today, while the domestic plasma supply has somewhat recovered from the COVID-19 pandemic, the overall market demand, despite some recovery, is still below pre-pandemic levels. Under these circumstances, our revenue in the third quarter achieved positive year-over-year growth of 1% factoring in the decrease in IVIG sales and the modest sales growth for our albumin products. That said we saw an encouraging rebound from the second quarter with our over 20% over — quarter-over-quarter growth. This reflects our strong effort in the past quarter to regain our sales momentum following the COVID-19 disruption.
We were also pleased to report nearly 12% non-GAAP operating income growth over the same quarter last year. This was mainly driven by increased sales and marketing efficiency as we proactively adjusted our marketing strategies and operating formats. However, the growth in the operating income was partly offset by a decline in interest income due to the lower nationwide interest rate as well as an increase in income tax that led to a flat year-over-year net income growth.
Our IVIG sales in the third quarter decreased by 11% as compared to the high sales in the same quarter of 2019. During the third quarter of 2019 we achieved over 50% IVIG growth over the third — over the third quarter of 2018 by penetrating into new hospitals with our newly available [Phonetic] distributors.
On a quarter-over-quarter basis, we were encouraged to see a strong rebound of IVIG sales with over 80% growth in the third quarter over the second quarter of 2020, validating our efforts to enhance sales and marketing capabilities and overtaking competitors over the past year. Sales volume for our albumin products increased by 1% during the third quarter over the same quarter of 2019 reflecting our conservative approach to aligning inventory with possible market demand. As we continue our strategy to focus more on direct sales and establish long term direct relationships with hospital customers, we were pleased to see an overall 20% growth in the albumin sales volume in the direct hospital channel over the same quarter of last year. And we decreased the sales within the distribution network in anticipation of a potential albumin shortage in late 2020 resulting from a decline in imports, which was consistent with the sales model adopted in the second quarter.
Our placenta polypeptide product demonstrated a better performance than we had expected, with close to 30% growth on both a year-over-year and a quarter-over-quarter basis. This reflected our recent efforts in sales team reorganization, channel optimization, as well as changing of invoicing policy for this product. We have integrated TianXinFu’s sales expertise with our existing polypeptide product sales team to broaden sales channels and develop sales strategies.
Sales revenue of our biomaterial products was comparable to the same quarter of last year, while the net profit from the sector increased over 10% due to better than expected sales performance of higher margin dura mater products. Going forward, however, dura mater products sales are expected to be impacted by the recent announcement of the Jiangsu provincial government’s procurement department of an overall 50% price cut. We are in the process of evaluating the impact and developing relevant strategies to cope with the challenging environment and to ensure that we were able to maintain our market share.
With sales growth across most of our products, we have further strengthened our market position and even improved our market share over the second quarter. According to the latest CPA data most of our major plasma products, including albumin, IVIG, factor VIII and fibrinogen gained market share at the third quarter over the second quarter. Our other products maintained comparatively a stable market share with our PCC already occupying 50% market share in the hospitals included in the CPA data.
Although our third quarter’s performance demonstrated an encouraging rebound from the second quarter, we do acknowledge ongoing macro related uncertainties in connection with the pandemic. We’re also expecting that there might be intensified competition due to our competitors’ inventory shipment. In late 2020 as we have seen from each — from batch approval data that most of our peer companies have large inventory positions, but only reported moderate or negative growth for the first nine months of the year. To face these challenges we have embarked on various initiatives to continue to transform our business.
Now, I will walk you through some developments within our operating segments during the past quarter. First, in our sales and marketing function, we further optimized our commercial team’s structure, improved the efficiency of our sales and the marketing strategies and enhanced the medical marketing support function. We employed multidimensional evaluation systems for staff performance, including work, competition and collaboration between our sales and marketing functions and channel inventory management specialty [Phonetic] capabilities and established better incentives and compensation structure. Also with the aim of launching customized promotion efforts for doctors and patient education in our strategic hospitals, we have been recruiting more experienced sales professionals who can help educate physicians, other healthcare professionals and patients and increase our promotion ability at the terminal level. These various initiatives aimed at improving our operational efficiency in the past several quarters have reflected positive results. Our non-GAAP operating income increased by 18% in RMB terms and non-GAAP operating margin increased by over 5 percentage points in the first nine months of 2020 compared with the same period last year.
In addition, we continue to strengthen our control over credit exposure and increased our collection efforts. The average account receivable turnover period for plasma product was shortened to 82 days in the first nine months of 2020 compared with 89 days in full year 2019. We have established a new set of customer credit evaluation and management systems allowing us to assess customer credit on more dimensions and manage customer receivable more strictly. For our new product coagulation factor IX for which we received a certificate of approval for manufacturing in late July, we have begun manufacturing and are waiting for the batch approval for the first batch of this product. We’re also applying for the inclusion of this product in the National Reimbursement List to improve accessibility to hospitals and customers.
The research and developments of our other pipeline products, include but not limited to, the new generation IVIG, human antithrombin III, human Fibrin Sealant as well as absorbable oral repair membranes are progressing as expected. In terms of plasma supply, our plasma collection volume has further improved by more than 13% growth in the third quarter when compared year-over-year or quarter-over-quarter. The total collection volume in the first nine months was only 6% lower than the same period of last year. At this pace we expect our full year collection volume will catch up and be comparable to last year. This is the result of our team’s great efforts in exploring various measures to make up for the reduced collection volume in the first quarter, including new donor recruitment plans and extended collection hours as well as our integration and strengthening of control and management on the stations to ensure plasma quality and safety. We are pleased to report that our newly built collection station in Youyang county, Chongqing city recently passed official inspection and expected to commence commercial operations soon. The construction of our two new plasma stations in Shandong also progressed well and are expected to be commercially launched in early 2021. And we’ll continue our efforts of applying for more station permits to further improve our plasma supply volume.
Looking ahead for the fourth quarter and beyond we are expecting uncertainties related to the pandemic, potentially see more fierce competition and the rippling effect from centralized procurement, especially for biomaterial products. We’ll continue to take various measures and make proactive adjustments to ensure our operational strategies are in alignment and to maintain our core product leading market positions. We will always endeavor to maintain our long track record of providing quality products to patients, investing in new product development and bringing better healthcare to the society.
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 second [Phonetic] quarter 2020. Ming, please go ahead.
Ming Yin — Senior Vice President
Thank you, Joseph and hello everyone. Now, I will walk you through the key P&L items for the third quarter 2020. Total sales in third quarter 2020 increased by 1.8% in US dollar terms, or 0.8% in RMB terms, to $138.5 million from $136.1 million in the same quarter of 2019. Total sales for biopharmaceutical products increased by 1.9% in US dollar terms, or 0.8% in RMB terms, to $126.6 million in the third quarter 2020 from $124.3 million in the same quarter of 2019, as a combined result of the increase in sales of albumin, coagulation factor and placenta polypeptide products, which were partly offset by a decrease in sales of our IVIG products. For plasma products, total sales in third quarter 2020 increased by 0.8% in US dollar terms, or decreased by 0.2% in RMB terms, to $120.8 million from $119.8 million in the same quarter of 2019.
Revenue from human albumin increased by 3.8% in US dollar terms, or 2.8% in RMB terms, to $48.8 million in third quarter 2020, from $47 million in third quarter 2019, primarily due to increase in direct sales to hospital customers. The sales volume of human albumin products increased by 1.3% in the third quarter 2020 over the same quarter last year. The average price increased by 2.5% in US dollar terms, or 1.5% in RMB terms in the third quarter 2020 compared to same quarter 2019, mainly because of higher proportion of direct sales in total sales.
Revenue from IVIG products decreased by 10.1% in US dollar terms, or 10.9% in RMB terms, to $32.2 million in the third quarter of 2020, from a relatively high comparison base of $35.8 million in the third quarter of 2019 during which period we had a strong rebound of IVIG sales after implementing new promotion strategy. The sales volume of IVIG products decreased by 10.8% over the same period of last year. The average price remained relatively stable in RMB terms in the third quarter of 2020 compared to same quarter of 2019.
In third quarter of 2020, IVIG and human albumin products remained our two largest sales contributors. As a percentage of total sales, sales of human albumin and IVIG products were 35.2% and 23.2%, respectively, in the third quarter of 2020. Revenue from other immunoglobulin products increased by 3% in US dollar terms, or 1.8% in RMB terms in the third quarter of 2020 compared to the same quarter 2019, representing 17.3% of total sales as compared to 17% of total sales in same quarter 2019.
Revenue from other plasma products increased by 15.2% in US dollar terms, or 13.9% in RMB terms, in the third quarter of 2020 compared to the same quarter of 2019, with increase in sales of three coagulation products, namely coagulation factor VIII, PCC and human fibrinogen products, representing 11.5% of total sales in the third quarter 2020 compared to 10.1% of total sales in the same quarter of 2019.
Revenue from placenta polypeptide products increased by 28.9% in US dollar terms, or 28.3% in RMB terms in the third quarter of 2020 as compared to the same quarter of 2019, accounting for 4.2% of total sales to 3.3% of total sales in the same quarter of 2019, reflecting our recent efforts in sales team reorganization and channel optimization for placenta polypeptide product.
Total sales for biomaterial products in the third quarter of 2020 increased by 0.8% in US dollar terms, or 0.7% in RMB terms, to $11.9 million from $11.8 million in the same quarter of 2019, accounting for 8.6% of total sales to 8.7% of total sales in the same quarter 2019.
Cost of sales decreased by 3.2% to $46 million in third quarter of 2020 from $47.5 million in same quarter of 2019. As a percentage of total sales, cost of sales decreased to 33.2% in third quarter of 2020 from 34.9% in the same quarter of 2019, mainly because of lower proportion of products made from higher-cost outsourced plasma. Gross profit increased by 4.4% to $92.5 million in third quarter of 2020 from $88.6 million in the same quarter of 2019. Gross margin increased to 66.8% to [Phonetic] 65.1% in the third quarter of 2019.
Total operating expense in third quarter of 2020 increased by $4.9 million, or 13.8%, to $40.5 million from $35.6 million in the same quarter of 2019. This increase was mainly because of a $9.8 million increase in general and administrative expense, which was partly offset by a $3.4 million decrease in selling expense and a $1.5 million decrease in research and development expense. As a percentage of total sales, total operating expense increased to 29.2% in the third quarter of 2020 from 26.2% in same quarter of 2019.
Selling expense in third quarter of 2020 decreased by $3.4 million, or 19.2%, to $14.3 million from $17.7 million for same quarter of 2019. As a percent of total sales, selling expense decreased to 10.3% in third quarter of 2020 from 13% in same quarter of 2019. The decrease reflects our continuing efforts to proactively adjust the sales promotion methods as well as channel penetration and customer management strategies.
General and administrative expense increased by $9.8 million, or 64.5%, to $25 million in the third quarter of 2020, from $15.2 million in the same quarter of 2019. As a percentage of total sales, general and administrative expense increased to 18.1% in the third quarter of 2020 compared to 11.2% in the same quarter of 2019. The increase was mainly because of $8.8 million increase in share-based compensation expense. Excluding the impact of share-based compensation expense, general and administrative expense would have been 7% and 6.4% of total sales in third quarter 2020 and 2019, respectively.
Research and development expense in third quarter 2020 decreased by $1.5 million, or 55.6%, to $1.2 million from $2.7 million in the same quarter 2019. As a percentage of total sales, research and development expense decreased to 0.9% in third quarter 2020 from 2% in same quarter 2019.
Income from operations in third quarter 2020 decreased by 1.9% in US dollar terms, or 2.8% in RMB terms, to $52 million from $53 million in same quarter 2019. Operating margin decreased to 37.5% in third quarter 2020 from 38.9% in the same quarter 2019.
Income tax expense in third quarter 2020 was $9.7 million, compared to $7.6 million in same quarter 2019. The effective income tax rate was 17.3% and 12.6% for third quarter 2020 and 2019, respectively. Net income attributable to the Company decreased by 16% in US dollar terms, or 16.7% in RMB terms, to $39.5 million in third quarter 2020 from $47 million in same quarter 2019. Net margin decreased to 28.5% in third quarter 2020 from 34.5% in same quarter 2019. Diluted earnings per share decreased to $0.99 in third quarter 2020 compared to $1.21 in same quarter 2019.
Non-GAAP adjusted income from operations increased by 12.8% in US dollar terms or 11.7% in RMB terms to $69.4 million in third quarter 2020 from $61.5 million in same quarter 2019. Non-GAAP adjusted net income attributable to Company increased by 1.3% in US dollar terms, or 0.2% in RMB terms, to $55.1 million in third quarter 2020 from $54.4 million in the same quarter 2019. Non-GAAP net margin was 39.8% in third quarter 2020 compared to 40% in same quarter 2019. Non-GAAP adjusted earnings per diluted share was $1.39 in third quarter 2020 compared to $1.40 in same quarter 2019.
Non-GAAP adjusted income from operations for third quarter of 2020 excludes $15.3 million in non-cash employee share-based compensation expense and $2.1 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 third quarter 2020 exclude $13.8 million in non-cash employee share-based compensation expense and $1.8 million in amortization expense of intangible assets and land use rights related to the acquisition of TianXinFu.
As of September 30, 2020, we have $566.9 million in cash on hand and demand deposits, $7.1 million in time deposits and $529.4 million in short term investments. Net cash provided by operating activities for the first nine months of 2020 was $188.5 million as compared to $156.4 million for the same period 2019. The increase of $32.1 million in net cash provided by operating activities was mainly because of a decrease in inventories and an increase in net income compared to the same period of 2019, which was partly offset by an increase in accounts receivable.
Inventory decreased by $22 million in the first nine months of 2020, compared with an increase of $8 million in the same period of 2019. The decrease of inventory in the first nine months of 2020 is primarily because of the high sales volume of IVIG products during the period, which cleaned up the high IVIG inventory as of the end of year 2019.
Accounts receivable increased by $33.1 million during the first nine months 2020 as compared to $19.2 million during the same period 2019, largely in line with the increase in sales revenue. Accounts receivable turnover days for plasma products were shortened to 82 days during the first nine months 2020 from 100 days during the same period of 2019, reflecting our ongoing efforts to shorten the credit terms of some of our distributors and increased collection efforts to control credit exposure.
Net cash provided by investing activities for first nine months of 2020 was $228.3 million as compared to net cash used in investing activities of $37.6 million for the same period of 2019. During the first nine months 2020, we received $2,369.1 million from maturity value of time deposits and short term investments. This was partly offset by payment of $14.1 million for acquisition of property, plant and equipment, intangible assets and land use rights, and a payment of $2,126.7 million for purchase of time deposits and short term investments.
Net cash used in financing activities for the first nine months 2020 was $12 million as compared to $238.7 million for the same period of 2019. During the first nine months 2020, our subsidiaries paid dividends of $12.3 million to non-controlling interest shareholders, which was partly offset by proceeds of $0.3 million from stock option exercise.
That concludes our prepared remarks. Operator, we are now ready to take some questions.
Questions and Answers:
Operator
[Operator Instructions] The first question today comes from Jason Liu with Credit Suisse. Please go ahead.
Jason Liu — Credit Suisse — Analyst
Hi, there. Congratulations management on the strong quarter results amidst COVID-19 and congratulations on the process on the merger agreement. I have two quick questions for management. The first regarding the merger agreement. We do see some of the steps that was listed in the announcement in order for the closing of the merger to occur by the first half of 2021. But we were wondering on the Company level if there are any steps that the management team as well as the Company staff or departments will need to take as a result of the merger.
And then my second question, as I would expect, we won’t be able to ask many questions anymore going forward, looking into kind of future growth and potential where CBPO could grow to, can you share a little more about long-term vision of where you think CBPO can get to in medium term or even longer term? Thank you.
Joseph Chow — Chairman and Chief Executive Officer
Jason, thank you. This is Joseph Chow. Somehow I — can you paraphrase the first part of your question because I know the second question is outlook on the CBPO’s mid to long-term prospects. The first one you were talking something about management’s role in merger or something. I couldn’t quite get it.
Jason Liu — Credit Suisse — Analyst
Sure. I was wondering for the merger agreement, we see the steps listed in order for the merger to occur on the shareholder level — on the shareholder level. I was wondering from the management team or from the Company, are there any steps that the Company has to take from either operations or from key personnel that would have to be done for the merger to also be completed.
Joseph Chow — Chairman and Chief Executive Officer
Okay. Now, I got it. Well, first, let me begin by saying well, anything merger-related, it is not very appropriate for us to address them on a earning call and — because this is more about a discussion of our operational results. Having said that, let me be quick in my comments with regard to your first part of the question that is that we’re not aware of any major plans or activities that are related to the merger and the closing of the merger in terms of personnel or operation. Everything is conducted in the normal course of business. So whatever announcement that’s related to the shareholders’ arrangement, I’m not aware of any. Okay.
On the second part of your question, what we see from a mid to long term perspective is that the plasma business for CBPO in the mid to long term remains pretty optimistic. However this industry has to go through some fundamental changes in terms of, let’s say, sales and marketing activity. In the past it was pretty much a sellers’ market. So in terms of sales and marketing plasma product companies typically do not have to do a lot in terms of promoting their products and educating their end-users and things of that nature. With increased competition, the market is approaching into a equilibrium and going forward competition will intensify. So those companies who can lead the path in terms of transforming sales and marketing operations will stand to win. And at CBPO we’re ready for that challenge. We would like to take a lead in that area.
The future of this business pretty much depends on our ability to penetrate into end users to promote our products, especially with the restricted market. It’s forced onto the basket of participants to promote the product, educate customers and CBPO is ready for that role. And we remain optimistic into mid — in the mid to long term growth perspective. The restrictive nature of the business allows the participants in the market to leverage their position and grow even better. That’s my answer to your question. Thank you, Jason.
Jason Liu — Credit Suisse — Analyst
Thank you very much.
Operator
[Operator Instructions] We have one more question from Stephanie Hanna with Dealreporter. Please go ahead.
Stephanie Hanna — Dealreporter — Analyst
Hi, there. Look, I just wanted to understand, I know you’re reluctant to talk about the merger, but the offer price for the merger was initially proposed before COVID, and now the offer price is unchanged. And obviously, the pandemic has had mixed impacts on both CBPO and the industry, created quite some volatility for the Company. I guess after all of this, I’m just wondering why the offer price remains unchanged, does the Company honestly think it is still worth $120 per share?
Joseph Chow — Chairman and Chief Executive Officer
Hi, Stephanie, this is Joseph Chow again. The offering price is typically negotiated between the two groups of shareholders, one part being selling part, the other part is the purchasing part. And it was typically done through a — third-party independent financial advisers. They have their own models and what I know is that both parties maintain their original outlook and despite all the volatilities and — so I’m just going to leave it at that because the management is not really heavily involved in that discussion. So I hope that addresses your question.
Stephanie Hanna — Dealreporter — Analyst
Okay. But I mean how does the management feel about the offer price? I mean, just in terms of the fundamentals of the Company. I know you’re sort of on both sides here, but just keen to know how the rest of the management, perhaps the CFO, might want to share his thought?
Joseph Chow — Chairman and Chief Executive Officer
The fact of the matter is that, as previously announced, and I signed up for the buying side, so that’s an indication. I mean, an agreement was done. So if that explains anything.
Stephanie Hanna — Dealreporter — Analyst
Yeah. No, I get the price is essentially locked in. I was also just wondering, in terms of the time frame, I see that you guys are trying to complete the deal in the — by the first half next year. But when do you expect the proxy statement to be released? Would that be before the end of 2020?
Joseph Chow — Chairman and Chief Executive Officer
I think that question needs to be more directed to the legal teams because they are the ones who are preparing all these paperwork and talking to various regulators. And I don’t have much color on that other than the general sense that normally it takes a few months to get all the documents cleared by the SEC. So I don’t have much better visibility at this point.
Stephanie Hanna — Dealreporter — Analyst
Okay. Thanks.
Operator
[Operator Instructions] I would now like to turn the conference back over to Mr. Joseph Chow for any closing remarks.
Joseph Chow — Chairman and Chief Executive Officer
Well, thank you for your participation and ongoing support of China Biologic. Have a great day.
Operator
[Operator Closing Remarks]