SHANGHAI, May 17, 2012 /PRNewswire-Asia/ -- ShangPharma Corporation (NYSE: SHP) (“ShangPharma” or the “Company”), a leading China-based pharmaceutical and biotechnology research and development outsourcing company, today announced its unaudited financial results for the first quarter ended March 31, 2012.
To help management and investors gain a better understanding of ShangPharma’s operating performance, the Company presents certain non-GAAP measures, each of which excludes expenses relating to or the effect of share-based compensation. See “About Non-GAAP Financial Measures” and “Reconciliation of Unaudited GAAP to Non-GAAP Financial Data” below for more information about the non-GAAP financial measures included in this press release.
Beginning in the first quarter 2012, in accordance with Accounting Standards Update 2011-05, the Company is presenting other comprehensive income and its components in the unaudited condensed consolidated Statement of Comprehensive Income. Other comprehensive income mainly consists of currency translation adjustments relating to translating some of our subsidiaries’ financial statements from their functional currency to our reporting currency, which is in the United States dollar. The functional currency of our main subsidiaries in China is the RMB.
First Quarter 2012 Highlights
- Net revenues increased by 24.1% year-over-year to $30.8 million.
- Net revenues from the Company’s top-10 customers increased by 33.3% year-over-year to $20.2 million, representing approximately 65.7% of total net revenues.
- Net revenues from full-time-equivalent (“FTE”)-based services increased by 30.3% year-over-year to $23.6 million.
- GAAP gross margin was 30.2%, compared with 32.3% in the first quarter of 2011. Non-GAAP gross margin was 31.1%, compared with 34.7% in the first quarter of 2011.
- GAAP operating margin was 5.2%, compared with 10.0% in the first quarter of 2011. Non-GAAP operating margin was 9.7% compared with 15.5% in the first quarter of 2011.
- Net revenue per employee increased 8.3% year-over-year.
Management Comment
“Our long-term strategy of robust investment has resulted in significant upgrades in the quality and scope of our service offerings. This has helped produce strong Q1 top-line performance, driven by increased revenue from our top-ten customers, including in key areas such as biologics,” said Michael Xin Hui, founder and Chief Executive Officer of ShangPharma. “While this investment strategy has created anticipated short-term margin pressure, we believe that we are now in a highly competitive position to capitalize on the future growth of the Chinese CRO market.”
Mr. Hui continued, “We believe that the recent investments we made in our service offerings will lead to more integrated discovery projects. These projects typically take longer to come online, but draw on more sophisticated capabilities and thus offer the potential for significant net revenue growth.”
William Dai, Chief Financial Officer, added, “We were pleased to see strong top-line growth this quarter as our customers, particularly the larger ones, expanded their business with us. While costs associated with our recent critical investments placed pressure on margins, we anticipate some improvement in the latter part of the year.”
First Quarter 2012 Results
Net revenues were $30.8 million, an increase of 24.1% from $24.8 million in the first quarter of 2011. Higher volumes from the Company’s top customers and greater cross-selling of services were major drivers of this growth.
Net revenues from the Company’s top-10 customers increased by 33.3% compared with the same period last year, representing approximately 65.7% of total net revenues, compared with 61.2% in the same quarter last year. The growth was a result of global leading pharmaceutical and biotech companies expanding their scope of work and business volumes with the Company. This increase was driven by our investments in expanding our facilities and adding new capabilities during 2011. The growth demonstrates progress in our continued efforts to become a preferred business partner of global leading pharmaceutical and biotech companies.
Net revenues from FTE-based services were $23.6 million, an increase of 30.3% from $18.1 million in the first quarter of 2011. This was primarily due to an increase in volume.
Net revenues from fee-for-service-based services were $7.2 million, an increase of 7.4% from $6.7 million in the first quarter of 2011. This was primarily driven by successful service cross-selling and increased demand for our newer services, which are more typically covered by fee-for-service contracts, including preclinical development and biologics. The increase in net revenues from fee-for-service-based services was partially offset by the impact of our strategy to gradually transfer more discovery biology contracts from fee-for-service based to FTE-based contracts, which provides us with greater visibility.
Gross profit was $9.3 million, an increase of 16.2% from $8.0 million in the first quarter of 2011. This was primarily due to an increase in net revenues, lower share-based compensation expenses, lower material costs as a percentage of total net revenues resulting from a change in service mix, as well as cost savings resulting from the value-added-tax (“VAT”) reform in Shanghai effective January 1, 2012. These factors were partially offset by the costs associated with our new facilities, some of which have not yet reached full utilization. More specifically, the manufacturing business operating at our Fengxian facility will take some time to reach full utilization, and the facility which we took over from Charles River in November 2011 will require a few additional quarters to achieve its full revenue potential. Q1 2012 was the first quarter that the full impact of these costs has been reflected in our financial performance. Other factors impacting our quarterly performance include continued Renminbi (“RMB”) appreciation and higher labor costs as a total of net revenues due to increased headcount to support near future business growth.
Non-GAAP gross profitwas $9.6 million, an increase of 11.3% from $8.6 million in the first quarter of 2011. This was primarily due to an increase in net revenues, lower material costs as a percentage of total net revenues resulting from a change in service mix, and cost savings resulting from the Shanghai VAT reform. These factors were partially offset by the facility expansion costs mentioned above, the continued appreciation of the RMB and higher labor costs as a total of net revenues due to the aforementioned increased headcount.
Gross margin was 30.2%, compared with 32.3% in the first quarter of 2011. This was primarily due to the factors mentioned in the above discussion of gross profit. These factors were partially offset by lower share-based compensation expenses, lower material costs as a percentage of total net revenues resulting from a change in service mix, and cost savings resulting from the aforementioned VAT reform.
Non-GAAP gross margin was 31.1%, compared with 34.7% in the first quarter of 2011. This decrease was primarily due to facility expansion costs, the continued appreciation of the RMB and higher labor costs as a percentage of total net revenues due to increased headcount. These factors were partially offset by lower material costs as a percentage of total net revenues, resulting from a change in service mix and cost savings resulting from the aforementioned VAT reform. The investments in and upgrades to our facilities made during 2011, including the build-up of the Fengxian facilities and the Charles River asset acquisition, are critical in positioning us for future growth and expanding further into higher-value added services.
Operating expenses (selling and marketing, general and administrative) were $7.7 million, an increase of 39.1% from $5.5 million in the first quarter of 2011. This was primarily due to higher listed company-related professional fees, higher labor costs resulting from the addition of senior scientists across our various service offerings during the quarter, and higher share-based compensation expenses. The enhancement of the senior scientific team is critical in positioning the Company for expansion into new capabilities and maintaining the Company’s competitiveness in the market.
Non-GAAP operating expenses were $6.6 million, an increase of 38.7% from $4.8 million in the first quarter of 2011. This was primarily due to higher listed company-related professional fees and higher labor costs resulting from the addition of senior scientists across our various service offerings during the quarter.
Profit from operations was $1.6 million, a decrease of 34.9% from $2.5 million in the first quarter of 2011, primarily due to facility expansion costs, the continued appreciation of the RMB, higher listed company-related professional fees, and higher labor costs resulting from an increase in the number of our scientific research staff members, including senior scientists, during the quarter. These factors were partially offset by an increase in net revenues, lower material costs as a percentage of total net revenues resulting from a change in service mix and cost savings from the aforementioned VAT reform.
Non-GAAP profit from operations was $3.0 million, a decrease of 22.6% from $3.8 million in the first quarter of 2011. This was due to the reasons mentioned in the above discussion of GAAP profit from operations.
Operating margin was 5.2%, compared with 10.0% in the first quarter of 2011. This decrease was primarily due to facility expansion costs, the continued appreciation of the RMB and higher listed company-related professional fees. These were partially offset by lower material costs as a percentage of total net revenues resulting from a change in service mix and cost savings resulting from the aforementioned VAT reform.
Non-GAAP operating margin was 9.7%, compared with 15.5% in the first quarter of 2011. This decrease was primarily due to the reasons mentioned in the above discussion of GAAP operating margin.
Net income decreased 42.5% year over year to $1.7 million, primarily due to lower profit from operations and lower other income, including lower government subsidies. These items were partially offset by higher gains recognized on foreign exchange forward contracts.
Non-GAAP net income was $3.1 million, a decrease of 29.3% from $4.4 million in the first quarter of 2011. This was primarily due to the reasons mentioned in the above discussion of GAAP net income.
Diluted earnings per ADS were $0.09, which compares with $0.16 in the first quarter of 2011.
Non-GAAP diluted earnings per ADS were $0.17, which compares with $0.23 in the first quarter of 2011.
Financial Position
As of March 31, 2012, the Company had cash and cash equivalents of $34.0 million and no debt outstanding. During the quarter, capital expenditures totaled $6.3 million, primarily from the investment in leasehold improvements of a new building dedicated to one of our major customers, the equipment acquired from Charles River, as well as payments related to the build-out of our Fengxian manufacturing facility.
Full Year 2012 Guidance
The Company reconfirms its guidance for the full year 2012. The Company expects:
- Net revenues to be approximately $131.7 $136.2 million, which represents growth of approximately 18.0% 22.0% compared with the full year of 2011.
- Non-GAAP gross margin to be approximately 31.5% 33.5%, which is slightly lower than non-GAAP gross margin of 34.3% in 2011, based on the consideration of the increased costs related to our expanded facilities such as rental, utility and depreciation, and continued appreciation of the RMB.
- Capital expenditures to be approximately $20.0 - $24.0 million.
This reflects the Company’s current view and is subject to change.
Conference Call
ShangPharma will host a conference call and live webcast at 8:00 amNew York time on May 17, 2012 (8:00 pmBeijing time on May 17, 2012).
