SCLN

SciClone Pharmaceuticals, Inc. (SCLN)

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SciClone Pharmaceuticals (SCLN)

Q3 2012 Earnings Call

November 09, 2012 8:30 am ET

Executives

Jane Green

Friedhelm Blobel - Chief Executive Officer, President and Director

Gary S. Titus - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

Hamed Khorsand - BWS Financial Inc.

Reni Benjamin

Yi Chen - Aegis Capital Corporation, Research Division

Jason M. Aryeh - Jalaa Equities, L.P.

Presentation

Operator

Welcome to the Q3 2012 SciClone Pharmaceuticals Incorporated Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Jane Green, Investor Relations. You may begin, Jane.

Jane Green

Good morning. SciClone would like to thank you for joining on the call today. The company would also like to remind you that today's call is being recorded. Speaking on today's call are Dr. Friedhelm Blobel, President and Chief Executive Officer; and Gary Titus, Senior Vice President and Chief Financial Officer.

It is SciClone's intention that forward-looking statements regarding financial guidance and commercial and development activity made during today's call be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available and SciClone assumes no obligation to update these statements. To better understand these risk factors, please refer to the documents that SciClone files with the Securities and Exchange Commission, including forms 10-Q and 10-K.

I'll now turn the call over to Friedhelm Blobel.

Friedhelm Blobel

Good afternoon, and welcome to SciClone's third quarter 2012 financial results conference call. Before I ask Gary to discuss our third quarter results and other corporate matters, I would like to provide some perspective on our overall business, including our progress in the last 1.5 years since the acquisition of NovaMed as well as the challenges and opportunities that lie ahead of us. In the third quarter, ZADAXIN sales were essentially flat compared to the second quarter and increased 12% in the quarter and 22% year-to-date compared to the prior year. Combined with revenue from other marketed products, this resulted in our overall company revenue growth of 9% in the quarter and 30% year-to-date.

There are several internal and external factors affecting our performance in the China market, which we are addressing. Externally, the China pharmaceuticals market is predicted to continue to grow at a rate of 15% or more due to increased consumer demand and expanded access to health care services. This is good news for pharmaceutical companies with substantial businesses in China, such as SciClone. At the same time, the China government is putting pressure on this market through price controls and other measures designed to contain health care costs. An example is the periodic price reductions that are imposed across therapeutic classes of drugs. Another example is the strategy of capping expenditures, putting a total prize limit on what can be spent on pharmaceuticals and other health care services by hospitals. Capping is being piloted in a number of leading hospitals throughout the country. Also, it remains unclear if this will become a policy for all hospitals in the future.

Relative to the recently announced 18% national price reduction of ZADAXIN, we were able to negotiate a favorable outcome with our importer that resulted in less than a 5% revenue impact on our company. But we believe that the prolonged uncertainty of the pricing issue had a dampening effect on ZADAXIN sales to the hospital pharmacies. Despite some challenges we face, we believe this limited price reduction is a positive outcome for our future. As we will discuss later in our call, we saw a rise in ZADAXIN channel inventory this year, particularly in the third quarter and have lowered our annual revenue projections in response, but we remain confident in our ZADAXIN business and our continuing efforts to expand sales for greater market penetration.

Internally, while there are important strategic benefits of the NovaMed acquisition, we are disappointed that the overall business has not met our original expectations and has not created the value at the profit and cash flow level that we originally anticipated. We have taken expedient action to identify and address issues across our China organization, some of which may have affected ZADAXIN sales to the hospital pharmacies, and to put strategies in place designed to strengthen our business and to improve our financial performance in subsequent quarters.

Over the next few minutes, I will discuss why we believe that the enhancements and changes we are implementing should have a long-term positive effect in our business and reestablish our company on a sustainable growth trajectory.

First, I'll provide some background. The acquisition of NovaMed was a major strategic event that transformed our company and established SciClone as a substantial specialty pharmaceutical company in the China market with broad market presence and significant growth prospects. Almost overnight, SciClone grew from a small, essentially one-product company to midsize market competitor. We expanded our commercial, regulatory and reimbursement capabilities. We acquired a larger and therapeutically diverse portfolio of branded marketed products that span high-growth areas including infectious disease, cardiovascular disease, CNS disorders and oncology and added it to our flagship brand, ZADAXIN. We acquired a portfolio of potentially market-leading products still early in their life cycle, such as Aggrastat, and the development portfolio to drive long-term future growth. And we gained licensing and promotion collaboration with companies seeking to leverage our capabilities in the China market.

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