YS Biopharma Co., Ltd.

Ladies and gentlemen, thank you for standing by and welcome to YS Biopharma's earnings call for the first fiscal quarter of 2024. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms. Alyssa Lee, the company's investor relations director. Please go ahead, madam.

Thank you very much. Hello, everyone, and thank you for joining us today. Welcome to YS Biopharmers' first fiscal quarter 2024 earnings conference call. Today, you will hear from our president and CEO, Dr. David Hsiao. who will provide an overview of our operations during the past quarter. Our CFO, Ms. Brenda Wu, will then provide a closer look into our financials. After the management team has given their prepared remarks, we will open up the call for questions. You can refer to our first fiscal quarter 2024 financial result on our IR website at investor.1isbiofarm.com. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that All numbers stated in the following prepared remarks by management are in RMB terms. With that, I'm now pleased to turn the call over to Dr. David Hsiao, our President and CEO.

Hello, everyone, and thank you for joining us today for our first quarter fiscal year 2024 earnings conference call. In the first quarter of 2024, our top line came under pressure due primarily to inventory issue stemming from COVID-related disruptions at our YSJ-Rebis vaccine manufacturing facilities. While we anticipate that the impact of this inventory issue will persist for the near term, we are confident that robust demand for our product, our continued effort to boost our manufacturing strength, our sales network and efficiency, and the eventual commercialization of our product pipeline will keep us on the path to long-term success. Let's begin by going over the details of our result for the first quarter of fiscal year 2024. Our total revenues for the quarter was RMB 176.3 million, representing a year-over-year decline of 14.2%. Gross profit was RMB 141.6 million, representing a gross margin of 80.3%. For the first quarter, we recorded net loss of RMB 69.5 million. At the end of first quarter, we had cash and cash equivalents of RMB 311.8 million, compared with RMB 370.4 million. as of March 31st, 2023. Since we launched product sales of our YSJ-Rebis vaccine in late 2020, the market intake of the vaccine has been consistent and strong. As of June 30, 2023, we had sold more than 22.2 million doses of our YSJ-Rebis vaccine to approximately 1,725 CDC customers. representing over 60% of CDC customers in China. Next, I'd like to provide some context regarding our previously manufacturing disruption we discussed in our previous earning call last month. The impact on our top line and our plan to overcome these near-term difficulties. Towards end of calendar year 2020, manufacturing operations at our YSJ Rips vaccine production facility in Shenyang were disrupted due to COVID-19 pandemic in China. This occurred as much of China was under siege from the virus. November and December 2022 marked the peak of the country's most recent wave, which extend to the beginning of calendar year 2023. Supply chain of raw materials as well as overall manufacturing operations were disrupted due to the pandemic, which weighed on our output. Since the production of vaccine involved multi-months of lead time from raw material to finished product, the disruption caused a lingering effect, limited batch production and approval, and has impacted the number of finished doses available for sale during the second half of calendar year 2023. We are building up our inventory and leveraging our existing inventory in an attempt to maintain sales levels month by month, while the demand for our product continues to overweight our inventory capacity. Vaccine manufacturing is a month-long process from start to finish. The manufacturing process starts when the viral cell is taken from the working cell bank, restored to a normal state, and moved to culture media. After several generations, The cell can be used for subsequent virus infection. The virus will reproduce after being inoculated to a cultured virus cell and will be used later in the production process. The manufacturing process also involves centrifugation, ultrafiltration, concentration inactivation, hydrolyzation and virus, as well as purification formulation of semi-finished product. like filling, lavalization, and the packaging steps. The production cycle of YSGA rabies vaccine is approximately five months. The shelf life of the finished product is approximately 36 months. After the production cycle, each completed lot of product must be inspected and approved by the relevant regulatory authorities. In China, the National Medical product administration, or NMPA, require vaccine product and other biologics to be sampled, inspected, and certified after thorough quality and technical check before each batch can be delivered to customer. This quality test is also called lot release, which could take three to four months long to complete. Due to the long and complete vaccine production, and the lot release process, we anticipate that we will continue to feel the impact of late 2022 to early 2023 delay our top line for the rest of fiscal year 2024, which will end March 31st, 2024. Presently, all of our revenue is derived from sales of our YSCA Rebis vaccine. As Rebis remains a persistent health concerns in China, Demand for our vaccine remains robust. We expect market demand to persist going forward. Despite encountering near-term difficulties in our operation, the foundation of our business remains stable, and our production continues to remain in demand in the marketplace. However, we have not used our confidence in the future as an excuse to stand idly by. Our team has taken a number of steps to ensure that we emerge from the period of difficulty as a more capable and better prepared business. First and foremost, we are currently taking several steps to increase our production capacity. This includes securing supplies of raw material from domestic and international supplies, conducting technical trainings of our manufacturing staff. Our initiatives will aid us in overcoming our weak points and enhancing GMP compliance in our manufacturing plant. As we enhance our production capacity and output consistency, we will better equip ourselves to meet demand for our product. And we will be better prepared to avoid inventory crunches in the event that future disruption occur. We are also taking steps to develop our infrastructure outside our core facilities. Over the past year, we have built up and begin operating approximately 25 satellite warehouse outside of our central warehouse in our Xinyang facility. These warehouse are designed to facilitate more efficient delivery of our vaccine to end user. By strengthening the core of our infrastructure, we will be able to operate more effectively in both favorable and unfavorable conditions. Second, Looking beyond our production infrastructure, we have historically placed emphasis on establishing relationships with the province and the county-level CDCs across China. These efforts have helped us to develop a robust, wide-ranging sales network spread across the country. This network spans 30 out of 34 province-level CDCs and 1,725 CDC customers in China. as of June 30, 2023. In total, this represents over 60% of CDC customers in China. Even as we take steps to diligently manage our sales and marketing expenses, our past investments in this area have provided a solid foundation from which we can grow our business in the future. As our production capacity grows, we will be able to more efficiently boost our sales by leveraging our existing network, helping us achieve great economies of scales, maintaining price stability and foster loyalty among customers. And while our investment into our sales network already benefit our business, they are also effective as a long-term strategy. As we bring our PicaRibs vaccine and other product candidate to market, we will be able to leverage our strong sales network to enhance their commercialization and potentially expand our network and market share. Finally, we have retooled and optimized our research and development operations to better suit our current situation and the global health environment. Last year, research and development expenses were elevated due to our effort to expedite trials of our PICA adjuvant COVID-19 vaccine. we have seen the global response towards COVID-19 shift as the disease become endemic. And so we have revised our research effort to better align with our vision of the future and the market trend. For fiscal year 2024, we expect the majority of our research and development investment will be focused on our new generation of rabies vaccine, the Pica rabies vaccine, which is entering phase 3 trial this year. This product candidate has the potential to become the best in class and to lift the standard of rabies infection care globally. The clinical data so far has demonstrated the potential superiority of the pica-rabies vaccine as compared to the conventional rabies vaccine in the marketplace. We expect the total clinical budget for these three clinical studies of our pica-rabies vaccine to be lower than that of our COVID-19 vaccine trial, which we just completed. We just reviewed the above three approaches to better managing our expense and enhance our stability that will help us ensure future success. Meanwhile, we remain optimistic about multiple driving forces, which we expect will continue to a long-term growth of our business. First, we expect that human rabies will continue to remain a substantial public health issue in largest sources of the world. Rabies is a threat, particularly in lower and middle income countries across Asia and Africa, where the vast majority of human rabies cases occurred. As we expand our presence and grow our business, we aim to enhance our capability to deliver vaccine to communities and individuals who need them most. This will allow us to provide a critical layer of protection against the disease that otherwise has fatal consequences. Both our existing YSGA rabies vaccine and our new generation pica rabies vaccine well play important role in this strategic expansion. Turning to our pica rabies vaccine, we expect that it will eventually provide us with significant growth opportunities and advantages compared to conventional rabies vaccine in the marketplace. Our pica rabies vaccine is expected to accelerate the onset of immunity from 14 days to 70 days, and can be administered in a three-visit, one-week regimen to replace the conventional regimen involving five injections, three- or four-week-long protocol. The product has the potential to elevate the global standard of rabies treatment as it excels beyond existing vaccines in both seroconversion rate and regimen schedule. By helping patients attain immunity sooner, The Pica-Rebis vaccine will help lower death rate and enhance the chance of survival for individuals exposed to Rebis. Recognize the substantial potential benefit of Pica-Rebis vaccine in comparison to the traditional Rebis vaccine. Our intention is to develop a premium pricing strategy that sets it apart from other competing products in the marketplace. As we mentioned in our last earning call, Our PicaRibs vaccine is currently entering phase three clinical development. We are taking proactive steps to maximize its commercialization potential once the clinical trials are complete. We have established a subsidiary in the Philippines to aid in the advancement of clinical and the regular process related to the vaccine's development. This subsidiary will also help us enhance PicaRibs vaccine commercialization going forward. In addition, we previously entered into agreement with a healthcare-focused investment firm to boost our commercialization effort of our rabies vaccine franchise, particularly in less developed countries. Now, as we move closer to bring our Pika rabies vaccine to market, we are exploring the potential of established strategic partnerships in regard to the commercialization of our Pika rabies vaccine. Finally, we are also making clinical progress on our other long-term pipeline candidate. PICA-YSON-001, our pipeline product targeting multi-indications of solid tumors, continued to progress through its phase one trial in China. We expect this trial to be completed by the end of calendar year 2023, and we hope that we could move this program into phase two study in 2024. Meanwhile, our new generation of hepatitis B vaccine is also making its way through the development process. Unlike most prophylactic hepatitis B vaccine, which are preventive, this product is designed to be a new therapeutic approach against the chronic hepatitis B infection. We expect this vaccine to enter phase one clinical trial in calendar year 2024. To summarize, The first quarter of our fiscal year, 2024, saw our top line impacted by the fallout from COVID-related issues we encountered late in 2022. Despite this, the core of our business remained robust, and we have taken the opportunity to reinforce our company's strengths and address our weakness. As we advance commercialization of our promising P. caribbean vaccine and progress toward exciting new chapters in our company's history, we will remain diligent in our operation and pursue new ways of innovating and growing our business. I will now turn the call over to our CFO, Ms. Brenda Wu, to discuss our financial results in more details. Brenda, please go ahead.

Okay, thank you, David. I will now provide a closer look into our financials. Please note that all members on the RB terms that the reporting period is first quarter of fiscal year 2024 and is June 30th, 2023 versus the comparable period in fiscal year 2023 and is June 30th, 2022. And all comparisons are year-over-year basis. And as otherwise stated, For the first quarter of fiscal year 2024, our revenue was $176.3 million compared to $205.5 million in the same period of 2023, representing a change of 14.2%. As discussed by David earlier in the call, this was mainly due to COVID-related disruption affecting raw material supply chain, manufacturing operations and production output at our VASG RIPES vaccine products facilities. These factors negatively impact batch approvals and doses of finished products available for sale. The gross profit was $141.6 million compared to $154.3 million in the previous year. the growth margin improved by 5 percentage point to 80.3%. Now, turning to our operating expenses. Setting and marketing expense was 79.2 million compared to 70.5 million in the same period of 2023. The change was primarily driven by our ongoing long-term strategy to enhance promotional and marketing service in order to expand their scope and distribution to CDC and hospital customers, which includes city, county, and district-level customers. This targeted expansion aligns with our commitment to increase accessibility and driven growth in the key market. The general anonymous GDP expense was $31.8 million compared to $25.5 million in the same period of 2023. This was mainly due to the increase of professional service fees associated with our status as a publicly listed entity. Research and development expense was $100.6 million compared to $70.3 million in the same period of 2023. The change was primarily driven by the increase in clinical and clinical development costs associated with our RIVIS vaccine pipeline. This increase reflects our tax allocation of resources in advising of our promising RIVIS vaccine candidates. Through various stages of development in line with our commitment to innovation and addressing unmet medical needs. Med loss was 69.5 million compared with 19.6 million in the same period of 2023. Tending to our balance sheet, we had 311.8 million in cash and cash equivalent as of June 30th, 2023, compared with 312.5 million $20.4 million as of March 31, 2023. Finally, I would like to provide some commentaries on our financial outlook. Sales of our WestJRuby vaccine have grown robustly over the last three years, and the product continues to experience a strong demand from the market. Since we launched the product for sale in late 2020, the market intake of our SARS-CoV-2 vaccine has been consistent and strong. In part, due to this persistent demand, our inventory level of finished products available for sale has remained low. Given that the SARS-CoV-2 vaccine is the only market product that contributes to our cost top line, and that sales could be affected by multiple factors. We may incur quarter-to-quarter volatility in terms of revenue number or revenue growth. Currently, we are still at the stage of building up our inventory of finished products, and as we are still in the first half of our fiscal year 2024, we are not in a position to provide special revenue guidance for fiscal year 2024 at this time. This guidance reflects our current and preliminary views on the market and operational conditions, which are subject to change. As we navigate through the lingering obstacles posted by late 2022's COVID disruption, we remain steadfast in our efforts to satisfy the considerable and growing demand for our product in our targeted market territory. As we strategically advise the development of our robust pipeline of product candidates, we will continue to strengthen our business and taking advantage of opportunity for growth. Overall, we believe well-will poised to achieve long-term success and create sustainable value for our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw yourself from the question queue, please press star, then two. In addition, I'd like to remind you to please mute yourself after asking your question. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Rachel Yu of Ocean Pine Capital. Please go ahead.

Hello. Thanks for the remark. I have a question about the revenue in the last quarter. So I heard you, if I remember right, you mentioned several factors impact the top line. First is about inventory. disruption due to the COVID situation in China in the beginning of this calendar year 2023. And second is about the broad release of the production facility in the Liaoning province. So in your view, which factors impact the top line most, like a given most negative impact? And then second question is still regarding the revenue. Since the COVID situation is long gone, I think in the beginning of this year, after that, it's pretty much already gone. Do you expect still have a lot lingering effect on the second quarter of this revenue? And then about the lot released by the inspection by the government, when do you expect we can pass that inspection? Yeah, that's all my questions. Thank you.

Okay, Richard, thank you for your question. This is a very excellent question. Indeed, the main impact coming from the disruption about the COVID pandemic, as we mentioned already, it involved supply chain disruption on the raw material front, as well as the regular manufacture operation. So that's really main cost of the delay of the production and the output of the production. In terms of the lot release timeframe, as I mentioned, it took about three to four months. That's really a standard three to four lead time for the lot release. So that's really secondary. The main impact is really coming from the company production step. And given the timeline, we are just in the mid of the summer. We are experiencing this kind of impact at this moment because, as you know, the production lead time is five to six months. In addition to that, we have three to four months lead time for the lot release. So right now we are in the middle of this type of delay. With that being said, we are not really totally no inventory, no lot release activity at all. We are waiting for additional auto release approval going basis. Why we are talking about this disruption at this moment, just the expectation of our inventory level for the finished product are lower than our original expectation. That's the situation we are facing at this moment. We expect that this situation will continue last probably towards the end of the year. That's pretty much I can provide some understanding or impact on this part.

Okay, thank you. Our next question today will come from Greg Arendt of Noble Capital Markets. Please go ahead.

Hello, everyone. Thank you for taking my call. I appreciate it. Actually, a pretty good quarter given circumstances. I have a couple of questions. The 80% gross margin level is pretty darn good. Can you talk about that? Was that related to pricing? Because, you know, given the disruptions and supply chain issues, expanding the margins 80% over 80% is Pretty good. So can you talk about how that got to that level?

Yes. Greg, thank you for this question. Actually, as a company, manufacturing operation, we have been performed this profit margin quite consistently around 78% or 80%. So that's what we have been achieving over the over the past few years. So it really meets our expectations on a regular basis. I'm not sure if I answered your question, or you have additional follow-up on this part.

Yeah, that's great. Thank you. So given the disruptions, it's still unusual to see an expanding margin to some extent. So I guess I'm looking at, in terms of normal times, where would the margin be going?

Okay. Actually, historically, if you look back at our gross margin, it has been between like a 76% to 79% or 80%. We have been operating this range, actually. Yeah.

Okay. Thank you. Was there any pricing impact? I'm sorry, is there any price impact?

Yeah, that's another aspect I just want to mention. We did experience, you know, slight price increase over the last three years' time frame. So, indeed, the unit price, the selling price increased, you know, in the single-digit annual rate. On the other hand, we are able to keep the production efficiency and the profitability along with the price increase.

Thank you. If you don't mind, I'd like to ask another question or I can get in the queue if you want to go to somebody else. But my question is related to your competition. You know, it's quite competitive market. Are they experiencing similar issues to supply chain and production that you are?

Actually, yeah, Greg, actually. Indeed, it's not only impact vaccine production business, also impact other pharmaceutical industry in China as well during the pandemic period. Just give you example, some of the starch material are imported, not really produced in China. As you could imagine that during those period, it's very difficult for the shipment or delivery of raw material from overseas to China. and across the continent. So a lot of companies experience this type of situation. And also during those periods, you know, vaccine products sometimes use very common starting material or media. And during those periods, they are the priority supply emphasis for COVID-related vaccine production, because during those periods, people want to make sure the starting material should be sufficiently enough for COVID vaccine production for other vaccine production could become secondary. So there's some logistic issues during those period and also during the supply chain disruption situation.

Great. Thank you so much. Appreciate the answers. Thank you.

Our next question will come from Hunter Diamond of Diamond Equity Research. Please go ahead.

Firstly, congratulations on the strong results. Some of my questions were answered, but I have one more question. Can you discuss some of the supply chain-related manufacturing productivity initiatives you're taking, specifically related to YSGA and the PICA vaccine, so what you're doing to boost the manufacturing capacities going forward and the productivity?

Okay, Hans, thank you. That's an excellent question. I'll just give you an example. For example, in our production process, there's one particular starting material initially we have to rely on imported resources. And right now, given the situation we experienced, we try to make sure for the same starting material, we can secure a multiple supplier. So that's what we are doing at this moment. And also, we try to set up a long-term contract with a potential supplier. make sure at the production cycle we could have sufficient starting material to work with. But this ongoing process, what we learned from the pandemic period will help us to avoid such a disruption in the future. But, you know, when we're talking about the pharmaceutical and biotechnology product, we probably just focus on research development and some clinical data. Actually behind that, the production is a very complicated, very important process that can involve multiple starting material, a very long-term production cycle. So if each of these steps have problems, that could delay a negative impact for the project. So that's why we emphasize a lot making sure we could have multiple supply for each individual ingredient of such material. Just give example.

Great. No, I appreciate that. That makes perfect sense in a way to combat future disruption. So, again, that's all I have. It was a fairly comprehensive call, and some of my questions were answered. But thank you for taking that one question.

Thank you, Hunter.

Our next question today is from Sid Rajeev of Fundamental Resource. Please go ahead.

Hi. You mentioned that you're expecting supply chain issues to be persistent in the coming quarters. How should we look at Q2, Q3 revenue? Can we expect a similar 14% decline?

Thank you, Sid. Actually, we are not at the position to give guidance for the next quarter financial performance, but as we indicated that because there is indeed a lingering effect on the finished product inventory level. As I mentioned, we do have inventory for delivering to the customer at this moment. But actually, we would like to have more inventory through ongoing approval process to accumulate our inventory. Hopefully, you know, after a couple of quarters from now on, we can have sufficient inventory to meet the demand from our customer orders. That's pretty much we can share with you at this moment.

Understood. In your prepared remarks, you talked about procuring raw materials from outside sources internationally. Is that something that you can pursue to mitigate supply chain issues going forward? Where will you procure from? It seems like you can diversify your inputs significantly by doing so.

Absolutely. Try to be specific on this particular question. You know, when we try to procure additional supply or additional supply of starchy material, we need to conduct a comprehensive equivalent test. Make sure this potential new supply starchy material would be equivalent and can be completely replaceable with our existing starchy material. So this process has a very stringent requirement and the need to be submitted and approved by the regulatory authorities in China. So it's quite a long process, but we are working on that end.

Okay. Just one more question. A lot of American market investors are not really familiar with other Chinese vaccine companies or directly comparable companies. Are you able to provide a few names so that we can start following them and kind of make comparisons and see and kind of have a benchmark of the performance of other companies there.

Yeah, that's good. I think we can come back with you after the call. We can provide additional background information to better help you to understand the vaccine players and the industry landscape in general. We do have some information we could share with investors and analysts, no problem.

Thank you so much. I appreciate it.

Again, it is star and then one if you would like to ask a question. Our next question today will come from Howard Halpern of Taglit Brothers. Please go ahead.

I just have one question. Everything was pretty much gone over, but based on the disruptions that you talked about, is there any impact on the next generation trial that you plan on starting soon?

Howard, thank you very much. That's really a very important question as well. Just for your information, production by engineering process, similar to YSGA rabies vaccine, but our new generation Pika rabies vaccine production engineering protocol are kind of different. That's why we didn't feel the impact from that. And also, since the Pika rabies vaccine at phase three clinical stage, and we have finished the production of the clinical samples, for those multi-country, multi-center trial, as we mentioned that we're going to do that trial in a coming month with 4,500 subject enrollment. Hopefully we can complete the enrollment in timely manner. So all the clinical sample has been produced and either shipped to the clinical site or ready to ship to the clinical site. So we have no consumer issue related to our PICA rabies vaccine phase three trial.

Okay. That's good to know and it's comforting. Thanks and keep up the good work.

Thank you. Thank you, Howard.

Again, it is SAR and then one to ask a question. At this time, we will conclude our question and answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you again for joining our call today. If you have any further questions, please feel free to contact us or submit a request through our IR website. We look forward to speaking with everyone during our next call. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.