ShangPharma third quarter net revenues increase 24.7% to $28.8 million

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 quarter ended September 30, 2011.

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.

Third Quarter 2011 Highlights

• Net revenues increased by 24.7% year-over-year to $28.8 million.
• Net revenues from China-based customers increased by 105.9% year-over-year to $3.1 million.
• GAAP gross margin was 31.2%, compared with 32.5% in the third quarter of 2010. Non-GAAP gross margin was 33.4% compared with 33.3% in the third quarter of 2010.
• GAAP operating margin was 7.2%, compared with 13.4% in the third quarter of 2010. Non-GAAP operating margin was 13.4% compared with 14.6% in the third quarter of 2010, primarily due to the additional rental costs associated with our new facility dedicated to one of our top customers.
• Revenue per employee increased 15.4% year-over-year.
• Revenue from biologics services grew 184.5% year-over-year.

Management Comment

"We experienced robust top-line growth in Q3, as increasing customer appreciation of ShangPharma's integrated service platform and upgrades to our facilities and service quality have enabled us to improve our pricing structure for some projects," said Michael Xin Hui, founder and Chief Executive Officer of ShangPharma. "During the third quarter, we made a critical investment in a new facility, which is fully dedicated to one of our top customers. We expect the near-term margin pressure from this investment to be offset by rapid utilization and additional revenue beginning from 2012."

Mr. Hui continued, "We saw excellent revenue growth from our biggest multinational pharmaceutical and biotechnology customers, which expanded at a year-on-year rate of 24.3%. Based on our current pipeline of projects, we expect to experience continued strong growth in 2012. We also saw highly encouraging growth from our China-based customers, which more than doubled from the third quarter of 2010. Our success on these two fronts demonstrates strong execution on our strategy to expand cooperation with large multinationals, while diversifying our customer base at the same time."

William Dai, Chief Financial Officer, added, "In the third quarter, ShangPharma did an excellent job of managing our costs, while also experiencing 15.4% revenue per employee productivity gains. Excluding costs associated with the new facility for one of our largest customers, non-GAAP operating margins remained largely stable year-on-year."

Third Quarter 2011 Results

Net revenues were $28.8 million, an increase of 24.7% from $23.1 million in the third quarter of 2010, primarily due to higher volumes from the Company's top customers, an increase in the size of the customer base and greater cross-selling of services.    

During the quarter, the Company's customer base grew to 362 customers, an increase from 237 customers as of December 31, 2010 and 316 as of June 30, 2011.

Revenue from customers based in China rose by 105.9%.  The growth came both from local pharmaceutical companies and smaller domestic laboratories, as well as major multinational biotech and pharmaceutical companies' R&D centers in China.

Revenue from the Company's top-10 customers increased by 24.3% compared with the same period last year, and accounted for 62.2% of the total revenue compared with 62.4% in the same quarter last year. The growth is a result of multinational pharmaceutical companies expanding their scope of work with the Company.

Net revenues from full-time-equivalent ("FTE")-based services were $20.7 million, an increase of 24.1% from $16.7 million in the third quarter of 2010, due to an increase in FTE services.

Net revenues from fee-for-service-based services were $8.1 million, an increase of 26.3% from $6.4 million in the third quarter of 2010.  Continued strong demand increases from China-based companies, successful service cross-selling and rapid increased demand for services such as biologics, were the primary drivers of this growth.

Gross profit was $9.0 million, an increase of 19.9% from $7.5 million in the third quarter of 2010, primarily due to the increase in revenues and operational efficiency improvements.  Continued appreciation of the Renminbi and higher share-based compensation partially offset these increases.

Non-GAAP gross profit was $9.6 million, an increase of 25.2% from $7.7 million in the third quarter of 2010, primarily due to the increase in revenues and operational efficiency improvements, which was partially offset by the continued appreciation of the Renminbi.

Gross margin was 31.2%, compared with 32.5% in the third quarter of 2010, primarily due to continued Renminbi appreciation and higher share-based compensation expenses, which were partially offset by operational efficiency improvements.  

Non-GAAP gross margin was 33.4%, compared with 33.3% in the third quarter of 2010.  The improvement was primarily due to operational efficiency improvements, and was partially offset by continued Renminbi appreciation.

Operating expenses (selling and marketing, general and administrative) were $6.9 million, an increase of 57.6% from $4.4 million in the third quarter of 2010, primarily due to higher share-based compensation expenses, a build-up of corporate managerial and supporting infrastructure in the second half of 2010, and rental expenses from one additional building leased since July 2011. The new building was still under renovation as of September 30, 2011 and is expected to be put into operation in the end of 2011 for one of our major customers.

Non-GAAP operating expenses were $5.8 million, an increase of 33.5% from $4.3 million in the third quarter of 2010, primarily due to a build-up of corporate managerial and supporting infrastructure in the second half of 2010 and rental expenses from the additional building leased since July 2011.

The build-up of corporate managerial and supporting infrastructure was near completion at the end of 2010.  The management team believes that the current infrastructure will be sufficient to support the future growth of the Company in the coming years.

Profit from operations was $2.1 million, a decrease of 33.5% from $3.1 million in the third quarter of 2010, primarily due to higher share-based compensation expenses, the continued appreciation of the Renminbi and rental expenses from the additional building leased since July 2011. The decline was partially offset by the increase in revenues and operational efficiency improvements.  

Non-GAAP profit from operations was $3.9 million, an increase of 14.5% from $3.4 million in the third quarter of 2010.  The rise was primarily due to higher gross profit and was partially offset by rental expenses from the additional building leased since July 2011.

Operating margin was 7.2%, compared with 13.4% in the third quarter of 2010.  The operational efficiency improvements were offset by higher share-based compensation expenses, the continued appreciation of the Renminbi and rental expenses from the additional building leased since July 2011.

Non-GAAP operating margin was 13.4%, compared with 14.6% in the third quarter of 2010.  The non-GAAP operating margin was impacted by rental expenses from the additional building leased since July 2011. Excluding costs associated with the opening of this building, which reduced non-GAAP operating margin by 1.0% in the third quarter of 2011, non-GAAP operating margin remained relatively stable compared with the third quarter of 2010.

Net income decreased 27.6% year-over-year to $2.6 million, primarily due to lower profit from operations and lower other income, including a smaller gain recognized on foreign exchange forward contracts. These factors were partially offset by higher interest income.

Non-GAAP net income was $4.4 million, an increase of 14.1% from $3.9 million in the third quarter of 2010, primarily due to higher non-GAAP profit from operations offset by lower other income.  

Diluted earnings per ADS were $0.14, which compares with $0.22 in the third quarter of 2010.  

Non-GAAP diluted earnings per ADS were $0.24, unchanged year-on-year.

Financial Position  

As of September 30, 2011, the Company had cash and cash equivalents of $40.6 million and no debt. During the quarter, capital expenditures totaled $8.1 million.  

Full Year 2011 Guidance

The Company reconfirms its guidance for full year 2011.  The Company expects:

• Net revenues to be approximately $111.1 – $115.6 million, which represents growth of approximately 23.0% – 28.0% compared with full year 2010.  
• Non-GAAP gross margin to be approximately 33.5% – 35.5%, which is within the same range as non-GAAP gross margin of 34.5% in 2010.
• Capital expenditure to be $28 - $32 million, including $6 million rolling payment lag impact carried forward from 2010.

This reflects the Company's current view and is subject to change.