ShangPharma Announces Third Quarter 2012 Results

SHANGHAI, Nov. 20, 2012 -- 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 third quarter ended September 30, 2012.

Third Quarter 2012 Highlights

  • Net revenues increased by 10.6% year-over-year to $31.9 million.
  • Net revenues from full-time-equivalent ("FTE")-based services increased by 14.6% year-over-year to $23.8 million.
  • Net revenues from the Company's top-10 customers increased by 11.3% year-over-year to $20.0 million, representing approximately 62.6% of total net revenues.
  • GAAP gross margin was 27.5%, compared with 31.2% in the third quarter of 2011. Non-GAAP gross margin was 28.1%, compared with 33.4% in the third quarter of 2011.
  • GAAP operating margin was 3.8%, compared with 7.2% in the third quarter of 2011. Non-GAAP operating margin was 7.7% compared with 13.4% in the third quarter of 2011.

Management Comment

"During the third quarter, ShangPharma saw steady top-line growth in our drug discovery and development services, despite overall industry headwinds and R&D budget fluctuations," said Michael Xin Hui, founder and Chief Executive Officer of ShangPharma. "Our top customers have been especially keen to expand their scale and scope of business with us in areas like chemistry, biologics, biology, DMPK and integrated services, and we believe that this demand will be even stronger next year.

"Our long-term investment strategy focused on higher-value services has enabled us to establish leadership in key areas, while reducing the impact of crowding in the market for more mature service offerings," Mr. Hui continued. "During the third quarter, our biologics team moved into a new state-of-the-art R&D facility, enabling us to provide fully integrated biologics, drug discovery and development services by accessing multiple leading technology platforms at one location.  Furthermore, we expect that the GMP manufacturing suite within this facility will be ready and operational by early 2013."

William Dai, Chief Financial Officer, added, "During a difficult third quarter for global pharmaceutical and biotech companies, we focused on easing margin pressure by optimizing our scientific team and reducing operational structural costs in areas like capital expenditure and administration. Our optimization plan is helping to improve margins and profitability, while keeping a high ratio of senior-to-junior scientific staff to ensure that we maintain our competitive advantage in the CRO market."

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.

Third Quarter 2012 Results

Net revenues were $31.9 million, an increase of 10.6% from $28.8 million in the third 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 this quarter were partially impacted by a deferral in revenue of certain integrated services projects.

Net revenues from the Company's top-10 customers increased by 11.3% compared with the same period last year, representing approximately 62.6% of total net revenues, compared with 62.2% 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 investments in expanding facilities and adding new capabilities during 2011, as well as the continued enhancement of the Company's integrated service platform. The growth demonstrates continuing progress in long-term efforts to become a preferred business partner of global leading pharmaceutical and biotech companies. Net revenues from top-10 customers this quarter were partially impacted by a deferral in revenue of certain integrated services projects.

Net revenues from FTE-based services were $23.8 million, an increase of 14.6% from $20.8 million in the third quarter of 2011. The growth was largely a result of global leading pharmaceutical and biotech companies expanding their scope of work and business volumes with the Company.

Net revenues from fee-for-service-based services were $8.1 million, which was consistent with the third quarter of 2011. The slower growth of non-FTE projects relative to FTE-based services was largely due to intensified market competition in more mature business segments and budget constraints from large pharmaceutical and biotech companies, as well as a deferral in revenue of certain integrated services projects.

Gross profit was $8.8 million, a decrease of 2.3% from $9.0 million in the third quarter of 2011. The decrease was primarily due to costs associated with new facilities, some of which have not yet reached full utilization. Specifically, the manufacturing business operating at the Fengxian facility will take several additional quarters to reach full utilization, despite steady progress. Other factors impacting quarterly performance include higher labor costs as a percentage of total net revenues due to slower revenue increases combined with recent headcount increases to support near future business growth. The increase in net revenues and cost savings resulting from the value-added-tax ("VAT") reform in Shanghai, effective January 1, 2012, helped to partially offset these factors. The Company has also begun to streamline its organizational structure and optimize human resources to improve employee productivity and efficiency.

Non-GAAP gross profit was $8.9 million, a decrease of 7.2% from $9.6 million in the third quarter of 2011. This was due to the reasons mentioned in the above discussion of GAAP gross profit.

Gross margin was 27.5%, compared with 31.2% in the third quarter of 2011. This was primarily due to the reasons mentioned in the above discussion of GAAP gross profit. These factors were partially offset by the cost savings from the aforementioned VAT reform. The investments and upgrades to facilities made during 2011, including the build-up of the Fengxian facility and the Charles River asset acquisition, are critical in positioning the Company for future growth and capturing more higher-value added services.

Non-GAAP gross margin was 28.1%, compared with 33.4% in the third quarter of 2011. This decrease was due to the reasons mentioned in the above discussion of GAAP gross margin.

Operating expenses (selling and marketing, general and administrative) were $7.6 million, an increase of 9.4% from $6.9 million in the third quarter of 2011. This was primarily due to higher labor costs resulting from the addition of senior leaders across various service offerings during the first half of 2012 and higher listed company-related professional fees. The Company will continue to optimize its senior scientific team and operational team structure in the coming months to enhance the talent pool throughout its service offerings. The Company believes that these improvements will be critical in positioning the Company for expansion into new capabilities and maintaining competitiveness in the market.

Non-GAAP operating expenses were $6.5 million, an increase of 12.9% from $5.8 million in the third quarter of 2011. This was primarily due to the reasons mentioned in the above discussion of operating expenses, excluding the impact of share-based compensation expenses.

Profit from operations was $1.2 million, a decrease of 41.6% from $2.1 million in the third quarter of 2011, primarily due to facility expansion costs, higher labor costs as a percentage of total net revenues resulting from an increase in the number of scientific research staff members, including senior scientists, during the first half of 2012, and higher listed company-related professional fees. These factors were partially offset by an increase in net revenues and cost savings from the aforementioned VAT reform.

Non-GAAP profit from operations was $2.4 million, a decrease of 37.0% from $3.9 million in the third quarter of 2011. This was due to the reasons mentioned in the above discussion of GAAP profit from operations, excluding the impact of share-based compensation expenses.

Operating margin was 3.8%, compared with 7.2% in the third quarter of 2011.  This decrease was primarily due to facility expansion costs, higher labor costs as a percentage of total net revenues, and higher listed company-related professional fees. These were partially offset by cost savings resulting from the aforementioned VAT reform.

Non-GAAP operating margin was 7.7%, compared with 13.4% in the third quarter of 2011. This decrease was primarily due to the reasons mentioned in the above discussion of GAAP operating margin, excluding the impact of share-based compensation expenses.

Net income decreased by 39.5% year over year to $1.6 million, primarily due to lower profit from operations and lower other income, including a smaller foreign exchange gain, an increased foreign exchange forward contract gain and lower interest income.

Non-GAAP net income was $2.8 million, a decrease of 36.3% from $4.4 million in the third quarter of 2011. This was primarily due to the reasons mentioned in the above discussion of GAAP net income.

Diluted earnings per ADS were $0.08, which compares with $0.14 in the third quarter of 2011.

Non-GAAP diluted earnings per ADS were $0.15, which compares with $0.24 in the third quarter of 2011.

Financial Position

As of September 30, 2012, the Company had cash and cash equivalents of $34.3 million and no debt outstanding.  During the quarter, capital expenditures totalled $5.0 million, primarily from purchase of equipment and investment in leasehold improvements of various facilities.

Full Year 2012 Guidance

The Company revises its previously announced guidance for net revenues and capital expenditures for the full year 2012, and reconfirms its guidance for non-GAAP gross margin for the full year 2012. The Company expects:
Net revenues to be approximately $125.0 – $128.0 million, which represents growth of approximately 11.1% – 13.8% compared with the full year of 2011.

Non-GAAP gross margin to be in the range of 30.0% – 31.5%.

Capital expenditures to be approximately $19.0 - $21.0 million.

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

ABOUT SHANGPHARMA CORPORATION

ShangPharma Corporation (NYSE: SHP) is a leading China-based contract research organization providing high quality and cost-effective services for the pharmaceutical and biotechnology industry. It offers a broad range of high-quality, integrated services across the drug discovery and development process to help international and Chinese pharmaceutical and biotechnology companies discover and develop novel drug candidates efficiently. ShangPharma's services consist of discovery chemistry, discovery biology and preclinical development, pharmaceutical development and biologics services. For more information, please visit www.shangpharma.com.

Safe Harbor: Forward-Looking Statements

This announcement contains forward-looking statements. These statements are made under the "safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "likely to" or other similar expressions. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. Among other things, the section titled "Full Year 2012 Guidance" and quotations from management in this press release, as well as the Company's strategic and operational plans, contain forward-looking statements. The Company may also make written or oral forward-looking statements in its reports filed or furnished with the U.S. Securities and Exchange Commission, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements and are subject to change, and such change may be material and may have a material adverse effect on the Company's financial condition and results of operations for one or more periods. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained, either expressly or impliedly, in any of the forward-looking statements in this press release. The Company expects to face potential risks and uncertainties related to its ability to, among other things, attract, train, motivate and retain skilled scientists; diversify its customer base and adapt to potential loss of sales to, or significant reduction in orders from, any of its major customers; adapt its business to industry trends, such as fluctuations in the R&D budgets of pharmaceutical and biotechnology industry participants; protect the intellectual property rights of its customers; comply with applicable regulations and industry standards; compete effectively in its industry, which may subject it to increasing pricing pressure and reduce the demand for its services; expand and market its services and manage its growth; and develop and maintain effective internal control over financial reporting; as well as other risks outlined in the Company's filings with the U.S. Securities and Exchange Commission. All information provided in this press release and in the attachments is as of the date of this press release, and the Company does not undertake any obligation to update any such information, except as required under applicable law.

About Non-GAAP Financial Measures

To supplement the Company's consolidated financial results presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), the Company uses the following non-GAAP financial measures: (1) gross profit, (2) gross margin, (3) profit from operations, (4) operating expenses, (5) operating margin, (6) net income, and (7) diluted earnings per ADS, each of which excludes expenses relating to or the effect of share-based compensation. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned "Reconciliation of Unaudited GAAP and non-GAAP Financial Data" set forth at the end of this press release.

The Company believes that these non-GAAP financial measures provide meaningful supplemental information regarding its operating performance by excluding expenses relating to or the effect of share-based compensation that may not be indicative of its operating performance. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing its operating performance and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management's internal comparisons to the Company's historical performance. The Company computes its non-GAAP financial measures using the same consistent method from quarter to quarter. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using non-GAAP financial measures excluding expenses relating to or the effect of share-based compensation is that these expenses and effects have been and will continue to be significant recurring expenses in the Company's business for the foreseeable future. Management compensates for these limitations by providing specific information regarding the GAAP amount excluded from each non-GAAP measure. The accompanying tables have more details on the reconciliation between non-GAAP financial measures and their most comparable GAAP financial measures.

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