ShangPharma Announces Second Quarter 2011 Results

SHANGHAI, August 22, 2011 /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 quarter ended June 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. See "About Non-GAAP Financial Measures" and "Reconciliation of GAAP to Non-GAAP Financial Data" below for more information about the non-GAAP financial measures included in this press release.

Second Quarter 2011 Highlights

• Net revenues increased by 26.0% year-over-year to $27.5 million.
• Net revenues from China-based customers increased 202.7% year-over-year to $2.7 million.
• GAAP gross profit increased by 23.6% year-over-year to $9.1 million. GAAP gross margin was 33.3%, compared with 33.9% in the second quarter of 2010.
• Non-GAAP gross profit increased by 26.7% year-over-year to $9.5 million. Non-GAAP gross margin was 34.7% compared with 34.5% in the second quarter of 2010.
• GAAP profit from operations decreased by 12.7% year-over-year to $2.8 million. GAAP operating margin was 10.3%, compared with 14.8% in the second quarter of 2010.
• Non-GAAP profit from operations increased by 22.2% year-over-year to $4.2 million. Non-GAAP operating margin was 15.2% compared with 15.7% in the second quarter of 2010.
• GAAP net income decreased by 19.0% year-over-year to $3.4 million. GAAP diluted earnings per ADS were $0.18, compared with $0.26 in the second quarter of 2010.
• Non-GAAP net income increased by 9.0% year-over-year to $4.7 million. Non-GAAP diluted earnings per ADS were $0.25, compared with $0.28 in the second quarter of 2010. The decrease is primarily due to the increase of weighted average outstanding ADSs as a result of our initial public offering in October 2010.
• Total number of customers increased to 316 as of June 30, 2011 from 237 as of December 31, 2010 and 282 as of March 31, 2011.
• The Company reaffirms its revenues, non-GAAP gross margin and capital expenditure guidance for the full year of 2011.

Management Comment

Michael Xin Hui, founder and Chief Executive Officer of ShangPharma, commented, "We are pleased to deliver another quarter of broad-based solid results. Our business lines grew as a result of our strategy to expand our technology platforms and customer base in different geographical areas to respond to the demands of our clients.

"Our expanded integrated service offerings are allowing us to penetrate deeper into our existing customer base. We are successfully attracting new customers in the Chinese pharmaceutical industry, which is a nascent, but rapidly growing industry. Revenues from our China-based customers rose by 202.7% year-over-year, and included a mix of both local pharmaceutical companies and smaller domestic laboratories, as well as major multi-national biotech and pharmaceutical companies' R&D centers in China, representing a great improvement on the diversification of our customer base. Revenue from China-based customers increased to near 10% of total revenues due to strong demand from the local market. There is tremendous growth opportunity for our services in China, and we plan to further increase our China business while simultaneously increasing penetration to developed pharmaceutical markets. We continue to do very well in terms of generating revenues from our top customers, which are largely major global pharmaceutical and biotechnology companies. We have continued to benefit from the trend that big major global pharmaceutical companies are increasing their outsourcing needs to China.

"We are especially encouraged by the recent significant growth in our biologics services. We are expecting a strong performance for our biologics services in the coming third and fourth quarters. These recent developments coupled with our growing reputation are helping to enhance our increasingly close partnerships with leading global and domestic companies, which will support our future growth."

William Dai, Chief Financial Officer, added, "We achieved our second quarter objectives despite continued pressures from wage inflation, higher material costs and the appreciation of the Renminbi. Despite these headwinds, we managed our expenses exceptionally well and continue to improve employee productivity. We generated sales growth of 26% year-over-year and 11% quarter-over-quarter while our headcount remained flat compared to the first quarter of 2011. We are also seeing benefits from investments we made into managerial and supporting infrastructure in 2010, while progress at our new facilities in Fengxian continues, and construction remains on schedule. We will focus on managing our costs in the second half of the year, and are confident that we will meet our financial guidance for 2011."

Second Quarter 2011 Results

Net revenues were $27.5 million, an increase of 26.0% from $21.8 million in the second quarter of 2010, primarily due to higher volumes from the Company's top customers, a larger customer base and expanded service offerings. During the quarter, revenues also benefited from higher average FTE rates.

During the quarter, the Company increased its customer base to 316 customers, an increase from 237 customers as of December 31, 2010 and 282 as of March 31, 2011.

Revenue from customers based in China rose by 202.7%. The growth came from both local pharmaceutical companies and smaller domestic laboratories as well as major multinational biotech and pharmaceutical companies' Chinese R&D centers. In light of the Chinese government's rising support of locally-developed drugs and more R&D investment into China by global pharmaceutical and biotech companies, the Company anticipates its China business will continue to grow and become a larger percentage of total revenues.

Revenue from the Company's top-10 customers increased by 24.4% compared with the same period last year, and accounted for 61.8% of the total revenue compared with 62.6% in the same quarter last year. The increase in top-10 customers' revenue has further demonstrated our continued efforts and commitments to become preferred business partners with global leading pharmaceutical and biotech companies. In addition, percentage of revenue from top-10 customers as of total revenue has continued to decrease due to the very strong increase in revenue contribution from China-based clients and increased diversification of the customer base.

Net revenues from full-time-equivalent ("FTE")-based services were $19.7 million, an increase of 26.5% from $15.6 million in the second quarter of 2010, primarily due to an increase in FTE numbers and higher FTE rates.

Net revenues from fee-for-service-based services were $7.8 million, an increase of 24.9% from $6.2 million in the second quarter of 2010. The rise was primarily driven by the Company's service offerings including discovery biology, preclinical development and newer biologics services. The growth in fee-for-service-based revenues reflects the Company's ability to cross-sell more services to existing customers as well as strong demand from new customers. The Company also saw strong demand from customers that use multiple services.

Gross profit was $9.1 million, an increase of 23.6% from $7.4 million in the second quarter of 2010, primarily due to the increase in revenues, operational efficiency improvements, and in particular, improvements in employee productivity. The increase was partially offset by the continued appreciation of the Renminbi, higher material costs as a result of service mix and higher share-based compensation expenses.

Non-GAAP gross profit was $9.5 million, an increase of 26.7% from $7.5 million in the second quarter of 2010, primarily due to the increase in revenues and operational efficiency improvements, and in particular, improvements in employee productivity. The increase was partially offset by the continued appreciation of the Renminbi and higher material costs as a result of service mix.

Gross margin was 33.3%, compared with 33.9% in the second quarter of 2010, primarily due to continued Renminbi appreciation, higher share-based compensation expenses and higher material costs as a result of service mix, which was partially offset by operational efficiency improvements.

Non-GAAP gross margin was 34.7%, compared with 34.5% in the second quarter of 2010. The improvement was primarily due to operational efficiency improvements, which was partially offset by continued Renminbi appreciation and higher material costs as a result of service mix.

Operating expenses (selling and marketing, general and administrative) were $6.3 million, an increase of 51.8% from $4.2 million in the second quarter of 2010, primarily due to additional headcount resulting from a build-up of corporate managerial and supporting infrastructure during the second half of 2010, higher share-based compensation expenses and listed company related professional fees such as SOX404 consulting fees and others.

Non-GAAP operating expenses were $5.4 million, an increase of 30.3% from $4.1 million in the second quarter of 2010, primarily due to additional headcount resulting from a build-up of corporate managerial and supporting infrastructure in the second half of 2010 and listed company related professional fees.

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 $2.8 million, a decrease of 12.7% from $3.2 million in the second quarter of 2010, primarily due to additional headcount resulting from a build-up of corporate managerial and supporting infrastructure in the second half of 2010, higher share-based compensation expenses and listed company related professional fees. The decline was partially offset by the increase in gross profit.

Non-GAAP profit from operations was $4.2 million, an increase of 22.2% from $3.4 million in the second quarter of 2010. The rise was primarily due to higher gross profit and was partially offset by additional headcount resulting from a build-up of corporate managerial and supporting infrastructure in the second half of 2010 and listed company related professional fees.

Operating margin was 10.3%, compared with 14.8% in the second quarter of 2010. The operational efficiency improvements were primarily offset by higher share-based compensation expenses and the continued appreciation of the Renminbi.

Non-GAAP operating margin was 15.2%, compared with 15.7% in the second quarter of 2010. The decline was primarily due to continued Renminbi appreciation and listed company related professional fees, which was partially offset by the operational efficiency improvements.

Net income decreased 19.0% year-over-year to $3.4 million, primarily due to lower profit from operations and lower other income, including lower government subsidies and a smaller gain recognized on foreign exchange forward contracts.

Non-GAAP net income was $4.7 million, an increase of 9.0% from $4.3 million in the second quarter of 2010, primarily due to higher non-GAAP profit from operations, which was partially offset by lower other income.

Diluted earnings per ADS were $0.18, which compares with $0.26 in the second quarter of 2010.

Non-GAAP diluted earnings per ADS were $0.25, which compares with $0.28 in the second quarter of 2010.

Financial Position

As of June 30, 2011, the Company had cash and cash equivalents of $41.6 million and short term debt of $0.8 million. During the quarter, capital expenditures totaled $11.0 million, including $5.5 million related to the purchase of a 68,000 square foot new lab and office building which replaced the original 36,000 square foot facility in Chengdu. The purchased lab and office building allows us to reduce overall expenditures and improve our earnings over time. With a strong balance sheet and sound financial position, the Company is well positioned to make targeted investments when opportunities arise.

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.

Conference Call

ShangPharma will host a conference call and live webcast at 8am New York time on August 22, 2011 (8pm Beijing time on August 22, 2011). A PowerPoint presentation accompanying the prepared remarks will be available on the Company's website shortly before the call.

The dial-in details for the live conference call are as follows:

A live and archived webcast of the conference call will be available on the Investor Relations section of ShangPharma's website at www.shangpharma.com

A telephone replay of the call will be available for seven days after the conclusion of the conference call from August 22, 2011 to August 29, 2011.

The dial-in details for the replay are as follows:

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 2011 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 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.