After a lapse of two years, Yiteng Pharmaceutical hit the Hong Kong Stock Exchange once again.

The Zhitong Finance App noticed that recently Yiteng Pharmaceutical Group Co., Ltd. (hereinafter referred to as “Yiteng Pharmaceutical”) submitted a listing application to the main board of the Hong Kong Stock Exchange, with Morgan Stanley as the sole sponsor. It is worth mentioning that the company submitted prospectus to the Hong Kong Stock Exchange three times on September 23, 2020, March 29, 2021, and December 15, 2021, respectively. The company also successfully passed the hearing on June 25, 2021, but finally failed due to the failure to launch a prospectus.

According to the prospectus, Yiteng Pharmaceutical was founded in 2001 and is a fully integrated biopharmaceutical company. The current product portfolio focuses on original research drugs in the fields of anti-infection, CVD and respiratory treatment, and has synergistic value in pediatric nursing. In terms of product pipeline, Yiteng Pharmaceutical currently has 3 core commercialized products, namely Steady and Credible, Cyclaw, and Yiruiping, as well as 3 authorized innovative products Vascepa, Mulpleta, and EDP125. The products cover various treatment fields such as anti-infection, cardiovascular disease, and respiratory system. As of December 31, 2022, the company has more than 300 regional distributors, covering more than 16,000 hospitals and 13,000 pharmacies in 30 provinces in China.

Can this resubmission fulfill Yiteng Pharmaceutical's dream of going public?

Industry demand continues to grow, leading the market position of core products

Looking at the industry first, the Zhitong Finance App learned that with the continuous increase in disposable income, population aging, health awareness and life expectancy, and the implementation of health care reform plans, China's total healthcare expenditure has increased dramatically and is expected to grow further in the future. Benefiting from this, the Chinese pharmaceutical market is developing rapidly and is expected to grow at a compound annual growth rate of 7.8% from 2022 to 2.1 trillion yuan (RMB, same below) in 2026, and then grow at a CAGR of 5.8% from 2026 to 2.62 trillion yuan in 2030.

Meanwhile, in the three major fields of anti-infection, cardiovascular disease, and respiratory system that Yiteng Pharmaceutical focuses on, the company also has a lot of room for growth.

According to the Frost & Sullivan report, cardiovascular disease is the third largest treatment field in China in 2022. In 2022, the total cardiovascular disease drug treatment market in China is about 184.8 billion yuan, and is expected to reach 225.5 billion yuan in 2026; anti-infective medicine is the fourth largest treatment field in China. In 2022, the market size of anti-infective drugs in China is 181.4 billion yuan, accounting for 11.7% of China's total pharmaceutical market; the respiratory system is one of the fastest-growing emerging treatment fields in China, with a market size of 71.1 billion yuan in 2022. Its market size is expected to reach 71.1 billion yuan in 2026 96 billion yuan. It can be seen that the total market size of the three major track markets involved in Yiteng Pharmaceutical exceeds 400 billion yuan.

Among them, antimicrobials are the largest category of anti-infective drugs in China, with a market size of 123 billion yuan in 2022, accounting for more than 67.8% of the anti-infective drug market in China. Cephalosporins are considered to have the most mature mechanism of action in the antimicrobial drug market. In terms of sales, they occupy the largest market share of about 45.8% in China in 2022. Furthermore, in recent years, due to the rise in diagnosed MRSA infections due to hospitalization, the anti-MRSA drug market in China has also continued to grow. The market size will reach 3.8 billion yuan in 2022, and is expected to grow to 7.3 billion yuan in 2026, with a compound annual growth rate of 17.9%.

Specifically, when it comes to Yiteng Pharmaceuticals, the company's commercial core products include Steady and Credible, Sikelau, and Yiruiping.

Among them, vancomycin is reliable, and vancomycin is the only first-line drug included in the national health insurance list to treat MRSA infections. In 2022, in the Chinese anti-MRSA drug market, vancomycin's sales revenue accounted for a large market share, reaching 46.4%. In terms of sales revenue in China, stable and reliable occupancy of the vancomycin drug market is leading the market, with a market share of 62.7%.

Meanwhile, Sikelau is also the original research drug for cefaclor, accounting for the largest portion of antimicrobials in China in 2022. Notably, from 2020 to 2022, Ceclor Sachet (Ceclor Sachet) held more than 70% of the dominant market share of pediatric cefaclor in China.

Furthermore, iRuipin is a new generation ICS nebulizer for treating asthma. As of June 14, 2023, the original fluorticasone propionate (FP) product developed was more effective and more long-lasting than the other two ICS nebulizers marketed in China.

In addition to this, Yiteng Pharmaceutical also has three non-core commercial products, including Cilicin, Fudaxin, and Rockman. It is worth mentioning that the company is not a license holder to list these products, but it holds exclusive marketing and/or distribution rights granted by multinational companies. Among them, the exclusive marketing and distribution agreement between Fudaxin and Xilixin will expire in December 2023.

There are also hidden concerns behind the high growth

The industry is in a leading position, and Yiteng Pharmaceutical's revenue is also rising steadily. From 2020 to 2022, Yiteng Pharmaceutical achieved operating income of 1,768 billion yuan, 2,073 billion yuan, and 2,074 billion yuan respectively.

By product, Yiteng Pharmaceutical's revenue is mainly contributed by core commercialized products such as Stable and Trustworthy, Cyclaw, and Yiruiping. In the reporting period, stable and credible contributions accounted for 57.7%, 48.7%, and 48.7% of revenue; Sikelow's revenue during the period accounted for 27.0%, 33.3%, and 36.6% of total revenue, respectively; and Yiruiping's revenue share was 5.2%, 4.8%, and 9.4%. It can be seen that the combined revenue of the company's three core products accounted for 89.9%, 86.8%, and 94.7% of total current revenue.

In terms of profitability, the company's gross profit performance continues to grow. According to the prospectus, the company's gross profit during the reporting period was $1,063 million, $1,278 million and $1,368 million respectively; gross margins for the same period were 60.1%, 61.6% and 66.0% respectively, increasing year by year. Benefiting from this, the company's net profit continued to increase during the reporting period to 86.9 million yuan, 157 million yuan and 3063 million yuan respectively.

However, the Zhitong Finance App noticed that there are also many hidden concerns behind Yiteng Pharmaceutical's high performance growth.

First, judging from business performance, the company has a serious dependency on big customers.

The company relied on distribution networks to sell and distribute its products during the reporting period; therefore, the company's customers were mainly distributors. The company's distributors include importers and regional distributors. In the reporting period, the company's revenue from the top five customers accounted for about 73.1%, 61.3% and 65.6% of Yiteng Pharmaceutical's total revenue, respectively. Over the same period, revenue from the largest customers accounted for approximately 55.1%, 54.5%, and 57.7% of total revenue, respectively.

The company stated bluntly that the company faces concentration and counterparty risks from major customers due to its dependence on a small number of major customers. Among them, for the stable and reliable core commercial products and Yiruiping, the company has only one importer and resells the products to regional distributors. The company stated that there is no guarantee that key customers will continue to buy its products or that business with them will not be reduced or terminated.

Second, the company also has the characteristic of “focusing on marketing over research and development.” As can be seen from the company's product pipeline, none of Yiteng Pharmaceutical's drugs originated from its own research; they were all authorized to be introduced abroad and sold by domestic agents.

According to the prospectus, in 2017, Yiteng Pharmaceutical was granted exclusive rights to promote and sell Steady Credible and Sikelao in China; acquired Steady and Trustworthy product rights in China and Italy and Sicklow's production facilities in Suzhou in 2019; in May 2020, the company obtained Yiruiping's IDL registration certificate and listing license, and obtained technology transfer rights from GSK to produce Yiruiping in China.

Against this backdrop, the company's sales expenses continue to grow. During the reporting period, Yiteng Pharmaceutical's sales expenses reached 428 million yuan, 540 million yuan and 571 million yuan respectively. In contrast, the company's R&D expenses were 59.967 million yuan, 107 million yuan and 95.32 million yuan respectively. The cumulative total over three years was only 260 million yuan, less than half of the sales expenses in 2022. It can be seen that the company is mired in the dilemma of “heavy marketing over R&D.”

Yiteng Pharmaceutical is still facing heavy debt pressure. As of 2021, December 31, 2022, and April 30, 2023, Yiteng Pharmaceutical recorded net current liabilities of $676 million, $930 million and $307 million respectively. Among risk factors, the company admits that the company may continue to have net current liabilities in the future. At the same time, a large amount of net current liabilities may limit the company's operating flexibility and adversely affect its ability to expand its business. Furthermore, as of April 30, 2023, the company's total bank and other loans were close to 2,394 million yuan. It can be seen that Yiteng Pharmaceutical is heavily indebted.

And this is probably the main reason why Yiteng Pharmaceutical is eager to go public. The Zhitong Finance App noticed that among the uses of the funds raised in this listing, Yiteng Pharmaceutical's first use was to repay part of the outstanding bank loans.

Taken together, in the Hong Kong stock pharmaceutical sector where losses have become the norm, Yiteng Pharmaceutical, which once again hit the Hong Kong Stock Exchange, showed its superior strength over its peers with its excellent profit performance. However, under the reliance of major customers, “heavy marketing over R&D,” and many “hidden concerns” due to high debt, it has undoubtedly dampened investors' confidence in its future growth potential.

How will the story of Yiteng Pharmaceutical's launch continue? Let's stay tuned.