China’s Guangdong Life Strong Pharmaceutical Co., Ltd. (hereinafter referred to as “Life Strong Pharmaceutical”) has attracted market attention on its way to the public market. And the company recently announced its latest prospectus and plans to be listed on the ChiNext.
Life Strong Pharmaceutical’s main business is the R&D, production and sales of proprietary Chinese medicines, with a history of 70 years. At present, its performance growth rate is declining rapidly, and the year-on-year growth rate of net profit from 2018 to 2020 was 94.16%, 4.77%, and -6.17% respectively.
Moreover, as a pharmaceutical company recognized as a “high-tech enterprise” in China, Life Strong’s pharmaceutical R&D expense ratio is lower than the average of its peers, and the number of invention patents may be in a “tailor” position among comparable listed Chinese companies in its peers.
In addition, it was repeatedly punished by the supervision department for quality problems, and multiple raw material suppliers were also punished for product failure during the cooperation period.
Performance growth slowed down, last year’s net profit fell by 6.17%
The prospectus shows that Life Strong Pharmaceutical was restructured from the Shantou Pharmaceutical Factory in Guangdong Province. Its history can be traced back to the Chaoshan branch of Guangzhou Xingqun Chinese Medicine Refinery General Factory established in 1951. It has a history of 70 years.
Its main business is the research and development, production and sales of proprietary Chinese medicines. It now has 101 drug registration numbers, including 32 original research products, 10 exclusive varieties, and 4 exclusive dosage forms. Product varieties include “biliary tract”, “hypoglycemic”, “clearing heat and detoxification”, “gynecology”, “tonic”, “pediatrics”, etc. The main products include Xiaoyanlidan tablets, Danshitong capsules, Shenqi Jiangtang tablets, Kumu injection, etc.
From the perspective of operating performance, Life Strong Pharmaceutical’s performance has shown signs of decline. According to the latest prospectus, from 2018 to 2020, Life Strong Pharmaceutical’s operating income was 290 million yuan, 317 million yuan, and 341 million yuan, respectively, representing a year-on-year increase of 51.62%, 8.98%, and 7.7%. In the same period, its net profits were RMB 63,604,400, RMB 66,633,100, and RMB 62,521,700, respectively, representing a year-on-year increase of 94.16%, 4.77%, and -6.17%.
The company’s operating income and net profit growth both declined in 2019, and the net profit even declined in 2020. For the decline in profit in 2020, the company explained that it was mainly caused by the decline in profit contribution from the pharmaceutical sales business. In the same period, the net profit of the comparable listed company Jolly Pharmaceuticals increased by 246.98% year-on-year, the net profit of Lingrui Pharmaceuticals increased by 10.55% year-on-year, and the net profit of ZBD Pharmaceuticals increased by 6.76% year-on-year. Only Fangsheng Pharmaceutical’s net profit declined.
R&D expense rate is lower than the average of comparable listed companies in China
It is worth noting that Life Strong Pharmaceuticals, as a “high-tech enterprise”, has had a research and development expense ratio lower than the average of its Chinese peers in the past two years.
According to the prospectus, from 2017 to September 2020, Life Strong Pharmaceutical’s research and development expenses accounted for 3.61%, 2.42%, 2.47% and 2.94% of operating income, respectively. According to WIND data, during the same period, the average R&D expense ratios of four comparable listed companies in the same industry, Fangsheng Pharmaceutical, ZBD, Lingrui Pharmaceutical, and Jolly Pharmaceutical, were 3.20%, 3.45%, 3.26% and 2.93%.
Life Strong Pharmaceuticals, whose R&D expense ratio is lower than the average of its peers, has far fewer invention patents than comparable listed companies.
According to data from the State Intellectual Property Office of China, as of September 16, 2020, Life Strong Pharmaceutical has 3 invention patents and 6 utility model patents. The prospectus shows that during the reporting period, Life Strong Pharmaceuticals obtained only one invention patent in 2018. During the same period, Jolly Pharmaceuticals, Lingrui Pharmaceuticals, Fangsheng Pharmaceuticals, and ZBD Pharmaceuticals obtained 14, 13, 22, and 33 invention patents respectively, as well as 0, 46, 3, and 0 utility model patents.
In response to this, Life Strong Pharmaceuticals stated in its reply to the review inquiry letter that the reason for the difference between the company’s R&D expense ratio and listed companies in the same industry is that the comparable listed companies in the same industry listed earlier, and after years of development, they have larger business scales, stronger capital strengths and greater R&D investments, as well as longer continuous R&D time, larger project reserves, and larger R&D teams. The company’s investment in research and development will further increase in order to maintain product market competitiveness.
Suppliers have been punished for being unqualified in spot checks
In addition, this 70-year-old Chinese pharmaceutical company has been repeatedly punished due to quality problems.
Public information shows that on June 23, 2017, Life Strong Pharmaceutical was ordered to make corrections due to the GMP technical transformation project for small-volume injections, large varieties of essential drugs, and GMP technical transformation projects for solid preparations and liquid preparations without the completion of environmental protection inspection and acceptance. The company’s actual sulfur dioxide emissions in 2017 exceeded the permitted emissions. On November 17 of the same year, Life Strong Pharmaceuticals used unqualified pharmaceutical packaging materials “medicinal polyethylene bags” in the production process. The Shantou Food and Drug Administration ordered it to correct and fined it 15,000 yuan.
In addition, the top five suppliers during the company’s operation also had a lot of problems and were frequently punished.
Public information shows that in 2017, four of the company’s top five suppliers were punished for unqualified operations. They were Anhui Hejitang, the largest supplier, Anhui Shenghaitang, Anhui Shenghaitang, the third largest supplier, and the fourth and fifth largest suppliers – Hubei Daodi medicinal materials and Chaozhou Chaoan District Meihuan Alcohol Co., Ltd.
Among them, in 2017, according to the inspection of Qiqihar Food and Drug Inspection and Testing Center, the batch number 20161101 of Anhui Hejitang Traditional Chinese Medicine Decoction Pieces Co., Ltd. was marked as unqualified, and the unqualified items were ‘traits’. In September 2017, the Chengdu Institute of Food and Drug Inspection found that 3 batches of star anise produced by Anhui Shenghaitang were unqualified. In 2017, the unqualified product of Hubei Daodi Medicinal Materials, safflower, was investigated and dealt with. In 2018, the supplier also appeared in the 11th phase list of unqualified pieces of traditional Chinese medicine the Shandong Drug Administration.
Source: Yangtze River Commercial Daily