Nuo Hui Health is caught in the storm of delayed annual reports and revenue recognition | Jianzhi Research

Cancer screening company Nuohui Health is facing its biggest crisis since going public.

On the evening of March 27, Nuohui Health received a letter of concern from Deloitte questioning the authenticity of sales and other issues. The company subsequently announced a delay in the release of its annual report and a trading halt. On April 8, the company announced the establishment of an "Independent Special Committee for Investigation" to verify issues related to the authenticity of product sales.

Investors have started to pay attention to the authenticity of Nuohui Health's revenue recognition.

The Story of Nuohui Health's Delayed Annual Report and Revenue Recognition Event

At the beginning of 2024, Nuohui Health seemed to be heading for a promising start. On January 10, this star company in colorectal cancer early screening publicly announced at the J.P. Morgan Healthcare Conference an expected revenue of $250 million in 2023, optimistic about the vast market space of $17 billion.

On January 22, the company released a profit pre-announcement, forecasting an astonishing growth of over 150% in annual performance, with its star product "Changweiqing" expected to achieve an impressive record of over $1 billion.

However, just as the market eagerly awaited good news from the annual report, Nuohui Health's stock price suddenly plummeted at the end of the day on March 27, closing down by 19.75%.

Amidst investors' astonishment, on the evening of March 27, the company issued an announcement stating that due to the incomplete audit work, the annual performance report could not be disclosed as scheduled, and the company's stock would be suspended from trading.

What shocked investors even more was that behind the "difficult birth" of the annual report was a significant questioning of the company's revenue recognition by the auditing firm.

This is not the first time Nuohui Health has been questioned. Last year, CapitalWatch released an investigation report on "Nuohui Health's Financial Data Falsification," emphasizing that Nuohui Health created false revenue through inventory pressure. However, the short-selling report was quickly exposed as fraudulent, and the company held a special meeting to respond to the issues, calming the storm quickly.

However, this time, the questioning by the auditing firm clearly had a huge impact on the company.

According to Nuohui Health's announcement, the auditing firm Deloitte raised objections to several key issues, including the validity of core product transactions, the commercial substance and reasonableness of the sales model, the effectiveness of sales and marketing expenses, and the commercial substance and reasonableness of marketing activities.

In short, Deloitte has serious doubts about the authenticity of Nuohui Health's revenue.

With this news, the once-star company instantly plunged into its "darkest moment." Are the previously disclosed outstanding performance figures true? Can the story of rapid growth continue? These have all become concerns for investors Facing the crisis, Nuohui Health has taken a series of response measures.

On April 8th, the company announced that in order to further strengthen corporate governance, two independent directors have been appointed. At the same time, the company has also established an "Independent Investigation Special Committee" composed of all five independent directors, specifically responsible for guiding and supervising the independent investigation work.

It is worth noting that the committee is chaired by the newly appointed independent director, and the investigation authority has been formally transferred from the previous audit committee to the special committee.

Nuohui Health has chosen to introduce new independent directors, establish a dedicated committee, and attempt to advance the investigation in a more independent, professional, and objective manner to quickly uncover the truth and rebuild investor confidence.

However, it is not easy for Nuohui Health to overcome the current predicament under layers of suspicion.

A series of doubts raised by auditing firms touch on the core of the company's operations, requiring considerable time to investigate and explain to investors. Even if the independent investigation ultimately proves that the allegations are unfounded, the company's reputation and market trust have already been severely damaged, making it difficult to fully recover in the short term.

Next, Nuohui Health faces at least three major challenges:

Firstly, the independent investigation must be truly independent, objective, and thorough, producing conclusions that are convincing to the market.

Secondly, if significant issues such as revenue falsification are confirmed, the company must hold people accountable and present feasible rectification plans.

Thirdly, in the face of damaged trust, the management must demonstrate sincerity and take action in compliance operations and improving internal controls to genuinely rebuild investor confidence.

Clinical data is highly confirmatory and unrelated to sales confirmation issues

However, despite being questioned in sales, Nuohui Health's product data remains convincing.

Nuohui Health currently has three marketed products. Changweiqing is the only domestically approved cancer screening product with Class 3 certification by the National Medical Products Administration. Youyouguan is the only domestically approved self-test product for Helicobacter pylori by the National Medical Products Administration. Pupuguan is the first domestically approved home fecal immunochemical test (FIT) kit.

Among them, Changweiqing has undergone long-term, large-scale prospective clinical validation for accuracy, setting a high standard for subsequent competitors in clinical development and registration, with detection capabilities comparable to the overseas leader Cologuard.

The domestic tumor early screening market is still in the nurturing stage, requiring sufficient market awareness education to stimulate consumer enthusiasm, especially in the field of colorectal cancer, where early screening can help patients detect colorectal cancer at an earlier stage, thereby eradicating cancer cells and extending life expectancy.

According to data provided by the American Cancer Society, the 5-year relative survival rate of colorectal cancer patients depends on the stage of cancer development For patients with colorectal cancer in the local stage (cancer has not spread beyond the colon), the 5-year relative survival rate is 91%. If the cancer has spread to surrounding tissues or organs and/or regional lymph nodes, the 5-year relative survival rate drops to 72% (colon cancer) or 74% (rectal cancer). For patients with colorectal cancer that has already spread to distant parts of the body, the 5-year relative survival rates are 13% (colon cancer) and 17% (rectal cancer) respectively.

Therefore, from a product perspective, Nuohui Health's technological level in the relevant domestic field is still leading. The authenticity issue in this sale does not affect the functional role of the company's products and the effectiveness of clinical data.

In other words, Nuohui Health's issues will not affect the benefits that the development of cancer early screening industry brings to patients.

For Nuohui Health, the top priority is to conduct this internal investigation with transparency and rigor, and to rebuild investor confidence through concrete actions. Integrity will be the ultimate weapon for the company to regain trust in the capital market