The once trillion-dollar 'white horse' has fallen! Hillhouse's 1 billion 'rescue' attempt, as WuXi AppTec struggles to survive.

The winter for the pharmaceutical and medical device industries is not yet over.

Especially for innovative pharmaceutical and medical device companies listed on the Hong Kong stock market, most are facing a once-in-a-decade predicament.

Recently, Hong Kong-listed medical device company MicroPort Scientific released its 2023 financial report. The report shows that in 2023, the company achieved revenue of $951 million, a year-on-year increase of 15.8%; gross profit of $532 million, up 6.0% year-on-year; net loss attributable to shareholders of $478 million, widening by 9.4% year-on-year; and a basic loss per share of 26.19 cents.

Notably, this is the fourth consecutive year this medical device giant has reported losses. Moreover, the company highlighted significant uncertainties about its ability to continue as a going concern in the report.

So, how did this once trillion-dollar market cap leader in medical devices come to this point? Can the company regain its past glory in the future?

Records show that MicroPort Scientific's predecessor, American MicroPort, was founded in 1996 and registered in California, USA. Similar to many medical device companies, its founder, Dr. Chang Zhaohua, is also a U.S.-trained Ph.D. in biological sciences.

In 1998, Chang Zhaohua established MicroPort Scientific in Shanghai. With a professional background and cutting-edge technology, Chang and MicroPort quickly gained traction in China, focusing on coronary intervention products (balloon catheters, coronary stents, etc.).

At the time, due to the high cost of imported products, very few patients in China could afford minimally invasive coronary intervention surgeries. Thus, the vast potential for domestic alternatives became the foundation for MicroPort's growth. Founder Chang Zhaohua has repeatedly stated that MicroPort has the "genes for a trillion-dollar market cap."

After more than a decade of operation, MicroPort Scientific went public on the Hong Kong Stock Exchange in 2010. With capital backing, the company quickly accelerated its diversification and expansion.

Within a few years, MicroPort expanded into 12 sectors, including orthopedics, neurology, medical robotics, medical aesthetics, and rehabilitation. Smooth sailing in the capital market emboldened Chang Zhaohua further. Subsequently, MicroPort accelerated its spin-offs, resulting in five IPOs to date: MicroPort CardioFlow, MicroPort NeuroTech, MicroPort CRM, MicroPort MedBot, and MicroPort EP. However, financial reports show that only MicroPort CardioFlow and MicroPort NeuroTech among the spin-offs are profitable.

In reality, three years ago, as the Federal Reserve continuously raised interest rates, companies reliant on financing began to struggle. For MicroPort, which pursued an aggressive spin-off strategy, it was only a matter of time before it faced difficulties.

The overly aggressive spin-off strategy accelerated the erosion of cash reserves by MicroPort MedBot, MicroPort CRM, orthopedics, and other incubated assets.

After the release of the 2023 annual report, MicroPort's predicament became even more apparent. The report indicates that in 2024, the company must repay two debts: a $295 million short-term bank loan and a $448 million convertible bond due by June, totaling $743 million.

As of the end of 2023, MicroPort's cash and cash equivalents stood at just $1.019 billion. The massive debt has led the capital market to vote with its feet. From its peak, the company's stock price has plummeted over 90% in three years, wiping out more than HKD 120 billion in market value.

Fortunately, during its most challenging period, shareholder Hillhouse Capital extended a helping hand. On April 5, MicroPort announced that it secured up to $200 million in financing from Hillhouse and other institutions, along with a $300 million loan to repay the upcoming $448 million convertible bond. The annualized interest rate for this funding is approximately 5.75%, slightly higher than bank loans at the same time.

Notably, Hillhouse's move may have been out of necessity. In March 2020, Hillhouse announced it would increase its stake in MicroPort by 47.734 million shares at HKD 13.5 per share, costing HKD 645 million. This means Hillhouse is now sitting on a paper loss of over 60%.

Kan Jian Finance believes that Hillhouse's intervention has temporarily alleviated MicroPort's financial woes, but the crisis is far from over. Moving forward, MicroPort and Chang Zhaohua must focus on cost-cutting and efficiency improvements. Otherwise, the "borrow new to repay old" model could eventually drag the company into an "abyss."