Revenue in the first three quarters dropped by 17.62%. Can a 390-million-yuan acquisition help Qianhong Pharmaceutical turn the tide?

Behind hitting the limit-up, Qianhong Pharmaceutical fell into the strange circle of "increasing profits without increasing revenue".

Source｜Pharmaceutical Research Society

Qianhong Pharmaceutical finally hit a limit-up.

On October 18, Qianhong Pharmaceutical's stock price surged and hit the limit-up. By the close, the stock price was reported at 6.71 yuan/share, reaching a new high in nearly a year.

Clearly, investors were encouraged by multiple positive news, including Qianhong Pharmaceutical's significant increase in Q3 net profit and its plan to acquire 100% equity of Fangyuan Pharmaceutical for 390 million yuan.

However, a company's development should be viewed comprehensively. According to the financial report, Qianhong Pharmaceutical is facing challenges of declining revenue. So, is the current acquisition a key step for Qianhong Pharmaceutical to break through its growth dilemma?

1. Increasing Profits Without Increasing Revenue in the First Three Quarters

The financial report shows that in the first three quarters of this year, Qianhong Pharmaceutical's operating revenue was 1.208 billion yuan, down 17.62% year-on-year; net profit attributable to the parent company was 310 million yuan, up 56.47% year-on-year. In Q3, the operating revenue was 352 million yuan, down 13.97% year-on-year; net profit attributable to the parent company was 127 million yuan, up 60.84% year-on-year.

Overall, Qianhong Pharmaceutical's issue of increasing profits without increasing revenue is quite prominent, largely due to the impact of core products like polysaccharides.

It is understood that Qianhong Pharmaceutical's polysaccharide products include heparin sodium and low molecular weight heparin series. Judging from the heparin market alone, Qianhong Pharmaceutical's business has some growth potential. According to a research report by Global Market Insights, the global heparin market size exceeded $4.5 billion in 2021 and is expected to surpass $5.7 billion by 2028.

However, the downstream of this industry is currently in a destocking cycle, leading to reduced demand for upstream heparin API companies like Qianhong Pharmaceutical.

With supply exceeding demand, the market is prone to price cuts, and the decline in export prices of heparin APIs is quite noticeable. According to China Post Securities, from January to April 2024, heparin exports totaled $262.35 million, down 38.89% year-on-year.

Additionally, heparin drugs have been included in centralized procurement, which will also affect the performance of related pharmaceutical companies to some extent.

It can be seen that in the heparin API industry, besides Qianhong Pharmaceutical, companies like Changshan Pharmaceutical also face significant growth pressure. According to the financial report, in the first half of this year, Changshan Pharmaceutical's operating revenue was 568 million yuan, down 30.79% year-on-year; net profit attributable to the parent company was -46.9027 million yuan, and adjusted net profit was -53.6666 million yuan.

In contrast, Qianhong Pharmaceutical achieved significant profit growth (in the first half of 2024, Qianhong Pharmaceutical's net profit increased by 53.57% year-on-year). How was this achieved?

It is partly related to the company's active cost reduction. According to the financial report, in the first three quarters, Qianhong Pharmaceutical's sales expenses, administrative expenses, and operating costs decreased by 27.54%, 17.47%, and 34.19%, respectively. Additionally, Qianhong Pharmaceutical explained that the profit growth was also due to the recovery of 85 million yuan in settlement funds from Jianyuan Trust (formerly Anxin Trust), which had been provisioned for bad debt losses.

However, despite the significant profit increase, Qianhong Pharmaceutical's financial performance of increasing profits without increasing revenue is clearly unhealthy, and the company urgently needs to find a more stable growth path.

2. The Acquisition Is Key to Breaking the Deadlock, but the Outcome Is Uncertain

Currently, the acquisition of Fangyuan Pharmaceutical is indeed a key move for Qianhong Pharmaceutical to break the deadlock.

First, let's understand Fangyuan Pharmaceutical. It is reported that Fangyuan Pharmaceutical is mainly engaged in the production of antibiotic drugs, with products including etimicin sulfate.

From the perspective of the end market, the global antibiotic market size exceeds $50 billion, and the domestic antibiotic market size is close to 200 billion yuan. For Qianhong Pharmaceutical, acquiring Fangyuan Pharmaceutical means entering a vast new market, potentially reducing reliance on existing products.

Moreover, after years of development, Fangyuan Pharmaceutical has established certain product advantages. It is understood that Fangyuan Pharmaceutical's etimicin sulfate is a new generation of semi-synthetic aminoglycoside antibiotics, and the competition in this market is favorable. Currently, there are only two domestic manufacturers holding approval for etimicin sulfate small-volume injections, with Fangyuan Pharmaceutical holding a 27% market share.

Based on this, Qianhong Pharmaceutical has high expectations: "After acquiring Fangyuan Pharmaceutical, we will further expand our core product pipeline and leverage our sales resources and marketing management advantages to integrate the marketing of Fangyuan Pharmaceutical's etimicin sulfate products, aiming to quickly boost sales and profitability."

However, the outcome is still uncertain.

According to Qianhong Pharmaceutical's announcement, Fangyuan Pharmaceutical's "Restructuring Plan (Draft)" has not yet been approved by the Xinbei Court, posing certain legal risks.

Additionally, Qianhong Pharmaceutical admitted in the announcement that there is still uncertainty about how to effectively integrate the company and Fangyuan Pharmaceutical in terms of production and operation models, risk control mechanisms, and cultural concepts to achieve synergies.

Therefore, through this proposed acquisition, Qianhong Pharmaceutical has only signaled its intention to break the deadlock, but the actual effects will take time to verify.