IPO Observation | Hainan Medicine Prepares for Hong Kong Listing, Sales Expenses Soar

Recently, Nanjing Hainan Medicine Technology Co., Ltd. (hereinafter referred to as "Hainan Medicine") plans to list on the Shanghai Stock Exchange's Growth Enterprise Market (GEM) board, issuing not more than 3174.06 million shares, with a minimum of 25% of the total share capital after issuance. The company expects to raise RMB 8.5 billion, with RMB 6 billion used for Hainan Medicine CXO Research and Development Headquarters project and RMB 2.5 billion used for replenishing working capital. The sponsor is Kongde Securities (600109) Co., Ltd.

Mainly Engaged in CXO+MAH

Hainan Medicine is a one-stop-shop for innovative pharmaceuticals and high-end generic drugs, with its main business divided into two categories: pharmaceutical research and development services, and self-owned product sales. The company has formed an "CXO+MAH" business model.

As of 2013, Hainan Medicine had established a pharmaceutical factory and began clinical CRO services; in 2015, Hainan Medicine received GMP certification; in 2016, the company started to take on CDMO/CMO projects; in 2018, a subsidiary company, One Health, was founded to handle bio-detection business; and in 2019, another subsidiary company, Nanjing Haibo, was established to handle clinical research business.

Hainan Medicine's main businesses are pharmaceutical research and development services, with two types: self-owned product sales and entrusted R&D projects. The company is also a CXO enterprise that provides comprehensive services to pharmaceutical clients, including pharmaceutical research, process validation, clinical trials, bio-detection, registration submissions, and contract manufacturing.

Among its main clients are Suzhou East China Pharmaceutical Co., Ltd., Shanghai Yiren Investment Management Co., Ltd. and its affiliated companies, Tianfang Pharmaceutical Co., Ltd., Hubei Min Kang Pharmaceutical Group Co., Ltd. and its affiliated companies, and Fuqing Pharmaceutical (600196) and its affiliated companies.

Notably, Hainan Medicine's contract assets have increased significantly. As of the end of each reporting period, the company's contract assets stood at RMB 1718.37 million, RMB 6501.06 million, RMB 10718.76 million, and RMB 11426.45 million.

The IPO prospectus shows that this round of Hainan Medicine's fundraising will be invested in two projects: the CXO Research and Development Headquarters project and the replenishment of working capital project, with an investment of RMB 6 billion and RMB 2.5 billion respectively.

Hainan Medicine said that the main purpose of this round of fundraising is to expand its research and development facilities, purchase equipment, and increase personnel, in order to meet the needs of the company's "CXO+MAH" business.

Sales Expenses Soar

As a CXO enterprise, Hainan Medicine faces increasingly fierce competition.

The pharmaceutical outsourcing industry (also known as CXO) is a comprehensive summary of outsourcing services for various stages, including drug discovery, preclinical research, clinical trials, registration submissions, and manufacturing. The industry chain includes CRO, CMO, and CDMO companies. China's generic pharmaceutical CXO industry has seen rapid development, with representative enterprises such as comprehensive integration-type CXO and specialized professional CXO.

According to the IPO prospectus, from 2020 to 2022, Hainan Medicine achieved operating income of approximately RMB 5681.83 million, RMB 1.68 billion, RMB 2.71 billion, and RMB 2.26 billion respectively, with corresponding net profits of approximately RMB -2871.3 million, RMB 1156.82 million, RMB 6801.77 million, and RMB 7318.21 million respectively.

However, Hainan Medicine's sales expenses have been rising steadily. From 2020 to 2022, the company's sales expenses were approximately RMB 394.36 million, RMB 1445.66 million, and RMB 2187.30 million respectively, with a compound annual growth rate of 135.51%, and a sales expense ratio of approximately 6.94%, 8.63%, and 8.07% respectively.

In comparison, the average sales expense ratio for comparable listed companies was approximately 2.95%, 3.81%, and 3.88%. Hainan Medicine's sales expense ratio is more than twice that of comparable listed companies.

The company attributed its high sales expense ratio to the self-owned product sales business, which typically has a higher sales expense ratio compared to pharmaceutical research and development services. Compared with other comparable listed companies such as Baishi Pharmaceutical and Yangguang Nuoke, Hainan Medicine's self-owned product sales business has resulted in higher marketing expenses.

As operating income continues to grow, Hainan Medicine's R&D expenses have shown a downward trend, with R&D investment ratios of approximately 59.95%, 23.53%, 14.91%, and 11.19% respectively for the years from 2020 to 2023. In 2022, the company's R&D expense ratio was even lower than the average R&D expense ratio for comparable listed companies of 16.97%. The company attributed this trend to increasing operating income.

In response to the increasingly fierce competition in the CXO industry, Hainan Medicine has started to sell its own products from 2021 onwards, but the high sales expenses that come with it may not be a sustainable strategy for the company in the long run.