IPO Observation: Three Uncertainties Behind Ping An Biotech's IPO

It is well-known that CRO companies have a crucial role in their businesses, particularly in terms of experimental animals. Prior to this, CRO companies had been aggressively "stockpiling" monkeys, which has raised industry attention, with the prices of monkeys being pulled up under supply-and-demand pressures. As these prices have dropped, these companies have also begun to feel the bitter taste of stockpiling.

Ping An Biotech Technology (Shanghai) Co., Ltd. (), a CRO company focused on innovative pharmaceutical R&D and preclinical research evaluation, is currently gearing up for its IPO.

In 2022, Ping An Biotech acquired 229 experimental monkeys, with these animals becoming a heavy burden as the prices dropped. Under this background, Ping An Biotech chose to go public, but there are three uncertainties that need to be explained.

Uncertainty One: Why Did You Stockpile So Many Monkeys?

For CRO companies, experimental animals play a crucial role in their businesses. Due to the blockage of wild animal imports and exports, domestic demand for new drugs was strong in recent years, leading to a shortage of monkeys and prices skyrocketing.

Ping An Biotech's prospectus shows that the company purchased experimental monkeys at prices ranging from RMB 2.3 million to RMB 13.71 million per unit during the reporting period.

In 2019, Ping An Biotech acquired 347 experimental monkeys, 205 in 2020, and 186 in 2021. It's worth noting that in 2022, the company purchased 216 monkeys just within the first nine months of the year.

Ping An Biotech explained that it comprehensively considered future experimental needs, market supplies, and price fluctuations when stocking up on monkeys.

However, with only 20% of its business involving experimental animals, did Ping An Biotech really need to stockpile so many monkeys?

Ping An Biotech replied that the company's various businesses only involve pharmaceutical R&D and CRO projects related to experimental animals. During the reporting period, the company's revenue from experimental animal-related projects accounted for 20.6%, 13.25%, 19.84%, and 20.94% respectively.

In 2022, Ping An Biotech acquired a total of 229 experimental monkeys, with all but 38 still unused by the end of the year. The company explained that the deceased animals were part of a process to clear out old stocks and make way for new arrivals.

Moreover, stockpiling monkeys has also put a strain on Ping An Biotech's cash flow.

Uncertainty Two: How Will You Consume the High-Priced Monkeys?

Ping An Biotech typically purchases experimental monkeys aged 3-6 years old, in good health and normal body size. According to Dr. Sun Jian from the Chinese Academy of Sciences' Institute of Neuroscience, the time window for using experimental monkeys is approximately two years, with a limited lifespan.

Although the company will use experimental animals at some point in its business, how long can Ping An Biotech keep these monkeys?

The company's financial reports show that when bidding on pharmaceutical R&D projects involving experimental animals, the price of monkeys is an important factor.

If Ping An Biotech continues to stockpile high-priced monkeys without reducing costs, it will face pressure; if it reduces costs, it may lose its pricing advantage and be affected by its business. In today's CRO industry, where competition is fierce, Ping An Biotech faces a dilemma.

Uncertainty Three: How Will You Achieve High Growth in a Low-Growth Industry?

In early December, the CEO of pharmaceutical company Mindray publicly stated that the entire CXO industry has entered a downward cycle since the third quarter of 2021. Our mistake was underestimating the magnitude of this adjustment. In its performance guidance, Mindray further downgraded industry growth to single-digit levels.

Medicinal companies such as Medici and Jingyuan have also reported slow revenue growth in their quarterly reports. The five companies, including Ping An Biotech, selected by Ping An Biotech as comparable peers had an average revenue growth rate of 11.37% in 2023.

Ping An Biotech's revenue growth, on the other hand, was a staggering 73.87%. The company explained that this was due to the impact of Shanghai's stay-at-home orders during the first half of 2022, which led to higher-than-expected revenue growth and a lower base effect.

The regulatory authorities have expressed concerns about Ping An Biotech's high growth rate and required the company's underwriters and auditors to review relevant matters, including the amounts and proportions of related transactions, non-compliant returns, and alternative programs for non-returning clients. The regulators also demanded that the company provide a clear opinion on the authenticity and accuracy of its revenue.