From "hoarding rats" to "hoarding monkeys", the performance risks of Pengli Biology's IPO on the Science and Technology Innovation Board remain to be resolved?

The innovative pharmaceutical industry is facing tough times, and CXO companies may not be able to stay out of it.

Recently, after WuXi Biologics (2269.HK) lowered its performance expectations, it triggered a sharp drop in the stock prices of the entire CXO sector.

The performance challenges of the CXO industry may be looming.

Currently, there are also many CXO companies in the process of IPO review and are in the inquiry stage. The industry changes are attracting attention as to whether they will bring more uncertainty to the IPO path of these companies.

One of the companies that has applied for an IPO on the Science and Technology Innovation Board is Penglai Biomedical Technology (Shanghai) Co., Ltd. (referred to as "Penglai Biomedical"). It has completed the first round of inquiries and mainly provides pre-clinical pharmacology research evaluation services for global innovative pharmaceutical companies.

During the reporting period, Penglai Biomedical's performance scale was relatively limited. The revenue for the first three quarters of 2020, 2021, and 2022 were RMB 111 million, RMB 193 million, and RMB 180 million, respectively. The net profit attributable to the parent company during the same period was RMB 15 million, RMB 37 million, and RMB 40 million, respectively.

In this IPO, Penglai Biomedical plans to issue no more than 125 million shares and raise RMB 601 million, which will be invested in the "Jinqiao Pre-clinical Research Service Industrial Base Project," "Innovation Research and Development Platform Project," "Zhangjiang Pre-clinical Service Industrial Base Technological Transformation and Upgrading Project," and supplementary working capital.

In the cold winter of the industry, how Penglai Biomedical's performance will evolve is also crucial for its IPO.

It is worth noting that during the previous surge in the price of "experimental monkeys," Penglai Biomedical had made large-scale purchases of experimental monkeys, with a purchase price of up to RMB 137,800 per monkey in the first three quarters of 2022, which was a significant increase compared to the purchase price of around RMB 50,000 per monkey in 2021.

However, now that the price of experimental monkeys has fallen, these heavily purchased experimental monkeys may be bringing certain performance risks to Penglai Biomedical.

The Contrarian of CXO

The industry leader "can't get a piece of the pie," and whether the smaller companies have a chance to "drink the soup" is a common challenge facing CXO companies.

On December 4th, WuXi Biologics announced that its full-year revenue growth outlook was lowered from 30% to 10%.

"The entire CXO industry's downward cycle began in the third quarter of 2021. We were still in a high-growth state in the early stage, and it was only this year that we felt the industry's cold winter. Our mistake was underestimating the extent of the industry's adjustment," said Chen Zhisheng, CEO of WuXi Biologics.

The "water sellers" also cannot thrive in the cold winter of the biopharmaceutical industry.

But Penglai Biomedical, which is sprinting towards the Science and Technology Innovation Board, is a "contrarian" in the industry.

As a company mainly focused on the pre-clinical CRO segment of drugs/medical devices, Penglai Biomedical achieved a revenue of RMB 138 million in the first half of 2023, a year-on-year increase of 73.87%.

According to the application materials, Penglai Biomedical has listed a total of 5 companies, including MediciNova (688202.SH), Zhaoyan New Drug (603127.SH), and WuXi AppTec (603259.SH), as comparable companies. The average revenue growth rate of these 5 companies in the first half of 2023 is only 11.37%, which is 62.5 percentage points lower than Penglai Biomedical. Pengli Biotech attributes its astonishing growth rate to the lower base of last year.

"The high YoY growth rate in revenue from January to June 2023 is mainly due to the impact of remote work in the Shanghai area from April to June 2022. The revenue growth in the first half of 2022 was lower than expected due to a smaller base," explained Pengli Biotech.

According to Pengli Biotech's explanation, its performance in the first half of 2023 may not be the norm, and the growth in the second half of the year may be the real challenge.

In fact, Pengli Biotech not only stands out in terms of growth rate compared to its peers, but also in terms of per capita revenue, which is close to the industry ceiling.

Since Pengli Biotech only disclosed complete financial data for the three fiscal years from 2019 to 2021, TradeWind01 calculated the per capita revenue based on this period. (Per capita revenue = total revenue/total number of employees)

From 2019 to 2021, Pengli Biotech's per capita revenue was 616,500 yuan, 677,100 yuan, and 717,400 yuan, respectively, which were 21.57%, 21.74%, and 20.23% higher than the average of five comparable companies including Medici, Zhaoyan Pharmaceuticals, etc.

Specifically, except for 2020, Pengli Biotech's per capita revenue level was the highest among comparable companies.

However, considering the high requirements of the biopharmaceutical industry in terms of technological expertise, Pengli Biotech's employees mainly have undergraduate and college degrees.

As of September 2022, Pengli Biotech had 109 employees with undergraduate degrees and 154 with college degrees or below, accounting for nearly 80% of the total.

This may not be the industry norm. For example, as of the end of 2022, 79.50% of Medici's employees with comparable companies had a bachelor's degree or above.

The source of Pengli Biotech's competitive advantage in per capita revenue, which is significantly higher than the industry average, may be another question beyond its growth rate.

In fact, the Shanghai Stock Exchange has raised concerns about the authenticity of Pengli Biotech's revenue and requested intermediary agencies to provide clear opinions on the authenticity of the revenue.

"Please ask the sponsoring institution and the reporting accountant to verify the above matters, explain the amount and proportion of the letters sent and received, the reasons and amounts of the letters not received or not matching, the alternative procedures taken for the clients who did not reply, the adjustment process for the letters not matching, and provide clear opinions on the authenticity and accuracy of the revenue," the Shanghai Stock Exchange pointed out.

According to the verification data from intermediary agencies, the proportion of the amount of letters received and replied to the revenue from 2020 to the first half of 2023 is between 70% and 80%, and the discrepancy in the amount of letters not matching is mainly due to differences in the timing of invoice recording.

Whether this can dispel the regulators' concerns may require further observation. Pengli Biotech's revenue can be divided into three major sectors: pre-clinical CRO for drug efficacy studies, pre-clinical CRO for medical devices, and sales of laboratory animals.

Among them, the pre-clinical CRO business focusing on pharmacology research services is the main source of revenue. In the first three quarters of 2021 and 2022, it generated revenues of RMB 131 million and RMB 115 million, accounting for 68.91% and 65.05% respectively.

In contrast, the sales of laboratory animals account for a limited proportion. In the first three quarters of 2021 and 2022, it achieved revenues of RMB 8 million and RMB 15 million, accounting for 4.24% and 8.46% respectively.

The sales of laboratory animals by Pengli Biotech were acquired.

In September 2021, Pengli Biotech spent RMB 7 million to acquire Shanghai Jihui Laboratory Animal Breeding Co., Ltd. (referred to as "Shanghai Jihui"), which provides various types of laboratory animals for mice. The laboratory mice can be used for internal use or exported.

Regarding the purpose of this acquisition, Pengli Biotech stated that it is for conducting research on spontaneous disease animal models and maintaining the confidentiality of experimental models.

"After the issuer acquires Shanghai Jihui, relying on its hardware facilities, professional team, and industry experience, it can continue to breed specific strains or customized animal models, and at the same time conduct research on spontaneous disease animal models, which is conducive to the expansion of the company's experimental animal strains and the confidentiality of customized models," explained Pengli Biotech.

However, after the acquisition, Pengli Biotech's purchases of laboratory mice from Shanghai Jihui are limited. The purchase amounts for 2022 and the first half of 2023 were RMB 1.789 million and RMB 954,000 respectively.

In this regard, Pengli Biotech stated that Shanghai Jihui is currently unable to provide the laboratory mouse strains it needs.

In fact, what Pengli Biotech wants to do more may be "selling mice".

Looking at the time of Pengli Biotech's acquisition in 2021, "selling laboratory mice" was indeed a lucrative business.

In June 2021, when the laboratory mouse company Yaokang Biotech (688046.SH) applied for an IPO on the Science and Technology Innovation Board, its prospectus showed that the sales prices of gene knockout mice, immunodeficient mice, humanized mice, and disease mice could reach RMB 11,700, RMB 172.34, RMB 1,623.50, and RMB 320.54 per mouse, respectively.

In 2020, Yaokang Biotech's overall gross profit margin even reached 70.33%.

But the business of laboratory mice is not easy.

In 2022, due to the impact of the pandemic, Shanghai Jihui's performance declined significantly as it encountered obstacles in executing orders, such as the inability to transport laboratory mice normally and the need for disposal due to expiration. Its revenue and net profit in 2022 were RMB 24 million and RMB 5 million, respectively, a year-on-year decrease of 25% and 61.54%.

Pengli Biotech's "stocking mice" business has also faced challenges.

However, Pengli Biotech did not give up and switched to "stocking monkeys" this time.

In the first three quarters of 2020, 2021, and 2022, Pengli Biotech's purchases of laboratory monkeys reached RMB 4.7189 million, RMB 10.249 million, and RMB 29.895 million, respectively. Among them, the purchase amount in the first three quarters of 2022 increased by 191.69% compared to the same period last year. During the same period, the purchase prices of experimental monkeys were 23,000 yuan per monkey, 55,100 yuan per monkey, and 137,800 yuan per monkey, respectively.

"Mainly due to the significant increase in demand for experimental monkeys in the domestic market and the impact of factors such as import restrictions, there has been a temporary shortage of supply and demand for experimental monkeys, leading to a continuous increase in purchase prices," said Pengli Biology. "The company has adopted a flexible stocking strategy, taking into account factors such as future experimental needs, market supply and price fluctuations, and resource reserve plans, to stock up on experimental monkeys within a reasonable range."

If we look at Pengli Biology's "hoarding monkeys" behavior from the perspective of 2022, this business may still be profitable - in 2022, the purchase price of experimental monkeys in some academic institutions even reached 194,000 yuan per monkey.

However, the price of experimental monkeys has now fallen to around 100,000 yuan, which may be a drag on Pengli Biology's performance.

According to the application materials, when Pengli Biology quotes for drug development projects involving experimental monkeys, the price of experimental monkeys is one of the important factors in the quotation.

Moreover, according to Sun Qiang, director of the Non-Human Primate Research Platform at the Institute of Neuroscience of the Chinese Academy of Sciences, the time window for using experimental monkeys in experiments is limited to about two years between the ages of 3 and 5.

All of this poses potential performance risks for Pengli Biology.

In fact, some companies have already experienced the "pain of hoarding monkeys".

In the first half of 2023, Zhaoyan Pharmaceuticals suffered an impact on its performance due to the decline in the market price of experimental monkeys, resulting in a fair value loss, and its net profit attributable to shareholders was 91 million yuan, a year-on-year decrease of 75.58%.

"During this reporting period, the fair value loss caused by the decline in the market price of the company's biological assets has had a negative impact on performance," Zhaoyan Pharmaceuticals said.