Preview of US Stock IPOs | Bringing double-digit performance to the US, how will Zhengye Biotech deal with industry competition with its "flagship product" pig vaccine?

With the rebound of pork prices, the pig cycle and breeding concept stocks have once again entered the investors' field of vision, and the animal protection industry under the linkage effect has gradually become active.

Recently, a Chinese livestock-focused animal vaccine supplier, ZYBT.US, announced its IPO terms. The company, headquartered in Jilin, China, plans to issue 1.3 million shares at a price of $4 to $5 per share, raising $6 million. Based on the midpoint of the proposed price range, ZYBT.US's market value is approximately $211 million.

This means that this animal vaccine enterprise, which was listed on the New Third Board in 2016 and prepared to sprint for the Northbound Exchange in 2021, has finally "landed" on the US stock market, indicating that its IPO is just a step away. Standing on the "post-pig cycle," how is ZYBT.US doing?

Decline in Revenue and Profit, Blaming it on Pig Vaccines

From the rocky experience of going public, it seems that ZYBT.US's persistence in the capital market is evident. It is understood that the company's predecessor was the Harbin Veterinary Biological Pharmaceutical Factory of the Ministry of Agriculture, which relocated to Jilin City in 1970 and has a history of over 50 years. In 2004, it was restructured from Jilin Provincial Biological Products Factory and is now a privately-owned joint-stock company controlled by Jilin Zhengye Group, a national-level agricultural industrialization leading enterprise.

ZYBT.US focuses on the research, development, manufacturing, and sales of animal vaccines, with a focus on animal vaccines. The company's product portfolio currently includes 43 kinds of animal vaccines, covering all major vaccines for pigs and cattle, and it is also developing vaccines for pets such as dogs. ZYBT.US's products are sold in 29 provincial-level regions in China and exported to overseas countries such as Vietnam, Pakistan, and Egypt.

From the revenue structure perspective, pig vaccines are undoubtedly the "main force" of the company's revenue, accounting for nearly 90% of the total revenue. However, due to the obvious importance of the "major product" pig vaccine to ZYBT.US, the fluctuation of this business further affects the overall revenue level of the company. In 2023, the sales revenue of pig vaccines rapidly declined by 19.82%, with ZYBT.US stating that the main reason was the controlled sales to its largest customer.

Also, due to the frequent fluctuations in pig vaccines, in 2023, ZYBT.US's revenue decreased by 18.7% from approximately RMB 260.3 million in 2022 to RMB 211.7 million, similar to the decline in pig vaccine sales. The company explained that this was mainly due to adjustments in the animal vaccine market and strategic adjustments to sales practices to achieve customer diversification and reduce concentration risk, resulting in a decrease in pig vaccine sales.

From the perspective of sales model, before 2017, China's animal vaccine market was mainly dominated by government tender procurement. Previously, Zhenye Biotechnology was one of the earliest 28 veterinary biological product enterprises directly under the Ministry of Agriculture, with "vaccine procurement" accounting for 80% of its sales. As a supplier of veterinary vaccines that relied on tender procurement in the past, Zhenye Biotechnology still relies on direct sales channels in distribution, including livestock breeders and local governments, accounting for as high as 80%, while the remaining nearly 20% of revenue comes from distributor channels.

Due to the advancement of market-oriented reform in the veterinary vaccine market in recent years, the sales model of strong immune vaccine products has shifted from government procurement to fully market-oriented sales, and breeding farms have started to make independent purchases. Even though Zhenye Biotechnology has adjusted its sales methods in recent years, it is still inevitably affected by the decline in sales revenue from a single customer.

Data shows that by 2023, sales revenue from Zhenye's largest customer decreased sharply from 193.9 million yuan to 110.3 million yuan, and by the end of 2023, the company's top two customers accounted for 53.2% and 10.8% of the total accounts receivable respectively. Therefore, even with an increase in sales to the second largest customer, it is still difficult to offset the negative impact of relying on declining sales from major customers.

In terms of profit, the company's profit has also decreased with the fluctuation in revenue, dropping from 55.742 million yuan in 2022 to 37.509 million yuan. Considering the low pig prices in 2023, huge losses for breeding enterprises, and the pig cycle being at a low point, the sales and procurement of pig vaccines fluctuate with pig prices, which is understandable. However, from the perspective of gross profit margin, Zhenye Biotechnology's gross profit margins in 2022 and 2023 reached 58.9% and 61.3% respectively, indicating a relatively considerable overall profit margin.

Industry consolidation, or facing a brutal price war

Having mature products and stable customer base does not necessarily mean that Zhenye Biotechnology can rest easy in the pig cycle. In the past 10 years, a complete product line has been the accelerator for the rapid growth of animal health enterprises. The prospectus shows that the size of China's veterinary vaccine market in 2022 was $2.5 billion, and it is expected to further increase to $3.2 billion by 2026, with a compound annual growth rate of 6.5%.

From the perspective of the animal health industry, it is generally believed that if pig prices are on the rise, leading animal health enterprises with high-quality products will benefit fully. Therefore, the animal health sector usually starts a bull market with the "post-pig cycle". At the same time, the emergence of new blockbuster products often creates growth opportunities for 2-3 companies or sectoral growth opportunities, achieving rapid performance growth, and can achieve short-term counter-cyclical performance. For example, the foot-and-mouth disease from 2013 to 2017 contributed to the success of a biological company From a cyclical perspective, as pig prices rise, the willingness of breeders to replenish their herds increases, leading to an increase in the number of pigs being raised, naturally increasing the demand for pig vaccines. However, with the market-oriented reforms, this purchasing dividend is rapidly disappearing.

On one hand, the pig vaccine track has opened an "internal competition" mode driven by marketization and enterprise group procurement. In a situation of product homogeneity, the competition in product sales is not only based on the construction of market-oriented sales channels, but also on pricing, products, production capacity, research and development, and other hard strengths. While the market share of leading animal health companies is increasing, it will undoubtedly squeeze out or even eliminate the living space of some small and medium-sized enterprises.

In this regard, VACN Biotech mentioned in its risk factors that the competition in the Chinese animal vaccine industry is fierce and developing rapidly. In recent years, many new companies have entered the competition, and some competitors and potential competitors have stronger product development capabilities, as well as financial, scientific, marketing, and human resources than VACN Biotech. The technical competition from biopharmaceutical and biotechnology companies is very intense and is expected to intensify. Looking at VACN Biotech's current market share, in 2022, the company ranks 10th among domestic animal vaccine companies; while in the company's main pig vaccine track, the company's market share ranks 8th, placing it in a relatively advanced position in the industry.

On the other hand, from a structural opportunity perspective, the biggest expansion opportunities in the animal health industry often come from the development and implementation of major single products based on new diseases and new routes. A multi-product matrix based on research and development capabilities and comprehensive service capabilities is the core barrier for animal health companies in the process of scaling up farming and the rise of the pet economy.

Currently, VACN Biotech is still the designated company by the Ministry of Agriculture to produce classical swine fever spleen and kidney attenuated vaccines. In 2023, the company will launch two new pig vaccines, Zheng Yuanjing (porcine circovirus type 2 subunit vaccine (recombinant rod-shaped virus OKM strain)) and Zheng Weijing (porcine pseudorabies inactivated vaccine (JS2012-△gI/gE strain)).

In addition to animal husbandry, looking at the company's product pipeline layout, based on the strategy of adhering to the "major single product" of pig vaccines, it is targeting the pet vaccine and mRNA vaccine tracks. The layout includes pet vaccines such as feline triple, feline infectious peritonitis, feline immunodeficiency virus, and animal experiments on pig epidemic diarrhea and porcine reproductive and respiratory syndrome mRNA vaccines. However, it is still too early to mention their launch or profitability.

In the context of market-oriented transformation, lowering prices may be the fastest way to gain customer favor. While improving the performance of "double decline," it also means that profit margins will be further squeezed. Therefore, how to have irreplaceable, difficult-to-replicate flagship products, and continue to achieve scale expansion and sustainable growth will become an important topic for VACN Biotech to further explore after landing on the U.S. stock market