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(Original title: Behind Hengrui Medicine’s response to the FDA warning letter: Sales expenses reached 7.5 billion, and the market value evaporated by more than 300 billion yuan from the peak)

Consumer Daily News (Reporter Lu Yue) Recently, JiangsuHengrui MedicineCo., Ltd. (hereinafter referred to as "Hengrui Medicine") received aFDAAfter receiving the on-site inspection report, it received the FDAWarning LetterOn the evening of the 16th, Hengrui Medicine responded that the problems pointed out in the FDA warning letter did not affect the quality and safety of the drug.

The reporter saw that Hengrui Medicine's financial data in recent years has been unstable. Since the company's revenue declined for the first time in 2021 due to the impact of centralized procurement, its operating performance has not returned to its previous level. From 2021 to 2023, the company's operating income will be approximately 25.906 billion yuan, 21.275 billion yuan and 22.820 billion yuan, respectively, with year-on-year growth of -6.59%, -17.87% and 7.26%; net profit will be approximately 4.53 billion yuan, 3.906 billion yuan and 4.302 billion yuan, respectively, with year-on-year growth of -28.41%, -13.77% and 10.14%.

In addition, Hengrui Medicine's sales expenses have been high year after year. After the company reduced nearly 4,000 sales personnel in 2021, the sales expenses that year were still as high as 9.384 billion yuan, accounting for 36.22% of the total revenue. In 2023, the company's sales expenses were 7.577 billion yuan, accounting for 33.2% of the total revenue. Although it has narrowed, the revenue has also declined compared with the previous period.

The manufacturing site received a warning letter from the FDA

Due to problems with its production base, following the "Form 483", Hengrui Medicine received another warning letter from the FDA.

From January 8 to 16 this year, the FDA inspected Hengrui Medicine's production base in Lianyungang City, Jiangsu Province, China, and found relevant problems in the production base. In June, the FDA sent the company a Form 483. According to public information, Form 483, also known as the "On-site Observation Report," records potential violations found by the FDA during inspections of pharmaceutical companies that produce products it regulates.

The Form 483 received by Hengrui Medicine mentioned that there were 8 problems, including insufficient management of sterility assurance details and cleaning validation assessment details; loopholes in the file management software, insufficient management of the destruction of discarded records and documents; insufficient maintenance of warehouse air conditioning failures, etc. In response, Hengrui Medicine said that it had submitted a rectification reply and completion tracking report for the defects raised by the inspection, and maintained active communication with the FDA. At present, the company's preparations exported to the United States have not been affected.

It is worth mentioning that before receiving the Form 483, Hengrui Medicine's application for the listing of the "Double Ai" combination in the United States had just been delayed, and the FDA raised a series of opinions related to the production and clinical trial environment. However, it later told the media that the inspection results had nothing to do with the company's PD-1 combination therapy application for listing in the United States.

On June 6, Hengrui Medicine responded that it had submitted a rectification reply and completion tracking report for the defects raised by the inspection, and maintained active communication with the FDA. At present, the company's preparations exported to the United States have not been affected.

On July 16, more than a month after receiving Form 483, Hengrui Medicine received another warning letter from the FDA. This warning letter is a follow-up measure to the FDA's inspection results of Hengrui Medicine's Lianyungang pharmaceutical production site. It is the same related event as Form 483, and the content is mainly derived from the previous Form 483. The FDA warning letter lists two deficiencies, namely, the company's quality control department failed to perform its duties to ensure that the drugs produced comply with CGMP and meet established identification, strength, quality and purity specifications, and the company failed to operate in a specially designated area of ​​sufficient size, and failed to have separate or designated areas or other necessary control systems to prevent contamination or mix-ups in sterile processing areas.

Among them, the FDA stated in the warning letter that Hengrui Medicine failed to provide adequate supervision and failed to ensure the reliability of data related to the quality of finished drugs produced by the factory. Its inspection recorded serious quality assurance (QA) deficiencies, such as the discovery of discarded original CGMP records piled in bags under vehicles and in nearby trash cans, and the company's production manager had unrestricted access to blank production batch records and other CGMP documents without QA issuance.

On the evening of July 16, Hengrui Medicine responded to the above situation, saying that the company has conducted a comprehensive investigation and assessment, and the problems pointed out in the FDA warning letter have not affected the quality and safety of the drugs. So far, the company's product exports at this site have not been affected.

Overseas revenue is unstable and sales expenses are high

Public information shows that Hengrui Medicine was founded in 1970. It started out as a manufacturer of gentian violet and was listed on the Shanghai Stock Exchange in 2000. It is a large-scale listed pharmaceutical company integrating scientific research, production and sales. Hengrui Medicine has long been focusing onGeneric Drugsbusiness, but due to factors such as centralized bulk procurement of generic drugs and medical insurance negotiations, the company's operating performance has been affected to a certain extent.

In its 2022 annual report, Hengrui Medicine disclosed that "since 2018, the company has had a total of 35 varieties of generic drugs involved in the national centralized bulk procurement, 22 varieties were selected, and the average price reduction of the selected varieties was 74.5%."

Financial data shows that from 2021 to 2022, Hengrui Medicine's operating income was approximately RMB 25.906 billion and RMB 21.275 billion, respectively, year-on-year decreases of 6.59% and 17.87%; the net profit attributable to the parent was approximately RMB 4.530 billion and RMB 3.906 billion, respectively, year-on-year decreases of 28.41% and 13.77%.

After generic drugs were affected by centralized procurement, Hengrui Medicine began to gradually transform intoInnovative drugsIn 2023, its operating income will be approximately RMB 22.82 billion, a year-on-year increase of 7.26%; its net profit attributable to shareholders will be RMB 4.302 billion, a year-on-year increase of 10.14%. Its innovative drug business has achieved certain growth, but it has not yet recovered to the level of 2021.

In its annual report, Hengrui Medicine stated that with the recovery of diagnosis and treatment in medical institutions, the demand for prescription drugs has been gradually released, and the sales of its analgesics and anesthetics and newly launched generic drugs have increased significantly year-on-year. However, the centralized procurement of generic drugs still puts a certain degree of pressure on sales. The second batch of centralized procurement involved paclitaxel injection and abiraterone acetate tablets. Due to factors such as failure to win the bid for centralized procurement renewal in most provinces and price cuts, sales of products decreased by 702 million yuan during the reporting period. The seventh batch of centralized procurement, which will be implemented in November 2022, involved products with a year-on-year sales of 911 million yuan during the reporting period.

In terms of overseas revenue, from 2020 to 2022, Hengrui's overseas market revenue was RMB 758 million, RMB 617 million, and RMB 779 million, respectively, accounting for 2.73%, 2.38%, and 3.66% of the total revenue, respectively. The growth rate was low and showed a fluctuating trend.

In addition, in the secondary market, as of now, the market value of Hengrui Medicine has fallen from 620 billion yuan at its peak in 2021 to about 268 billion yuan, with a market value evaporation of more than 350 billion yuan.

In addition, the company's sales expenses also remained high. In 2021, after its business was affected by centralized procurement, it also carried out a series of sales reforms, including integrating sales operations, marketing finance, and support department functions, streamlining sales staff, and other measures. The number of sales staff decreased by nearly 4,000 to 13,208, but sales expenses were still as high as 9.384 billion yuan, accounting for 36.22% of total revenue. Although sales expenses were streamlined, its performance that year still declined.

In 2023, Hengrui Medicine's sales expenses will be approximately RMB 7.577 billion, a year-on-year increase of 3.12%. Of this, approximately RMB 3.877 billion will be used for market expenses such as academic promotion and the construction of a specialized platform for innovative drugs. R&D expenses for the same period will be approximately RMB 4.954 billion, a year-on-year increase of only 1.38%.

We will continue to pay attention to the FDA's attention, the overseas obstacles faced by the "Double Ai" combination, and the sales expenses.