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Text丨Jin Duo Editor丨Bai Jin

Source: Zhengjingshe (ID: zhengjingshe)

(This article is about 3,600 words)

[Observation on "New Power of Medicine" by Zhengjingshe Part 4]

2024 is halfway through, and investors are eager for“Recover lost ground and return to 20 yuan per share”It did not happen as expected, and Shanghai Pharmaceuticals has been below the hope line for a long time. After barely climbing to 19.86 yuan per share at the end of July, the capital market's hope for Shanghai Pharmaceuticals was quietly ignited again.

Looking back at the last glory, it was only two years ago. On March 25, 2022, Shanghai Pharmaceuticals' stock price hit 27.20 yuan per share (before readjustment, the same below), infinitely close to the highest record of 27.97 yuan per share set in May 2015. However, with the de-bubble of the pharmaceutical sector and its involvement in corruption cases, the abolition of new drug research and development projects, and the supervision and punishment of its subsidiary for producing inferior drugs, creating another success has since become a bright moon hanging high in the sky, which is out of reach.

Facing the biting cold wind, how can Shanghai Pharmaceuticals protect its market and move forward?

1

The “20 yuan” that cannot be crossed

2024 will undoubtedly be a difficult year for pharmaceutical stocks. As of July 29, the A-share pharmaceutical and biological sector fell from 9211.51 to 7117.99, a drop of more than 20%. Only 36 of the 494 pharmaceutical stocks recorded an increase in the range of 0.12%-50.33%. The remaining 458 stocks recorded a decline in the range, with a decline of 0.74%-79.40%.

Specifically in the pharmaceutical distribution sector where Shanghai Pharmaceuticals is located, only three stocks among the 23 A-share pharmaceutical distribution companies recorded an increase in the range, namely Shanghai Pharmaceuticals (18.32%), Sinopharm Group (15.18%), and Sinopharm United (4.17%), while the remaining 20 stocks fell between 6.10% and 41.48% during the same period.

Objectively speaking, the 18.32% increase in Shanghai Pharmaceuticals' share price is enough to save the reputation of this pharmaceutical company, which claims to be "China's leading pharmaceutical company." However, Shanghai Pharmaceuticals has been fluctuating below expectations for a long time, which has greatly tested investors' "patience."

The last time Shanghai Pharmaceuticals' stock price reached 20 yuan per share was in 2023, and it reached a high of 22.96 yuan per share on June 9 of that year. But it has been falling since then.It reached a low of 14.95 yuan per share.

Later we all knew that pharmaceutical stocks ushered in a "bonus period" blessed by the epidemic. The legendary stories of the pharmaceutical and biological sector have been constantly innovating in the past two years, from Wantai Biological's 15-fold surge in 2020, to Jiuan Medical's 4-fold surge in 2021, to Xinhua Pharmaceutical's efforts to double in 2022. The dividends have disappeared all the way, but it can also be said that the upward trend remains. Even in 2023, when the winter is approaching, there are stocks such as Baili Tianheng and Sinopharm that have doubled their value due to breakthroughs in the research and development of innovative drugs. In this process, the share price of Shanghai Pharmaceuticals has gone from more than 10 yuan per share to more than 10 yuan per share.

It is worth mentioning that Chen Fashu, who was once the co-chairman of Yunnan Baiyao, led Yunnan Baiyao to participate in the private placement of Shanghai Pharmaceuticals in 2022, spending 10.9 billion yuan to acquire 18.02% of Shanghai Pharmaceuticals. However, when Yunnan Baiyao recorded a net profit loss in the fourth quarter of 2023, it attributed part of the reason to the "decline in investment income of Shanghai Pharmaceuticals." In investing in Shanghai Pharmaceuticals, Chen Shufa was as unlucky as most investors.

From 2018 to 2024, after five years of waiting, a large number of investors have been eagerly waiting on the interactive platform for Shanghai Pharmaceuticals to "regain lost ground and return to 20 yuan per share", and according to the current trend, this wait continues.

2

The road to innovation is full of twists and turns

In terms of market capitalization, Shanghai Pharmaceuticals, with a market value of 70 billion yuan, ranks among the top 20 among the nearly 500 pharmaceutical stocks in the entire biopharmaceutical sector; and as an old pharmaceutical company that has emerged from the wild era of China's pharmaceutical industry, it can be regarded as a veteran in the Chinese pharmaceutical industry; at the same time, as one of the four Chinese pharmaceutical companies shortlisted for the 2023 Fortune Global 500, it can also be regarded as the light of Chinese pharmaceutical companies.

With so many halos around, many people are confused about the difficulties Shanghai Pharmaceuticals has faced in the capital market.

The answer to this question may be found in Shanghai Pharmaceuticals' financial report. According to analysts from Zhengjingshe, Shanghai Pharmaceuticals' revenue growth rate has fluctuated downward in the past five years, falling from 17.27% in 2019 to 12.21% in 2023. Net profit also fluctuated during this period, and in 2023 it fell by 32.92%.

For a huge business empire, it is normal for performance growth to slow down after entering a mature development period, and this is also true for Shanghai Pharmaceuticals. Since Shanghai Pharmaceuticals' revenue exceeded 100 billion yuan in 2015, it has exceeded 260 billion yuan, but the revenue growth rate has barely maintained double-digit growth for a year before it began to fluctuate and decline. During this period, it once fell below 10% in 2017, 2020, and 2022, reaching 8.35%, 2.86%, and 7.49% respectively, and its instability is evident.

On the other hand, profit margins have been further compressed after the gradual implementation of medical reform policies and the promulgation or revision of a number of pharmaceutical-related industry laws. The "two-invoice system" has directly hit the pharmaceutical distribution industry. As one of the leaders in this field, Shanghai Pharmaceuticals is not immune.

Zhengjingshe analysts have sorted out and learned that:From 2019 to 2023, the revenue of Shanghai Pharmaceuticals' distribution sector was RMB 139.445 billion, RMB 162.390 billion, RMB 167.650 billion, RMB 190.617 billion, and RMB 233.760 billion, respectively, and the proportion of total revenue increased from 87.04% to 89.81%. During the same period, the gross profit margin of the sector fell from 7.03% to 6.31%. It can be seen that the distribution sector, as the main pillar of the company's performance, has stable revenue growth, but its profitability is declining, which has directly led to the stable growth of Shanghai Pharmaceuticals' revenue but the slowdown or even reversal of net profit growth.

If you want to wear the crown, you must bear its weight. This is why giants such as Alibaba and Kweichow Moutai have to constantly seek new growth poles to maintain a stable and "beautiful" growth rate after reaching a certain scale. Shanghai Pharmaceuticals is also exploring its own way to "beautify" - innovation.

As mentioned above, Shanghai Pharmaceuticals' main revenue comes from pharmaceutical distribution, which is commonly known as "drug dealers."It can also be seen from the financial report data that pharmaceutical distribution itself has a low gross profit margin, and coupled with changes in policy direction, profit margins have been further compressed. The limitations of Shanghai Pharmaceuticals' growth are visible to the naked eye.

To this end, in addition to distribution, Shanghai Pharmaceuticals has been focusing on new drug research and development.In 2015, Shanghai Pharmaceuticals defined the company's development slogan as "persisting in both imitation and innovation" in its annual report, and was committed to providing safe and effective therapeutic drugs for major diseases and chronic diseases. Since then, its new drug research and development projects have emerged one after another.

The financial report shows that as of 2023, Shanghai Pharmaceuticals has 68 new drug projects under development (calculated by indication), including 55 innovative drugs and 13 improved new drugs. In the same year, R&D expenses were 2.204 billion yuan, accounting for 0.85% of revenue. Although this is not outstanding in the pharmaceutical and biological sector, it can be regarded as a good effort in the subdivided pharmaceutical distribution sector. During the same period, the R&D expenses of China Pharmaceutical, Sinopharm, and Jiuzhoutong accounted for 0.71%, 0.28%, and 0.19%, respectively.

But even with such hard work, new drug research and development is not an easy task for Shanghai Pharmaceuticals.In May and June 2024, Shanghai Pharmaceuticals successively cut off seven innovative drug research and development pipelines, including B001 and B001-A, involving lymphoma, multiple sclerosis, breast cancer and other popular research fields in recent years, with a total investment of 437 million yuan.

Of course, new drug development is not easy. In the past two years, more than 25 pharmaceutical companies, including BeiGene, Huadong Medicine, Dongyao Pharmaceutical, Yahong Pharmaceutical, Propharma, Tiantan Biopharma, and Watson Biopharma, have expressed their intention to terminate their R&D pipelines. Hot research areas are even more severely affected. For example, the popular target HER2, domestic pharmaceutical companies will have 171 related pipelines cut in 2023, accounting for about 42% of the global HER2 pipeline. Shanghai Pharmaceuticals is in the sea, and it is inevitable that it will rise and fall with the waves.

3

A dream worth hundreds of billions is hard to realize

The greater the hope, the greater the disappointment. This is probably the truest portrayal of the inner feelings of Shanghai Pharmaceuticals investors in the agonizing wait. The small goal of "recovering lost ground and returning to 20 yuan per share" is still difficult to achieve, let alone the ambition of impacting a market value of 100 billion US dollars.

Behind the market value of 100 billion US dollars is Shanghai Pharmaceuticals' ultimate goal of entering the top 40 global pharmaceutical companies by 2025, entering the top 20 global pharmaceutical companies by 2030-2035, and becoming a world-leading giant biopharmaceutical company. Zhou Jun, former chairman of Shanghai Pharmaceuticals, once publicly declared that China's market, economic size, and national nature determine that China must have 3-5 world-leading giant biopharmaceutical companies. The standard for "giant" is a market value of more than 100 billion US dollars.

However, before Shanghai Pharmaceuticals took the first step in its battle to reach a market value of US$100 billion, Zhou Jun, the flag-waving leader, fell. On November 20, 2023, Zhou Jun was investigated by the Shanghai Commission for Discipline Inspection and Supervision for suspected serious violations of discipline and law, and was later expelled from the party and removed from office on March 15, 2024. Just five months before he was investigated, he had just begun his third term as chairman of Shanghai Pharmaceuticals, which was originally scheduled to end in 2026.

Zhou Jun is just one of the top executives of Shanghai Pharmaceuticals. In fact, since September 2023, nearly 10 senior executives of Shanghai Pharmaceuticals, including former vice presidents Pan Deqing and Gu Haoliang, have been investigated one after another.

The large number of senior executives who were dismissed also shows that Shanghai Pharmaceuticals’ internal management is in chaos, and the chaos at the top will lead to chaos in the market.

On December 17, 2023, Shanghai Pharmaceuticals issued an announcement stating that its wholly-owned subsidiary Shanghai First Biochemical Pharmaceutical Co., Ltd. (hereinafter referred to as "First Biochemical") was fined 462 million yuan for abusing its dominant market position to sell drugs at high prices. The drug sold at a high price by First Biochemical this time is polymyxin B sulfate for injection, and its main treatment area is "systemic anti-infection", such as bacteremia, endocarditis, pneumonia, post-burn infection, etc. At present, only First Biochemical holds the marketing approval for this drug in China, that is, it is the exclusive seller.

Holding on to this "exclusive" advantage, First Biochemical falsely increased the price of polymyxin B sulfate from 94 yuan per gram to 35,000 yuan per gram. After being punished by regulators, First Biochemical uniformly reduced the price of the drug to 123 yuan per vial, a drop of more than 95.8%. This shows the extent of the company's huge profits under the temptation of monopoly.

High-price monopoly at least guarantees authenticity, but Shanghai Pharmaceuticals is so obsessed with money that it even sells inferior drugs. In May 2024, Shanghai Pharmaceuticals' subsidiary Shanghai Xinyi's Jinzhu Pharmaceutical and Tianyi Pharmaceutical were judged to be selling inferior drugs because the drugs they produced did not meet the standards or regulations.

It is worth mentioning that Shanghai Xinyi has a long history of criminal records. As early as 2018, Shanghai Xinyi Pharmaceutical's products such as salbutamol sulfate inhalation aerosol and piracetam tablets were judged as substandard by local regulatory authorities. Before Jinzhu Pharmaceutical and Tianyi Pharmaceutical, Xinyi Pharmaceutical was investigated in March for not meeting regulations for its thiothioprine tablets...

All medicines are three-quarters toxic, and Shanghai Xinyi’s inferior medicines increase that to seven-quarters, and the remaining three-quarters depends entirely on timely detection by supervision.

On March 19, 2024, the position of Chairman of Shanghai Pharmaceuticals, which had been vacant for 4 months, fell to Yang Qiuhua. Zhou Jun and his colleagues left, leaving behind Shanghai Pharmaceuticals' increasingly weak and declining pharmaceutical distribution business, increasingly fierce competition for new drugs, an increasingly large and cumbersome body, and somewhat bleak expectations in the capital market... This is the working environment of the "new official" Yang Qiuhua.

Shanghai Pharmaceuticals is at the center of controversy. The market is paying close attention to whether Yang Qiuhua's next work arrangements can revitalize capital, consumption and even public opinion.Judging from the only two public events he attended, one was a visit to the Shanghai Umbilical Cord Blood Bank headquarters of China Stem Cell Group on behalf of Shanghai Pharmaceuticals in June, signaling to the outside world that he attaches great importance to the stem cell field; the other was a survey at the Shanghai Pharmaceutical Industry Association in July, reiterating the plan to accelerate the layout of new tracks such as cell therapy. Both were ideas for the development of new drugs, which was also understood as Yang Qiuhua's statement on the future work priorities of Shanghai Pharmaceuticals.

Since you have such lofty ambitions, how can you not evolve and upgrade?After a major reshuffle of senior management, what will Yang Qiuhua's new drug development plan for Shanghai Pharmaceuticals look like? Welcome to leave a comment in the comment section and share your thoughts. [Produced by Zhengjingshe]

Editor-in-charge | Tang Weiping · Editor | Du Hai · Bai Jin · Editorial | An An · Proofreading | Ran Ran

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