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On the evening of August 2, Guizhou Bailing Enterprise Group Pharmaceutical Co., Ltd. (hereinafter referred to as "Guizhou Bailing") announced that the company and relevant responsible persons had recently received administrative supervision measures issued by the Guizhou Regulatory Bureau of the China Securities Regulatory Commission (hereinafter referred to as "Guizhou Securities Regulatory Bureau"). This move marks the end of the regulatory authorities' in-depth review of its recent financial status and information disclosure.

The announcement disclosed the main problems found by the Guizhou Provincial Securities Regulatory Bureau during its inspection: First, Guizhou Bailing had inaccuracies in its accounting treatment during the period of sales expense attribution, which deviated from the relevant provisions of the enterprise accounting standards; second, its internal control system needed to be strengthened.

In view of the fact that the above-mentioned behavior seriously violated the relevant provisions of the "Regulations on Information Disclosure of Listed Companies", the Guizhou Securities Regulatory Bureau decided to take regulatory measures to order the company to correct the problem, and record the incident in the integrity file of the securities and futures market. Further regulatory arrangements will be made based on the verification results. At the same time, in response to the failure of the relevant responsible persons of the company to perform their duties diligently and also violated the information disclosure regulations, the Guizhou Securities Regulatory Bureau decided to take regulatory talks and also record it in the integrity file of the securities and futures market.

Industry insiders pointed out that with Guizhou Bailing receiving the regulatory decision letter, it means that the regulatory authorities have completed their review and the regulatory handling opinions are clear. The company's uncertainty since the annual report performance fluctuations and the stock being ST has also come to an end. For the market and investors, other risks that were previously more worried and panicked have been resolved accordingly, and the company is expected to enter a new stage of compliance governance and high-quality development.

Deviation from corporate accounting standards

Back to April this year, the 2023 annual report released by Guizhou Bailing showed that its performance turned from profit to loss, and due to major defects in the internal control of sales expenses and other issues, the accounting firm issued a negative opinion on its 2023 internal control audit report, which led to the implementation of "other risk warnings" (ST) on the company's stock. The abbreviation changed from "Guizhou Bailing" to "ST Bailing".

According to the 2023 annual report released by Guizhou Bailing, during the reporting period, Guizhou Bailing demonstrated strong market expansion capabilities and achieved operating income of approximately 4.263 billion yuan, an increase of 20.42% over the same period last year. However, in terms of profitability, Guizhou Bailing encountered challenges, with a net loss of approximately 415 million yuan attributable to shareholders of the listed company, turning from profit to loss year-on-year. Sales expenses for the year reached 2.311 billion yuan, an increase of 780 million yuan from the previous year, a year-on-year increase of 51%.

The verification results of the Guizhou Securities Regulatory Bureau are highly consistent with the internal control issues previously disclosed by Guizhou Bailing. The main problems are that the accounting treatment such as inaccurate attribution period of sales expenses does not comply with the provisions of the enterprise accounting standards, and there are major defects in internal control. This is basically consistent with the company's previous disclosure of "defects in internal control related to market development and promotion service fees, inventory management, etc., such as untimely and incomplete provisions", and no other problems were found.

Guizhou Bailing also stated in response to investors' questions on the interactive platform that it has set up a special rectification working group for the internal control audit report. Under the leadership of the board of directors and the audit committee, it will conduct a comprehensive review of relevant issues and carry out rectification work in a sub-item manner to eliminate risks as soon as possible, ensure that all aspects of the company's internal control are fully compliant, and "remove the hat" as soon as possible. The company's 2024 internal control audit report will be disclosed together with the 2024 annual report.

The regulatory measures decision letter clearly requires Guizhou Bailing to attach great importance to the rectification work, comprehensively sort out and improve the problems in financial accounting, information disclosure, internal control, etc., effectively improve corporate governance, improve internal control, strictly fulfill information disclosure obligations, and ensure that the information disclosure of listed companies is true, accurate, complete, timely and fair.

Guizhou Bailing also emphasized in the announcement that this administrative supervision measure will not have a substantial impact on its normal business management activities. The company and relevant responsible persons attach great importance to the issues raised in the "Decision" and will actively cooperate in the rectification work in strict accordance with the supervision requirements of the Guizhou Securities Regulatory Bureau, fully learn lessons, make careful summaries, and comprehensively sort out and improve the problems in financial accounting, information disclosure, internal control, etc.

Many companies were fined for financial problems

Public information shows that Guizhou Bailing is engaged in the research and development, production and sales of Miao medicine and was listed on the Shenzhen Stock Exchange in June 2010.

It is worth noting that despite the dual pressures of performance fluctuations and stock ST, Guizhou Bailing has maintained a steady momentum in market expansion, product development and share repurchase. Huanglian Jiedu Pills, Yishen Huazhuo Granules, Bingliancao Lozenges, Shaoling Tablets, Tangning Tongluo, etc. are under development.

Guizhou Bailing revealed that Tangning Tongluo has obtained the "Medical Institution Preparation Registration Certificate" in Guizhou Province, Hunan Province, Yunnan Province, Inner Mongolia Autonomous Region and Guangxi Zhuang Autonomous Region, and is actively promoting the relevant work of Tangning Tongluo's new drug application, which is expected to achieve wide coverage in the next two years.

According to information disclosed by Guizhou Bailing in response to investors' questions, the estimated target for net profit in the 2024 financial budget is 148 million yuan, turning losses into profits.

In fact, with the tightening of supervision in the pharmaceutical industry, many listed pharmaceutical companies have received regulatory letters or been fined for violations in recent years.

In April 2021, the Ministry of Finance imposed administrative penalties on 19 pharmaceutical companies.

A review of the violations of pharmaceutical companies disclosed so far shows that many companies have internal control deficiencies related to sales expenses. In contrast, Guizhou Bailing was only ordered to make corrections and the relevant responsible persons were interviewed by the regulators. No fines or other penalties were imposed, and the degree of punishment was relatively light among all the companies.

From this point of view, the impact on the stability of Guizhou Bailing's management team, strategic goals and the stability and continuity of its business activities may be relatively minor.

(The content is for reference only and is not intended as any investment advice.)