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The star biotech company Rongchang Bio (688331) recently disclosed its semi-annual report, and the company's net profit in the first half of the year further increased. In recent years, Rongchang Bio has only made a profit in 2021, and then began to go downhill. Behind the increase in performance and losses, the company's sales expenses and research and development expenses have increased, and these two expenses alone have invested nearly 1.2 billion yuan in the first half of the year. Not only has the performance increased and lost money, but Rongchang Bio's cash flow situation has also inevitably worried investors. As of the end of the first half of the year, the company's monetary funds were 676 million yuan, a year-on-year decrease of more than 40%. At the same time, the company's liabilities have risen sharply. The company's stock price has already fallen first, falling by more than 40% in less than two months, and has now fallen below the issue price.

Net profit increased in the first half of the year

Rongchang Biopharma's 2024 semi-annual report shows that the company achieved operating income of approximately RMB 742 million during the reporting period, a year-on-year increase of 75.59%; the corresponding attributable net profit was approximately RMB -780 million, compared with RMB -703 million in the same period last year. According to the data, Rongchang Biopharma is an innovative biopharmaceutical company that has been focusing on therapeutic antibody drugs such as antibody-drug conjugates (ADCs), antibody fusion proteins, monoclonal antibodies and bispecific antibodies since its establishment.

Rongchang Biopharma's core product is Taitasip, which is the world's first and first-in-class fusion protein product for injection with dual targets of recombinant B lymphocyte stimulator (BLyS)/proliferation-inducing ligand (APRIL) independently developed by the company. In addition, the company has the first domestically developed ADC innovative drug and the first Chinese ADC product recognized as a breakthrough therapy by the US FDA, vedicizumab, which targets common cancers with a large number of unmet medical needs.

Although the revenue increased significantly in the first half of the year, Rongchang Biopharma's net profit further increased during the reporting period, mainly due to high period expenses. During the reporting period, the company's R&D expenses were 806 million yuan, an increase of 49.18% compared with the same period last year. Rongchang Biopharma said that the increase in R&D expenses was mainly due to the company's continuous enrichment and expansion of its pipeline of products under development during the reporting period, and the rapid advancement of existing clinical projects.

In addition, during the reporting period, Rongchang Bio's sales expenses were 390 million yuan, an increase of 11.28% compared with the same period last year. As for the reasons for the increase in sales expenses, Rongchang Bio mentioned that with the substantial increase in the number of hospitals and pharmacies covered by Tetasip and Vedicituzumab, the company's commercialization team's front-line sales staff expanded and commercial promotion efforts increased, resulting in a corresponding increase in sales expenses.

Looking at the long term, Rongchang Bio was profitable in 2021. In 2021, the company achieved operating income of approximately 1.426 billion yuan, and the corresponding attributable net profit was approximately 276 million yuan. However, in 2022, Rongchang Bio fell into losses again, and the losses further intensified in 2023.

Rising debt-to-asset ratio

Rongchang Bio's 2024 semi-annual report shows that the company's debt-to-asset ratio has reached 53.7%, while a year ago, this figure was 26.34%, a sharp increase.

Financial data showed that as of the end of the first half of the year, Rongchang Bio's cash balance was 676 million yuan, compared with 1.264 billion yuan in the same period last year, a year-on-year decrease of 46.52%. At the end of the first half of 2022, it was 2.66 billion yuan, showing a rapid downward trend in recent years.

This situation has made investors extremely concerned about the company's cash flow. In July this year, Rongchang Bio said in a telephone conference that the company has made sufficient preparations in terms of funds, and has a certain amount of cash reserves in its account; the company's commercialization has brought a certain amount of cash flow; and the company has sufficient bank credit. In addition, Rongchang Bio's potential international cooperation may also bring a certain amount of cash flow, and it can also raise funds through the capital market in the future.

While cash and cash equivalents declined, Rongchang Bio's liabilities increased significantly. At the end of the first half of the year, the company's liabilities were 3.09 billion yuan, including 930 million yuan in short-term loans and 1.342 billion yuan in long-term loans. In the same period last year, the company's liabilities were 1.536 billion yuan, with short-term loans and long-term loans of 11.85 million yuan and 531 million yuan, respectively.

During the reporting period, the net cash flow from the company's operating activities was -820 million yuan. Rongchang Bio said that the company's operating funds rely on external financing. If the company's future operating funds are insufficient to cover the required expenses, it will put pressure on the company's financial situation. If the company cannot make a profit or raise enough funds to maintain operating expenses in a certain period of time in the future, the company will be forced to postpone, cut or cancel R&D projects, affecting the commercialization progress of the drugs under development, thereby adversely affecting the company's business prospects, financial status and operating results.

Zhang Xinyuan, head of research at Kefangde Think Tank, said that the R&D cycle of innovative drugs is long and risky, and they need to go through multiple stages of R&D and clinical trials. This not only consumes a lot of time and energy, but also brings high cost pressure to companies. Therefore, innovative pharmaceutical companies need to have sufficient funds and resources to support various links such as R&D, clinical trials, approval, and market promotion.

Rongchang Biopharma is planning to raise funds through a private placement. The company plans to raise no more than 1.953 billion yuan, all of which will be invested in new drug research and development projects. It is worth mentioning that Rongchang Biopharma originally planned to raise no more than 2.55 billion yuan, but it was reduced in July this year by nearly 600 million yuan.

The price has fallen by more than 40% relative to the issue price

In the secondary market, Rongchang Biopharma experienced a sharp drop at the end of June, and its stock price has fallen below the issue price so far.

According to Dongfang Wealth, during the 10 trading days from June 27 to July 10, Rongchang Biopharma's cumulative decline was 45.85%, a rapid decline. From June 27 to date, Rongchang Biopharma's cumulative decline was 43.28%, while the market fell by 3.13% during the same period, underperforming the market. As of the close of August 16, Rongchang Biopharma reported 26.97 yuan per share, which was more than 70% lower than its historical high in February 2023.

It is worth mentioning that Rongchang Bio's stock price has fallen below the issue price. The company's issue price was 48 yuan per share, and it is currently down 43.81% from the issue price.

Taitasip is the core asset of Rongchang Biopharma's overseas BD. Many of its indications have entered key overseas clinical trials. The market has always placed high hopes on its overseas prospects, but no good news has been heard yet.

Deng Zhidong, general manager of Hainan Boao Medical Technology Co., Ltd., said that innovative drugs may face many difficulties in going overseas, such as choosing the timing of going overseas, the specific markets for going overseas, the differentiated positioning of overseas products, overseas clinical trials, overseas drug application and approval, international business management, international market competition, quality and cost control, technical confidentiality management, policy and legal risks, etc.

In a conference call in July this year, Rongchang Bio said that the company is actively promoting the external licensing of Taisip, but since Taisip has many indications, it brings certain difficulties to the cooperation negotiations. The company will further adjust and optimize the BD strategy to promote the project.

In the opinion of Qu Fang, an investment consultant at Wanlian Securities, a single domestic market is unlikely to meet the commercialization needs of domestic pharmaceutical companies. The expansion of overseas markets is more conducive to companies' participation in international competition and strengthening their corporate strength.

Regarding company-related issues, a Beijing Business Daily reporter sent an interview letter to Rongchang Biopharma, but as of press time, no response was received from the company.

Beijing Business Daily reporter Ding Ning