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Interface News reporter | Niu Qichang

Although operating income increased significantly, it could not offset the continued burning of money in R&D investment and commercial promotion. The innovative drug leader Rongchang Biopharma (688331.SH, 09995.HK) saw its losses further expand in the first half of this year.

On August 17, Rongchang Biopharma disclosed its semi-annual report showing that in the first half of 2024, the company achieved total operating revenue of 742 million yuan, a year-on-year increase of 75.59%; the net profit attributable to the parent was a loss of 780 million yuan, compared with a loss of 703 million yuan in the same period last year.

It is worth mentioning that since 2020, Rongchang Bio's interim results have been in the red for five consecutive years, and the scale of losses has shown a trend of further expansion.

Since 2020, Rongchang Biopharma has reported losses for five consecutive years in its interim results, and the scale of losses is showing a trend of further expansion. Source: Tonghuashun

Regarding the further decline in performance, Rongchang Bio said that during the reporting period, the company achieved operating income of 742 million yuan, an increase of 75.59% from 422 million yuan in the same period last year, mainly due to the increase in sales of Tetasip and Vedicituzumab for injection, and the increase in sales revenue. At the same time, in terms of research and development, the company continued to increase its investment in research and development, and further expanded its research and development pipeline. During the reporting period, research and development expenses reached 806 million yuan, an increase of 49.18% compared with the same period last year.

In short, the company's sales revenue growth is difficult to cover the high R&D expenditure.

Public information shows that Rongchang Bio is the first "A+H" listed pharmaceutical and biological company in Shandong, and the first company in the domestic ADC (antibody-drug conjugate) industry to achieve commercialization of its products. Currently, the company has two main products being commercialized, one is the ADC drug vedicituzumab, and the other is the BLyS and APRIL dual-target fusion protein product tetasip.

In November 2020, Rongchang Biopharma was listed on the Hong Kong Stock Exchange, raising approximately US$590 million; in March 2022, Rongchang Biopharma was listed on the Science and Technology Innovation Board, issuing 54.4263 million shares, raising a net amount of approximately RMB 2.506 billion, and an issue price of RMB 48 per share.

However, since entering the capital market, Rongchang Bio's performance has been unsatisfactory. Except for 2021, it has been in a loss-making state in the remaining three years.Among them, in the two years since listing on the Science and Technology Innovation Board, the net profit attributable to the parent has accumulated a loss of 2.511 billion yuan, which is exactly equivalent to the amount of funds raised by the company's IPO.

In response to the further decline in performance, Rongchang Biopharma explained in its annual report that "this is mainly due to the continued advancement of various R&D pipelines this year and the fact that multiple innovative drugs are in the key experimental research stage, which has led to a substantial increase in R&D expenses. In addition, there has been an increase in expenses for commercial sales team building and academic promotion activities."

Judging from the first half of this year, this momentum is still intensifying.

Source: Rongchang Biopharma Semiannual Report

First, let's look at R&D expenses. In the first half of this year, Rongchang Biopharma's cumulative R&D expenditure reached 806 million yuan, an increase of nearly 266 million yuan over the same period last year. Among them, employee salaries, clinical trial expenses, raw material expenses, testing expenses, and purchased non-patented technologies all increased significantly.

Rongchang Bio said that the company's new drug research and development pipeline continues to increase, and many innovative drugs are in the key experimental research stage, especially the accelerated clinical progress overseas, which has led to increases in clinical trial fees, material fees, testing fees and other costs.

Compared with the significant increase in R&D expenses, the number of R&D personnel at Rongchang Bio has dropped by nearly 100 people since the beginning of this year.

The semi-annual report shows that Rongchang Bio has 1,216 R&D personnel, compared with 1,271 in the same period last year, and by the end of 2023, the company had 1,308 R&D personnel. Among them, there were 454 master's students in the first half of this year, a decrease of 28 from 482 at the beginning of the year; and 468 undergraduates, a decrease of 47 from 515 at the beginning of the year.

Despite the decrease in R&D personnel, the total salary of the company's R&D personnel increased by nearly 30 million yuan compared with the same period last year to 236 million yuan.

Source: Rongchang Biopharma Semiannual Report

Next, let’s look at sales expenses. In the first half of this year, Rongchang Bio’s sales expenses reached 390 million yuan, a further increase of 11.28% from 350 million yuan in the same period last year. Among them, employee salaries, consulting service fees, and academic promotion fees all increased further.

Rongchang Bio said that this was mainly due to the company's increased investment in sales and promotion in order to further expand the market. It is reported that as of the first half of this year, Rongchang Bio's autoimmune commercialization team has formed a sales team of about 800 people, and the oncology commercialization team has formed a sales team of nearly 600 people.

"Relying on the professional knowledge and industry connections of the company's team, as well as the greatly improved accessibility of the two core products after being included in the medical insurance catalogue, the company mainly promotes the products through further marketing strategies aimed at doctors, further interacts and communicates directly with key opinion leaders and doctors in related treatment fields, and carries out differentiated product positioning and promotion work." Rongchang Bio said.

In the first half of this year, Rongchang Biopharma's monetary funds dropped by 46.52% compared with the same period last year. Source: Tonghuashun

Interface News noted that in the face of continued money-burning innovative drug research and development and market promotion, Rongchang Bio's cash flow has become further tightened, which has also caused investors to worry.

As of the first half of this year, Rongchang Biopharma's cash and cash equivalents were 676 million yuan, a sharp drop of 46.52% from 1.264 billion yuan in the same period last year. At the same time, the company's liabilities rose sharply.

As of the first half of this year, the company's total liabilities reached 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 only 11.85 million yuan and 531 million yuan respectively. The debt-to-asset ratio also increased from 37.82% at the beginning of the year to 53.70%.

Against this background, Rongchang Bio's financial expenses also increased significantly in the first half of this year, from -11.2861 million yuan in the same period last year to 32.0726 million yuan, mainly due to an increase in the company's loans and financial expenses in this period, and a decrease in interest income in this period.

Rongchang Bio said that during the reporting period, the net cash flow generated by the company's operating activities was -820 million yuan.Working capital depends on external financingIf the company's future operating funds are insufficient to cover the required expenses, it will put pressure on the company's capital situation. If the company is unable to make a profit or raise sufficient funds to maintain operating expenses within a certain period of time in the future, the company will be forced to postpone, cut or cancel research and development projects, affecting the commercialization progress of the drugs under development, thereby adversely affecting the company's business prospects, financial condition and operating results.

Moreover, if the company's operating capital is tight, it will affect the company's ability to continue to pay or increase salary levels to employees, which may have an adverse impact on the company's ability to introduce core talents and stabilize the existing team in the future, which may hinder the realization of the company's R&D and commercialization goals and damage the company's strategic ability to further expand its business scope.

Rongchang Bio's deteriorating financial situation has been reflected in the secondary market.

In January this year, there were rumors in the market about Rongchang Biopharma's tight cash flow, causing the company's A-share and H-share prices to plummet by 15.71% and 22.73% respectively on January 17.

On July 9, Rongchang Bio's stock price hit the 20CM limit down again. Rongchang Bio urgently convened a telephone conference to clarify the cash flow situation, saying that the company has a certain amount of cash reserves in its account; the company's commercialization has brought a certain amount of cash flow; the company has sufficient bank credit, etc.

As of the close of August 19, Rongchang Biopharma reported 26.81 yuan per share, close to the lowest point so far this year, and nearly "halved" from the issue price of 48 yuan per share. The company's market value has also shrunk significantly from 52 billion yuan at its peak in 2023 to 14.6 billion yuan.

An investor told Interface News that since its listing, Rongchang Biopharma has seemed to be only concerned with spending money without caring about returns, and has used the secondary market as a cash machine for the company's risky operations. It is understandable that the market voted with its feet.

Interface News noted that since the funds raised from the IPO have been basically exhausted, in order to ease the tight capital chain, Rongchang Biopharma had put forward a plan for a private placement on March 29 this year, intending to issue shares to no more than 35 specific investors to raise a total amount of no more than 2.55 billion yuan (including principal), and the funds would be used for "new drug research and development projects."

On July 24, Rongchang Biopharma suddenly announced that it would reduce the size of its private placement to no more than 1.953 billion yuan. The relevant person in charge of Rongchang Biopharma's securities department said that the company has been communicating with the regulatory authorities, but the progress has been slow. The reduction in the size of the private placement is also based on the fact that the overall market review prospects are not very optimistic.