Recently, Kanghong Pharmaceutical released its 2021 report card. During the period, the company achieved revenue of 3.605 billion yuan, a year-on-year increase of 9.4%; net profit attributable to the parent company turned a loss into a profit, achieving 421 million yuan, a year-on-year increase of 256.04%.
The reason for the turnaround is that in 2020, Kanghong Pharmaceutical’s Conbercept Ophthalmic Injection tested the efficacy and safety of the global Phase III clinical trial in patients with neovascular age-related macular degeneration. The pilot project (abbreviation: KH916 project) failed, resulting in performance losses after financial adjustments.
Specifically, on April 9, 2021, the KH916 Project Test Scientific Steering Committee conducted a mid-term review and concluded that the KH916 project test failed to achieve the expected goals and recommended that the KH916 project test be stopped. Subsequently, Kanghong Pharmaceutical announced the termination of the project and revised its 2020 annual results. The company stated that the previous accumulated capitalized expenditure of 1.397 billion yuan was transferred to the current profit and loss.
As a result, Kanghong Pharmaceutical has correspondingly reduced its total profit and operating profit in 2020 by 1.397 billion yuan, reduced income tax expenses by 382 million yuan, and reduced net profit by 1.015 billion yuan. This is also the first loss for Kanghong Pharmaceutical since its listing in 2015. At that time, within a month, the company’s stock price nearly halved, and its market value evaporated by more than 15 billion yuan.
However, although Kanghong Pharmaceutical's net profit attributable to the parent company turned around in 2021, the result of 421 million yuan was also the "profit low" in the company's performance since its listing. Historical data shows that from 2015 to 2020, the company's net profit attributable to the parent company was: 394 million yuan, 497 million yuan, 644 million yuan, 695 million yuan, 718 million yuan, and -270 million yuan respectively. In other words, Kanghong Pharmaceutical's net profit attributable to its parent company in 2021 is almost half of its peak.
Moreover, in 2021, Kanghong Pharmaceutical will still be affected by impairment. Data show that the company's performance in the first three quarters and the fourth quarter is quite different. From the first to the fourth quarter, the company’s revenue was 915 million yuan, 985 million yuan, 945 million yuan, and 761 million yuan; the net profit attributable to the parent company was 234 million yuan, 187 million yuan, 233 million yuan, and -232 million yuan. .
Kanghong Pharmaceutical’s previous performance forecast reminded that its wholly-owned Israeli subsidiary IOPtima, which was controlled and merged, continued to be affected by the new crown epidemic during the reporting period. The progress of product promotion and new product development was lower than expected, and goodwill is expected to decrease. Valued at 215 million yuan. Previously, in order to enter the glaucoma market, Kanghong Pharmaceutical acquired IOPtima.
The above-mentioned facts show that after the setback of Conbercept’s overseas expansion, Kanghong Pharmaceutical’s performance has not yet fully recovered. Moreover, after successive failures in product line layout, the company's future growth point is still a question.
Currently, Conbercept is still the most important product of Kanghong Pharmaceutical. This injection is a genetically recombinant fusion protein of the VEGF receptor and the Fc segment of human immunoglobulin. It is mainly used to treat wet age-related macular degeneration (wAMD). It was improved and developed on the basis of aflibercept (trade name: Alea), and the patent was later transferred to Kanghong Pharmaceutical.
In 2013, Conbercept was launched. Kanghong Pharmaceutical's financial data shows that Conbercept's annual sales exceeded 1 billion yuan from 2019 to 2021, accounting for more than 30% of the current operating income. Since its launch, the cumulative sales of this product have exceeded 4 billion yuan.
In recent years, under the attack of two major foreign pharmaceutical companies’ competing products, aflibercept and ranibizumab, and with the continuous price reduction of medical insurance cost-control products, Kanghong Pharmaceutical began to plan to go overseas in 2017. The efficacy of the product was proven through international multi-center clinical trials and then expanded into overseas markets. Of course, this plan has now failed, and Kanghong Pharmaceutical’s product overseas plans have not been updated yet.
As the original market becomes increasingly difficult, breakthroughs in new indications have also been delayed. According to Kanghong Pharmaceutical’s statement on a public platform in March 2022, Conbercept’s new indication RVO (retinal vein occlusion) is currently under review by the Drug Evaluation Center of the National Medical Products Administration. The submission time for this indication is early 2021, so it has been more than a year.
It is worth noting that in the 2021 annual report, Kanghong Pharmaceutical’s inventory suddenly increased by 80%. In this regard, the company explained that the increase in inventory was mainly due to the impact of sales stocking. However, in recent years, even the company's flagship product, Conbercept, has not experienced such a sales growth. Financial information shows that from 2019 to 2021, Conbercept’s sales were 1.155 billion yuan, 1.086 billion yuan, and 1.319 billion yuan.
Moreover, due to the current impact of the epidemic, it is a challenge whether Kanghong Pharmaceutical can digest its large inventory. And if it cannot be digested in time, will there be inventory impairment in the future?
In addition, Kanghong Pharmaceutical recently released its first quarter report for 2022. The company achieved revenue of 895 million yuan in the first quarter of this year, a year-on-year decrease of 2.11%; net profit attributable to the parent company was 297 million yuan, a year-on-year increase of 27.22%.
In the first quarter of 2022, Conbercept achieved sales revenue of approximately 340 million yuan, a year-on-year increase of 13%. However, the company's chemical pharmaceutical sector achieved revenue of 246 million yuan, a year-on-year decrease of 29.45%, resulting in a 2% decrease in the company's overall operating income compared with the same period.
The decline in revenue of the chemical sector reflects that Kanghong Pharmaceutical is increasingly affected by centralized procurement. The company’s annual report shows that in addition to Conbercept and a series of Chinese patent medicines, the company’s chemical drugs include venlafaxine hydrochloride extended-release tablets, aripiprazole orally disintegrating tablets, aripiprazole oral solution, and citrate. Sapride tablets, Mosapride citrate dispersible tablets, eszopiclone tablets, etc.
In the fifth batch of centralized purchasing in June 2021, Kanghong Pharmaceutical’s chemical preparation venlafaxine extended-release tablets were included in the centralized purchasing. The unit sales price before the centralized purchasing was approximately 6.25 yuan per tablet. The winning bid for centralized procurement dropped to 2.54 yuan. According to Kanghong Pharmaceutical's announcement, in 2019 and 2020, the company's sales revenue from this product was 354 million yuan and 456 million yuan respectively, both of which are not small.
Among other preparations, in February 2021, Kanghong Pharmaceutical’s Mosapride Citrate Ordinary Tablets was the first to win the bid for the country’s fourth batch of centralized mass procurement, which was reduced to 0.5 yuan per tablet. A decrease of 58.5%; in August 2020, eszopiclone tablets were the first to win the bid for the third batch of national centralized procurement, and the price dropped to 0.61 yuan per tablet, a decrease of 86%. In fact, in the 2021 annual report, Kanghong Pharmaceutical's chemical pharmaceutical sector experienced a 7% decline.