"Puffy" Fosun Pharma

Reporter | Fan Jiazhi


Editor | Chen Feixia


1


The stock price of Fosun Pharma (600196.SH, 02196.HK) has retreated more than 30% from its high point.


According to WIND data, the stock price of Fosun Pharma’s A shares climbed from 33.59 yuan per share in early July to a maximum of 79.19 yuan per share, an increase of 124%, and its market value once exceeded 200 billion yuan. As of press time, the share price of Fosun Pharma was 53.24 yuan per share.


What catalyzes this wave of doubling is the concept of a new crown vaccine. On August 5, Fosun Pharma announced through its WeChat official account that it and BioNTech will conduct a domestic clinical trial of a new crown vaccine based on mRNA technology. It is worth noting that when the secondary market frantically hyped vaccine concept stocks in the first half of the year, Fosun Pharma did not receive attention. Data show that the vaccine index (8841313.WI) rose by as much as 73% from February to June this year, while Fosun Pharma rose only 29% during the same period. Since July, the vaccine index has risen by 18%, while Fosun Pharma has doubled.


The core logic of vaccine concept stocks has turned, and profit expectations have been broken.


Zheng Zhongwei, director of the Science and Technology Development Center of the National Health Commission and head of the vaccine research and development team of the Joint Prevention and Control Mechanism Scientific Research Team of the State Council, said in the "Dialogue" broadcast by CCTV Finance on August 22 that the new crown vaccine is a public health product. Its pricing cannot be based on the contradiction between supply and demand in the market, but can only be based on cost. Considering the huge low-income group in China, as well as the consideration of social equity and expansion of the vaccination rate, it is not appropriate to set an excessively high price for the vaccine.


On August 25, Fosun Pharma released an interim report that was slightly lower than expected. In the first half of the year, Fosun Pharma's revenue was 14.028 billion yuan, a slight decrease of 1.02% year-on-year, and the net profit attributable to the parent after deduction was 1.304 billion yuan, an increase of 11.71% year-on-year. On a single-quarter basis, the performance of the second quarter improved from the first quarter.


This may be one of the reasons for Fosun Pharma's callback. Why can't Fosun Pharma support a market value of 200 billion yuan?


Valuation troubles


In fact, the new crown vaccine, which doubled Fosun Pharma's stock price in the short term, is not its main business. In the eyes of many investors, Fosun Pharma looks more like an equity investment company than a pharmaceutical company.


Fosun Pharma has always emphasized that it is a pharmaceutical company that expands through mergers and acquisitions and operates in multiple sectors, and this is indeed the case. Its revenue can be split into three parts, namely pharmaceutical manufacturing and research and development, medical diagnosis and medical devices, and medical services.

Data source: WIND, Interface News Research Department


In the first half of 2020, the revenue of Fosun Pharma's pharmaceutical manufacturing and R&D segment was 10.012 billion yuan, a year-on-year decrease of 8.11%, mainly because some core injection products were affected by the epidemic.


Based on the net profit attributable to the parent, the main subsidiaries of Fosun Pharma's pharmaceutical sector are Jiangsu Wanbang, Yaoyou Pharmaceutical, GlandPharma (hereinafter referred to as GlandPharma) and Jinzhou Aohong Pharmaceutical Co., Ltd. (hereinafter referred to as "Aohong Pharmaceutical"). Among them, Jiangsu Wanbang's Febuxostat Tablets (You Litong) and Pitavastatin Calcium Tablets (Bangzhi), Fuhong Henlius' biosimilar Rituximab Injection (Hanlikang), YaoPharma's generic drugs The revenue of pharmaceutical products such as Escitalopram Oxalate (Qicheng) increased. In addition, Fosun Pharma has also acquired other products including monoclonal antibody bioinnovative drugs and biosimilars, CAR-T cell drugs and other products through acquisitions. However, these are still in the research and development stage and have not contributed to profits for the time being.


The second part of Fosun Pharma's revenue comes from the medical diagnosis and medical device segment. In the first half of 2020, the revenue of medical devices and medical diagnosis business was 2.641 billion yuan, a year-on-year increase of 46.96%, and the profit was 434 million yuan, a year-on-year increase of 88.22%, mainly due to the new crown virus detection kits, negative pressure ambulances and ventilators. This was due to the increase in revenue from similar products.


The third part of Fosun Pharma's income is medical services. In the first half of the year, due to the impact of the epidemic, this part of the business fell by 6.83%, and the profit was only 1.6124 million yuan.


In terms of revenue volume, Fosun Pharma belongs to the first echelon among A-share pharmaceutical companies. Comparing the 2019 revenue data, Fosun Pharma's 28.585 billion yuan scale is only slightly lower than Yunnan Baiyao (000538.SZ)'s 29.6 billion yuan revenue in the A-share market, but higher than Hengrui Pharmaceutical (600276.SH) 232 billion in revenue.


However, from the perspective of market value, Fosun Pharma has not entered the first echelon of pharmaceuticals, and is far behind Hengrui Pharmaceutical with a market value of 480 billion yuan. In 2000, the market value of Hengrui Pharma was 4 billion yuan when it was listed, and the total market value of Fosun Pharma reached 6.8 billion yuan in the same period. In the next 20 years, the two companies have undergone great changes. The current market value of Hengrui Pharma is three times that of Fosun Pharma.


Data source: WIND, Interface News Research Department


In fact, Fosun Pharma's valuation has never been like a pharmaceutical company. Wind data shows that in the past ten years, the central price-earnings ratio of Fosun Pharma was only 23.54 times, while the central price-earnings ratio of Hengrui Medicine was 50.92 times in the same period. Compared with pharmaceutical stocks, Fosun Pharma's valuation system is more like consumer stocks.


One of the reasons for the difference is the gross profit margin of Fosun Pharma.


In the first half of 2020, the gross profit margin of Fosun Pharma's sales reached 55.69%, and the gross profit margin of all three segments declined. Specifically, the gross profit margin of the pharmaceutical manufacturing and R&D segment was relatively high at 62.50%, a year-on-year decrease of 4.3 percentage points; the medical diagnosis and medical device segment was slightly inferior, with a gross profit margin of 50.44%, a year-on-year decrease of 0.75 percentage points; the gross profit margin of the medical service segment was only It was 16.88%, a significant decrease of 9.13 percentage points, which dragged down the company's comprehensive gross profit margin. During the same period, the gross profit margin of Hengrui Pharmaceutical reached 87.94%.


In terms of profits, in the first half of 2020, Fosun Pharma's net profit attributable to its parent company after deducting non-deductibles was 1.304 billion yuan, which is far less than Hengrui's net profit of 2.562 billion yuan in the same period.


Another factor affecting valuation is R&D investment.


In absolute terms, Fosun Pharma's R&D investment in 2019 was 3.131 billion yuan, while Hengrui's R&D investment was 3.896 billion yuan in the same period. The difference between the two is not obvious. However, there is a big difference between the two in the allocation of R&D resources.


Fosun Pharma adheres to the strategy of "combining generics and innovations" in research and development, and has invested in the four major research and development platforms of small molecule innovative drugs, high-value generic drugs, biological drugs and cell therapy. To a certain extent, this also means that there are no products that focus on research and development.


Hengrui Medicine adopts the strategy of divesting the research and development of low-end generic drugs. In October 2019, Hengrui Medicine stated that it would stop the research and development of most generic drugs, and only retain some high-end varieties. In terms of development system, most of Hengrui Medicine's products are developed internally, and its attitude towards licensing and venture capital is conservative.


The hidden danger of mergers and acquisitions is emerging


Fosun Pharma has deep acquisition genes.


In the first half of 2020, Fosun Pharma's investment income included in the income statement was 1.175 billion yuan. Fosun Pharma has long relied on investment. The 2019 annual report data shows that Fosun Pharma’s investment income was 3.565 billion yuan, accounting for 95% of its net profit.


In 2019, Fosun Pharma's investment income mainly came from two parts: the long-term equity investment accounted for by the equity method generated income of 1.431 billion yuan, and the disposal of long-term equity investment generated investment income of 1.741 billion yuan. The investment income generated from the disposal of long-term equity investment is mainly obtained from the sale of the shares of United Family Healthcare held by it.


In July 2019, Fosun Pharma obtained a pre-tax profit of 1.647 billion yuan through the sale of United Family Healthcare. The focus of the outside world on this transaction is the timing. After Fosun Pharma "quickly" sold United Family, it included investment income in its profit in 2019, so there were many voices questioning its performance growth at that time. In fact, the net profit of Fosun Pharma after non-deduction was 2.234 billion yuan, a growth rate of only 6.9%.


One of the great benefits of epitaxial mergers and acquisitions is that considerable investment returns can be obtained. However, if the amount of investment income is "overwhelming", it will inevitably make people question the true quality of the company's business. In the past 20 years, the investment income of Fosun Pharma has always accounted for more than 60% of the net profit. From 2017 to 2019, the net investment income of Fosun Pharma reached 2.307 billion yuan, 1.815 billion yuan and 3.565 billion yuan respectively, accounting for 64%, 60% and 95% of the net profit for the same period.

Data source: WIND, Interface News Research Department
High-density mergers and acquisitions have buried hidden dangers in the company's finances.


As of June 30, 2020, Fosun Pharma's book current assets were 22.559 billion yuan, current liabilities were 22.534 billion yuan, the current ratio was almost 1 times, and the liquidity was not ample.


Among non-current assets, goodwill is very noteworthy. In the 2020 semi-annual report, Fosun Pharma has accumulated a goodwill of 9.093 billion yuan, and its scale ranks second among A-share listed pharmaceutical companies, second only to Shanghai Pharmaceuticals (601607.SH) of 10.79 billion yuan.


According to the 2019 annual report, Fosun Pharma’s goodwill consists of 19 asset acquisitions, of which the two largest are the acquisition of Indian injection pharmaceutical company GlandPharma for US$1.091 billion (about 7.2 billion yuan) in 2017. While setting the record for overseas mergers and acquisitions of pharmaceutical companies, it also formed a goodwill of about 3.9 billion yuan. In addition, the acquisition of Aohong Pharmaceutical also formed a goodwill of nearly 850 million yuan.


The hidden dangers of this part of goodwill formation are emerging. AoDejin, a product of Aohong Pharmaceutical, was removed from the medical insurance catalog in 2019, which is expected to have a certain impact on future revenue and profitability. Therefore, in 2019, Fosun Pharma accrued a goodwill impairment of RMB 60 million to Aohong Pharmaceutical.


On the liability side, non-current liabilities including long-term loans totaled 17.776 billion yuan.


It can be seen that the performance of Fosun Pharma is actually driven by high capital leverage, which may be one of the reasons why the market has always been biased against Fosun Pharma.


After the doubling of the market, Fosun Pharma's stock price has fallen continuously recently, but even if the retracement exceeds 30%, will Fosun Pharma with a market value of 122.8 billion yuan be recognized?