Two asset reorganizations, transformation of CRO business, Baihua Village still cannot escape the predicament

In the past month, CXO (pharmaceutical outsourcing) companies have successively disclosed their 2020 annual results
.

However, compared with typical CXO companies such as Zhaoyan New Medicine and Yaoshi Technology with revenues of more than 1 billion yuan, a company that was once known as the "dark horse of the CRO sector" not only had revenue of less than 100 million last year, but also suffered a substantial loss in net profit.
320 million, gross profit margin reached -161.
95% (cost is greater than the loss of revenue sales, which also led to the company's sales gross margin last year was negative)
.

Such a poor performance is incompatible with the high-level CXO
.

One or two asset reorganizations still cannot escape the predicament

Although Baihua Village in Xinjiang has undergone two asset reorganizations, its main business has changed from catering to coal, and then from coal to medicine
.

Xinjiang Baihua Village was originally a catering company.
In 2010, it transformed into energy and coal chemical industries through acquisitions
.

However, since 2012, due to the downturn in the coal industry and the continuous decline in coal production, the company has suffered losses for successive years
.

       In order to relieve the risk of delisting and get rid of business difficulties, Baihuacun undertook major changes in 2016
.

       However, the good times did not last long.
As Warwick Pharmaceuticals failed to fulfill its performance commitments in 2016 and 2017, it caused goodwill impairment, which led to another dismal performance of Baihua Village: In 2017 and 2018, they lost 564 million yuan and 6.
75 respectively for two consecutive years.
100 million yuan, the delisting risk warning was implemented again
.

       Although the net profit in 2019 was 34.
385 million yuan, the deduction of non-net profit was only 7.
31 million yuan
.

       This is mainly due to the fact that as a CRO-based company, Baihuacun’s top five customers account for nearly half of the company’s total revenue
.

       In addition to relying too much on large customers and making its performance unstable, the company's too much reliance on its wholly-owned subsidiary, Warwick Pharmaceuticals, is another major "fault
.
"

       2.
Warwick Medicine is successful, and Warwick Medicine is defeated

       Today, Baihuacun’s main business is drug contract R&D and production services, providing services from drug discovery and CMC development, clinical trial CRO, registration declaration, CDMO/CMO, API and related intermediate production and supply to the entire process of drug R&D and registration.
All-in-one solution
.

       In fact, the company's revenue mainly comes from its wholly-owned subsidiary, Warwick Pharmaceuticals
.
Once Warwick Pharmaceuticals does not perform well, Baihua Village's performance will inevitably suffer
.

       Warwick Pharmaceuticals has 7 subsidiaries (Winord Pharma, Lihua Bio, Simospo, Simo, Huanglong Biology, Liwei Biology, and Cypreda), whose business covers early discovery and screening of new drugs, and drug CMC development , Clinical trials, registration applications, BE/PK biological sample analysis and pharmaceutical testing services, clinical SMO and data services, MAH services, API and intermediate production and supply, which can provide pharmaceutical companies or customers with drug discovery, pharmaceutical CMC development, and clinical One-stop outsourcing service for the whole process of testing and registration
.

       According to the financial report, Warwick Pharmaceuticals will only achieve an operating income of 56.
4183 million yuan in 2020, a decrease of 176 million yuan from the previous period and a year-on-year decrease of 75.
71%
.
In turn, the operating cost of Baihua Village last year was 221 million yuan, which was the cost of Warwick Pharmaceuticals, an increase of 86.
458 million yuan from the previous period of 135 million yuan, a year-on-year increase of 64.
06%
.
It can be seen that the decline in revenue and the rise in costs ultimately led to a substantial loss in Baihua Village's performance last year
.

       In terms of product breakdown, the company achieved revenue of 21.
67 million yuan in pharmaceutical research and development in 2020, a year-on-year decrease of 81.
08%; clinical trials achieved revenue of 33.
83 million yuan, a year-on-year decrease of 70.
88%; other pharmaceutical revenues achieved 880,800 yuan, a year-on-year decrease of 44.
54%
.

       Attributable to the reasons: On the one hand, due to policy adjustments, market changes, customer strategic adjustments, and lagging research and development progress, the contract was terminated, which ultimately led to a net profit reduction of 121 million yuan
.
Among them, last year, Warwick Pharmaceutical terminated 58 pharmaceutical R&D contracts, resulting in a decrease of 112 million yuan in net profit
.
Lihua Biotech terminated 21 clinical service contracts, resulting in a decrease of 8.
92 million yuan in net profit
.

       At the same time, affected by the policy and the market environment this year, excluding the factor of termination of the contract, the main revenue of Warwick Pharmaceuticals last year decreased by 61,245,600 yuan compared with the same period of the previous year, of which the revenue from medical research and development increased by 5,258,400 yuan, and the revenue from clinical trials decreased by 65,796,700 yuan.
Revenue decreased by 707,300 yuan
.
Due to the decline in R&D orders, clinical research orders in the downstream of the industry chain have also been greatly affected, resulting in a significant decline in revenue
.

       On the other hand, the company's costs have also increased due to technical difficulties and increased review requirements
.
Affected by last year's force majeure and other factors, new orders decreased and the current R&D cycle was extended.
The increase in fixed costs allocated for R&D projects last year resulted in an increase in the total budget cost, resulting in an increase in operating costs during the current period
.
In summary, the cost of pharmaceutical R&D projects increased by RMB 82.
691 million
.
In addition, as of the reporting period, the company's subsidiary Liwei Company has spent RMB 6,114,500 on innovative drug research and development
.

       It is worth mentioning that the original Baihuacun acquisition of Warwick Pharmaceuticals resulted in a total of 1.
704 billion yuan of goodwill
.
From 2017 to 2019, the company has accrued a total of 1.
548 billion yuan in impairment of goodwill
.

       As of the end of 2020, the appraised price of the Warwick Pharmaceutical Asset Group including goodwill is 118 million yuan, which is 144 million yuan lower than the book value of the Warwick Pharmaceutical Asset Group (including goodwill) of 262 million yuan.
Therefore, the company accrued the goodwill formed by the acquisition of Warwick Pharmaceutical The impairment was 144 million yuan, resulting in an increase of 144 million yuan in asset impairment losses in the consolidated financial statements this year, leaving a goodwill of 11 million yuan
.

       After several years of financial "big bathing", Baihua Village, which has reduced the pressure of goodwill impairment, also plans to use "light outfits" to reverse its predicament
.

       3.
The 389 million fixed increase was denied, and the predicament is difficult to reverse

       As mentioned in the previous article, the current drug R&D in China has gradually changed from "generic" to "innovative", and innovative drugs will gradually replace generic drugs in the future
.
Therefore, Warwick Pharmaceuticals also suffered a large loss in performance last year due to industry policies such as 4+7 centralized procurement and transfer of innovative drugs, as well as customer strategic adjustments
.

       In order to reverse the predicament, the management of Baihua Village also proposed a new development strategy: to seize the window period for the pharmaceutical industry to upgrade from "imitation" to "independent innovation", integrate resources to achieve "long-term excellence" and highlight differentiated advantages , Centering on the core of the large pharmaceutical industry, implement the "innovative drugs + generic drugs" industrial route to continuously improve the core competitiveness of the enterprise
.

       In fact, the company is planning to allow its subsidiaries to take advantage of differentiation
.
For example, let Reiwei Biotech focus on characteristic subdivisions to create a proprietary technology platform for the development and industrialization of synthetic peptide drugs, recombinant peptides/proteins/mAbs, and characteristic small molecule drugs, thereby creating a proprietary technology pipeline for innovative drugs
.

       Despite this, Baihua Village still faces many difficulties
.
Especially in March of this year, the company announced the termination of the planned increase in September 2020, which has undergone four revisions and raised funds of 389 million yuan
.

       According to the company's original plan, this fixed-increasing project of nearly 390 million yuan was originally used for drug R&D, small molecule innovative drug R&D and peptide innovative drugs and PDC drug R&D projects of Huanglong Biology and Liwei Biology
.
However, the China Securities Regulatory Commission decided on March 16 to terminate the review of the administrative license application.
The company also said that “considering the changes in the external market environment and other factors, combined with the company’s actual situation, development planning and many other factors, after careful study, The company terminates the non-public issuance of A shares in 2020 and withdraws the application materials
.
"
.

       From this point of view, Baihuacun’s “road to reversal of the dilemma” is really too difficult
.

       Fourth, the conclusion

       In general, even though Baihuacun carried out its second asset reorganization in 2016 and entered the CRO sector with better development prospects, the poor operation of its wholly-owned subsidiary, Warwick Pharmaceuticals, also led to consecutive years of losses in the company's performance
.
In the same period, the company's stock price also fell from 20 yuan to a minimum of 2.
8 yuan, facing the risk of delisting at any time
.

       In fact, the case of Baihua Village can also reflect the epitome of the current development of the pharmaceutical industry
.
For example, generic drug companies that once did not seize the opportunity to transform innovative drugs have been deeply impacted by centralized procurement in recent years; API companies that also face development difficulties have also been seeking API-preparation integration or transitioning to the CDMO route in recent years.

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       Editor in charge: Penicillin

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