Behind the performance pressure, New Novartis's deeper risks can no longer be ignored

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2024 is the first year for the former functional raw materials giant, Shiyao Innovation Pharmaceutical Co., Ltd. (formerly known as “Newway”, hereinafter referred to as “Newway”), to completely transform into the field of biopharmaceutical innovation, but its report card is less than satisfactory.

According to the annual report, the company achieved an annual revenue of 1.981 billion yuan, a sharp decline of 21.98% year-on-year; the net profit attributable to the parent company was 53.7263 million yuan, a significant drop of 87.63% year-on-year; the net profit after deducting non-recurring items shrank by 94.31%, leaving only 42.34 million yuan. The reasons for the sharp decline in performance include not only the expected increase in research and development expenses putting pressure on performance but also the significant decline in the company’s traditional business, which is a core factor.

What is more concerning is that when Newway continues to acquire assets from its controlling shareholder, Shiyao Group, at a premium, creating a situation where its valuation increases, the group realizes high-level financing through Newway, and the original small and medium shareholders fully enjoy capital gains, if the related assets cannot support the corresponding valuation, it may ultimately become a “hot potato” game where the “later buyers pay.”

Is innovative drug assets no longer appealing? Low proportion of down payments, clinical data questioned for fraud

In January 2024, Newway acquired 51% of the equity of Giantstone Biotech for 1.871 billion yuan in cash, marking its official entry into the field of biopharmaceutical innovation. However, this company, focusing on ADC (antibody-drug conjugate) and mRNA vaccine development, has become a “black hole” consuming profits. In 2024, Giantstone Biotech posted a net loss of 727 million yuan. As a result, Newway’s net cash flow from operating activities plummeted to -1.335 billion yuan, a year-on-year decline of 271.26%, with cash and cash equivalents decreasing by about 2.898 billion yuan.

Giantstone Biotech’s core assets include the domestic first mRNA COVID-19 vaccine “Duntai” and the PD-1 monoclonal drug “Enshuxing.” Although in 2024, the company’s biopharmaceutical segment contributed revenue of 87.79 million yuan, an approximate year-on-year increase of 153%, the sustainability of this growth is questionable. At the same time, the overseas licensing of the ADC pipeline encountered severe setbacks, and the company’s valuation may face reshaping.

Regarding listed drugs, although “Duntai” is the first mRNA COVID-19 vaccine in China, the COVID-19 benefits had gradually faded by the time it was launched, and the relevant sales data is no longer disclosed in the annual report, offering little support for performance growth. The PD-1 monoclonal drug “Enshuxing” was approved in June 2024 for the treatment of patients with recurrent or metastatic cervical cancer expressing PD-L1, but the PD-1 sector has already become a red ocean with limited future commercialization prospects.

In terms of the research pipeline, Giantstone Biotech has over 20 projects under development, among which SYS6002, SYSA1801, and SYS6005 have been licensed to overseas pharmaceutical companies, receiving upfront payments of $7.5 million, $27 million, and $15 million, respectively. Generally speaking, these licensing agreements include upfront payments and subsequent profit-sharing arrangements. Since upfront payments are typically one-time and non-refundable, the amount reflects the overseas companies’ value assessment of the pipeline more accurately.

In horizontal comparison, compared to other domestic manufacturers’ overseas cases, the upfront payment ratio obtained by Giantstone Biotech for external licensing cooperation is significantly low, with the upfront payments for SYS6002, SYSA1801, and SYS6005 accounting for approximately 1%, 2%, and 1% of the potential total transaction amounts, indicating that the pipeline’s value may still need verification.

Furthermore, it is worth noting that SYSA1801, the overseas project with the highest upfront payment, has been terminated due to clinical data not meeting expectations. On March 20 of this year, Shiyao’s overseas partner, Elevation Oncology in the U.S., announced the termination of the Claudin18.2 ADC project SYSA1801 introduced from Shiyao. Elevation stated, “Compared to other Claudin18.2 ADCs, it did not show sufficient competitiveness,” and “does not meet our success criteria, nor does it provide a competitive risk-benefit profile for patients.”

It is reported that the Phase I clinical data of SYSA1801 in the U.S. differs significantly from the previous clinical results conducted in China. In May 2023, data disclosed at the American Society of Clinical Oncology (ASCO) annual meeting showed that among 15 gastric cancer patients with a Claudin 18.2 expression rate exceeding 20%, 7 had an overall response rate (ORR) of 42.8%. In contrast, the U.S. Phase I clinical data showed an ORR of only 22.2%, such a large data difference has even sparked market disputes regarding whether there was data fraud in the previous Chinese clinical trials.

**　Significant decline in traditional business, gross margin falls below 40% for the first time**

In addition to the poor quality of the acquired innovative drug assets, the company’s traditional business also faces challenges. As the world’s largest producer of synthetic caffeine, Newway had maintained its position as a leader in the niche market based on this business, with clients including international giants like PepsiCo and Coca-Cola. However, the annual report for 2024 indicates that its traditional business has fallen from a “cash cow” to a performance drag.

During the reporting period, the company’s functional raw materials business (mainly caffeine products) generated revenue of 1.84 billion yuan, a year-on-year decline of 24.9%, nearly a 30% decrease from the peak in 2022. Behind the revenue collapse is a sharp decline in the business’s gross margin, which dropped by 5.75 percentage points to 39.73%, marking the first time it fell below 40%, and a stark contrast to the gross margins of over 80% in 2021 and 2022.

At the same time, it is reported that the inventory of the company’s caffeine products reached 4,680.58 tons, a year-on-year increase of 59.66%, while the production and sales rate dropped from 95.07% in 2023 to 89.4%. Correspondingly, the company’s inventory turnover days significantly extended to 97.46 days, setting a historical high, which is an increase of 36.68 days compared to 2023.

The company stated that its functional raw material caffeine products were affected by market factors, causing prices to retreat from the high levels in 2023, leading to a reduction of 610 million yuan in the main business revenue of the functional food and raw materials segment compared to the same period last year. However, in fact, even in 2023, when caffeine prices were high, this business’s revenue still fell by 5.01% year-on-year, indicating that Newway’s traditional advantage business has entered a downward channel. The company explained that it was “affected by market conditions,” but the deeper reason is that caffeine, as a bulk commodity, is subject to pricing power constraints imposed by international supply and demand patterns, and the capacity expansion of domestic competitors has further intensified the price war.

**　Capital maneuvering reappears; who will become the loser?**

While Newway’s traditional business is declining and its new business is deeply in the red, the company still intends to continue acquiring assets from its controlling shareholder. In October 2024, the company announced a restructuring plan to acquire 100% equity of Shiyao Baike, intending to purchase 100% equity of Shiyao Baike (Shandong) Biopharmaceuticals Co., Ltd. (hereinafter referred to as “Shiyao Baike”) through issuing shares and paying cash, with a transaction amount of 7.6 billion yuan and an appraisal value increase rate of 78.25%.

However, the company’s quality is hard to describe as excellent, and the performance commitments given are clearly mismatched with the valuation increase rate.

Shiyao Baike’s existing commercialized products include the long-acting white blood cell boosting agent Jinyouli and the short-acting white blood cell boosting agent Jinxuli. Among them, Jinyouli is Shiyao Baike’s primary source of revenue. In 2023, Shiyao Baike achieved revenue of 2.32 billion yuan, of which 2.25 billion yuan came from Jinyouli, accounting for 97%.

As Jinyouli is gradually being implemented at the inter-provincial alliance procurement winning price in multiple provinces, the product unit price and sales rate have shown a downward trend, leading to a decline in Shiyao Baike’s performance. The sales of Jinyouli in 2022, 2023, and the first half of 2024 were 1.6539 million, 2.0352 million, and 873,900 units, respectively, with sales rates of 86.56%, 80.92%, and 71.37%, and average sales prices of 1,349.22 yuan, 1,104.04 yuan, and 1,053.12 yuan per unit, respectively.

From a performance perspective, in the first half of 2024, Shiyao Baike achieved operating revenue of 922 million yuan and a net profit of 244 million yuan after deducting non-recurring items, accounting for 39.8% and 33.66% of the corresponding indicators for the full year of 2023, respectively. The company also stated in the announcement that the operating revenue and net profit after deducting non-recurring items for January to June 2024 had decreased, and if Jinyouli’s sales after the inter-provincial alliance procurement do not meet expectations, it will pose a risk of performance decline for the target company.

Regarding the research pipeline, Shiyao Baike’s pipelines that have entered the clinical stage mainly include TG103 injection (an innovative long-acting recombinant human glucagon-like peptide-1 (GLP-1) Fc fusion protein) and Semaglutide injection (a long-acting GLP-1 analog), which are expected to be launched successively starting in 2026.

In recent years, driven by the expansion of weight loss indications, the global sales scale of GLP-1 peptide drugs has continuously broken through. However, from a market perspective, the competition is becoming increasingly fierce, resulting in a red ocean. According to the medical database, there are currently 206 GLP-1 pipelines being developed by domestic pharmaceutical companies. Among them, generics of liraglutide by Huadong Medicine, benaglutide by Renhui Biotech, terzepatide by Eli Lilly, and semaglutide by Novo Nordisk have already been approved for weight loss indications, and Innovent Biologics’ injection of mazhidutide is in the NDA stage.

At the same time, the Chinese patent for semaglutide will expire as early as 2026, allowing domestic biosimilars to be approved for sale. Currently, eight domestic companies have applied for clinical trials of semaglutide biosimilars, actively preparing for the domestic market after the patent expiration.

Among them, Jiuyuan Gene and Livzon Group are progressing the fastest, with applications for type 2 diabetes indications already entering the approval stage, and are expected to be launched after the expiration of semaglutide’s patent. The weight loss indication has also been approved for clinical trials, and with the domestic approval of the weight loss indication for the original semaglutide, the clinical trials of biosimilars are about to begin.

Furthermore, about 40 domestic companies have entered the clinical development stage for GLP-1 drugs targeting weight loss indications, including various drug forms such as peptides, small molecules, and fusion proteins targeting GLP-1R single targets, GLP-1R/GIPR dual targets, and GLP-1R/GCGR/GIPR triple targets.

With core commercialized products included in centralized procurement and research pipelines yet to be launched, Shiyao Baike’s future commercialization prospects are not optimistic. Although the acquisition agreement for Shiyao Baike includes performance commitment clauses, the amounts are clearly low.

The performance commitments state that from 2024 to 2025, Shiyao Baike’s net profit will not be less than 435 million yuan, 393 million yuan, and 436 million yuan, totaling not less than 1.264 billion yuan. Financial data show that in 2022 and 2023, Shiyao Baike achieved operating revenues of approximately 2.235 billion yuan and 2.316 billion yuan, respectively; corresponding attributable net profits were approximately 621 million yuan and 785 million yuan; and net profits after deducting non-recurring items were approximately 693 million yuan and 725 million yuan, all exceeding the performance commitment amounts.

In this “left hand to right hand” capital game, Newway has achieved a significant valuation increase through restructuring; the premium acquisition not only helps the controlling party, Shiyao Group, to elevate the valuations of Giantstone Biotech and Shiyao Baike but also allows Newway’s funds to be consolidated back to the parent company, and it can obtain financing at high stock prices through capital increase and share distribution; Newway’s small and medium shareholders, benefiting from the valuation increase, will also gain considerable capital gains.

However, it is important to note that the premise for achieving a win-win situation for many parties is that the relevant innovative drug assets truly deserve the premium acquisition valuation; otherwise, when the tide recedes, it will ultimately become a “hot potato” game where the “later buyers pay.”