Fosun Pharma Hopes Covid Vaccine Can Cure Its Ailing Margins (SFOSF)

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Covid-19 Vaccine

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Vaccines have been the most potent weapon in the fight against Covid-19, with a number now available for over a year. Many such vaccine developers and sellers have reaped big profits from the business, including Shanghai Fosun Pharmaceutical (Group) Co. Ltd. (OTCPK: SFOSF) (2196.HK; 600196.SH), which got a lift from distributing BioNTech’s (BNTX) mRNA-based Comirnaty vaccine in Greater China last year.

Fosun Pharma raked in over 1 billion yuan ($ 157 million) last year from sales of the vaccine, helping to boost its overall revenue for the year, according to its 2021 financial report released last Wednesday. More specifically, that report showed the company’s revenue grew 28.8% for the year to 38.9 billion yuan, with net profit up by a similar 29.3% to 4.74 billion yuan.

Yet despite Comirnaty’s contribution, the big prize – sales on the Chinese mainland – has yet to materialize as Beijing has yet to approve the vaccine for its massive market, where so far only home-developed options are available. But Fosun Pharma certainly is not one trick pony, reporting impressive growth in all its three main business operations last year.

Its pharmaceutical manufacturing business contributed the biggest slice of 28.7 billion yuan in revenue, up 32.3% from 2020. Within that figure, manufacturing of innovative new drugs has become an especially important driver representing more than 25% of last year’s total. The new injectable drug Rituximab, made by Fosun’s Shanghai Henlius Biotech (2696.HK) subsidiary, turned in handsome revenue of 1.69 billion yuan for the year, up a remarkable 125%.

But things were not all rosy, with the pharmaceutical manufacturing business’ gross margin declining by 8.25 percentage points in 2021 to 51.9%. When taken with smaller margin declines for its other two operations, the company’s total gross margin fell by 6.53 percentage points to 47.94% last year from 54.47% in 2020. It attributed the pressure to falling prices as some of its drugs were included on the National Reimbursement Drug List, as well as to higher costs due to the use of more expensive raw materials.

By the end of 2021, the company had secured government contracts in six bidding rounds and had 23 drugs included on the National Reimbursement Drug List. Such inclusion means the National Healthcare Security Administration undertakes large-scale purchases of such drugs. But it also demands big discounts, with the result that the average price of those drugs fell by 53%. The bottom line was that sales of Fosun Pharma’s most popular products soared, but big price declines ate into its generic chemical drug business’ gross margin.

Facing such pressure, the company has doubled down on R&D with a focus on biological drugs and small-molecule innovative drugs to diversify its business portfolio and boost revenue. In 2021, it invested nearly 5 billion yuan in such endeavors, up 24.3% over the previous year, with R&D investment in drug manufacturing reaching 4.49 billion yuan. The company said it is developing innovative and antibody drugs for the treatment of immune, metabolic and digestive disorders and cancer, as well as diseases related to the central nervous system.

So, how could the company achieve net profit growth in line with its revenue growth, despite a substantial fall in gross margin? The answer lies in selling down stakes or its subsidiaries. Last year it sold all or part of the stakes in four subsidiaries, bringing in 2.7 billion yuan, or 57% of its total net profit for the year.

Comirnaty waiting for China green light

As early as March 2020, just four months into the pandemic, Fosun Pharma was astute enough to sign an agreement with BioNTech to become the German company’s exclusive licensee in Greater China to develop and commercialize its Comirnaty mRNA Covid-19 vaccine. That vaccine was being commercialized by Pfizer (PFE) outside Greater China and is one of the most widely distributed Covid-19 vaccines in the world. It was approved for use by Hong Kong and Macau in March 2021 and started to be administered in September in Taiwan.

Fosun Pharma President Wu Yifang told reporters on March 23, the day the company released its 2021 financials, that over 22 million doses of the vaccine had been administered to people in those three jurisdictions by the end of February 2022. But it had yet to enter the 1.4 billion-person mainland Chinese market, where its application is still under review.

At first the market was optimistic about huge sales the vaccine would suck up in the mainland, sparking a rally that saw Fosun Pharma’s shares surge to HK $ 82 last August. When the deal was first reached it was understood BioNTech would handle development and manufacturing of the vaccine, with Fosun Pharma pitching in for procurement costs, sharing its gross revenue with BioNTech and paying it sales-related milestone fees. But Fosun Pharma corrected that perception last May by announcing a joint venture with BioNTech to manufacture the vaccine in China. It added the venture expected to produce 1 billion doses of the vaccine annually, potentially providing a strong boost to its revenue.

Comirnaty aside, Fosun Pharma has also made some moves on Covid-related oral drugs. In January and March this year, it obtained approvals from the Medicines Patent Pool (MPP) to manufacture and supply some low-income countries with Merck’s oral drug Molnupiravir and an important ingredient called Nirmatrelvir from Pfizer’s oral drug Paxlovid, respectively. Wu estimated it would file for certification of its MPP approved products by the World Health Organization (WHO) at the end of 2022, and would be able to bring those products to market after getting the green light.

While Fosun Pharma posted strong gains in both revenue and profit, the capital market was unimpressed. Its shares fell 5.3% the day of release and closed at HK $ 35.75, near the low end of its 52-week range. Its price-to-earnings (P / E) ratio is now 16.22 times for its Hong Kong-listed shares and 27.75 times for its Shanghai-listed A-shares. By comparison, Zhejiang Jiuzhou Pharmaceutical (603456.SH), Zhejiang Huahai Pharmaceutical (600521.SH) and Apeloa Pharmaceutical (000739.SZ), which have also secured orders for Covid-19 oral drugs, had P / E ratios ranging from 42 to 66 times. So, the company is apparently valued lower than its peers.

Major investment banks are cautiously optimistic about the company. According to Sinolink Securities, Fosun Pharma has certain things going for it, including a bigger R&D budget, a steadily-growing main business and the prospect of launching its Covid-19 oral drugs as well as its mRNA vaccine in China. The brokerage gave Fosun Pharma an “overweight” rating. But it has also noted that investors should watch out for how China’s national drug procurement policies will affect the company’s profit margin.

Disclosure: None.

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Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these stocks.



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