Report by our reporter Chen Ting and Cao Xueping from Shenzhen

The first CRO (Pharmaceutical Contract Research Organization) company on the board, Medissi (688202.SH), suffered its first loss since listing in 2023. For the future, it recently admitted in its reply to the annual report inquiry letter: "There is a possibility that the company's net profit level will continue to decline."

In the past year, Medissi's revenue fell 17.68 year-on-year to 1.365 billion yuan, with a loss of about 33.21 million yuan, and its profit in 2022 was about 0.338 billion yuan. In response to the inquiry letter, Medissi said that the decline in the company's performance was mainly due to a sharp decline in gross profit margin and a large provision for impairment. In 2023, while the number of customers continued to grow, the unit price of Medissi's core business experienced a double-digit decline. In addition to the company's initiative to reduce order quotations, there was also the impact of delayed execution of some orders.

In Medissi's disclosure, peer companies will also experience slower revenue growth or reduced revenue in similar businesses in 2023. The relevant staff of the Securities Department of Medissi told the reporter of "China Business News" that the decline in order prices is an overall phenomenon in the industry, and the company is also adjusted according to market demand, and the price reduction is equivalent to that of its peers.

Internally, Medissi will have nearly 700 employees in 2023, but labor costs will increase by 17.87 percent year-on-year, accounting for 47 percent of the company's operating costs. At the same time, with the commissioning of the laboratory, the manufacturing costs incurred by Medissi have increased significantly, but it should be noted that the current market demand has undergone major changes, and there has been a phased excess of production capacity.

Regarding the processing of delayed orders and other issues, Medissi told reporters that the company will strictly perform its information disclosure obligations in accordance with relevant regulations. If relevant matters meet the conditions required by the applicable information disclosure rules, the company will Announce in the way, related issues refer to the company's disclosed information.

Price reduction and order grabbing

The annual report shows that Medisi is mainly engaged in drug discovery and pharmaceutical research and pre-clinical research CRO services. Among them, drug discovery and pharmaceutical research mainly includes compound synthesis and screening, API and preparation process research and other services; preclinical research services mainly include pharmacodynamic research, pharmacokinetic research, toxicology research and so on.

In November 2019, Medissi was listed on the CRE Board, with revenue of about $0.45 billion, net profit of about $66.573 million and total assets of $1.128 billion. In the following three years, the revenue scale of Medissi continued to grow, exceeding 1.6 billion yuan and net profit exceeding 0.3 billion yuan by 2022. But the year after earnings reached an all-time high, Medissi fell into the red.

In 2023, the revenue and gross profit margin of Medissi's two core businesses both showed double-digit declines. Among them, the revenue of drug discovery and pharmaceutical research business was about 0.632 billion billion yuan, down 14.07 percent from the same period last year, and the gross profit margin was 15.92 percent, down 17.03 percentage points from the same period last year. During the same period, preclinical research business revenue was about 0.734 billion billion yuan, down 20.55 percent from the same period last year, and gross profit margin was 30.53 percent, down 16.5 percentage points from the same period last year. In terms of the company's business structure, the share of revenue from preclinical research has stabilized at around 55 percent in the last two years, while the share of revenue from drug discovery and pharmaceutical research has fallen below 50 percent since 2022 and about 46.3 percent in 2023.

judging from the number of customers and the unit price, the number of customers in medisi's drug discovery and pharmaceutical research business increased by 35.98 to 684 in 2023, but the unit price decreased by 36.81 to 923700 yuan. The unit price of preclinical research business decreased by 23.59 to 1.0775 million yuan, and the number of customers increased by 3.97 to 681.

How many of these new customers are obtained through price reduction? The relevant staff of Medissi Securities Department only said that the growth of customers was mainly due to the efforts of the company's front-line team, and price reduction was a common situation in the whole industry. And from the market position, the company currently has certain advantages in the integration of preclinical research.

Medissi further stated in the announcement that due to the decline in investment and financing in the biomedical industry, market demand has changed and industry competition has intensified. In order to gain market business opportunities, the company has taken the initiative to reduce some business order quotations. At the same time, affected by the industry investment and financing environment, biopharmaceutical enterprises to promote research and development more cautious, some research and development service orders delayed execution, resulting in a decline in customer unit prices.

as of the end of 2023, 35 project contracts in medisi's products (mainly projects with an experimental period of March-June) at the end of the period have suffered losses, accounting for 11%, and the corresponding order amount is 2.4556 million yuan, which is mainly affected by factors such as pricing strategy and actual project investment exceeding expectations, resulting in the estimated total investment cost of these projects exceeding the income. However, Medissi did not provide for a loss on the decline in value of its work-in-progress inventory because "the amount of the actual loss incurred was not material to the financial statements".

The advancement of service orders provided by Medissi is primarily influenced by factors such as the customer's R & D strategy, R & D plans, and funding arrangements. In 2023, the company's customer structure is dominated by domestic customers, accounting for about 70%, and foreign customers accounting for about 30% of revenue.

By business, Medisi's business orders in China are dominated by preclinical research, which accounted for 62.11 percent of revenue in 2023, and foreign business orders are mainly drug discovery and pharmaceutical research, which accounted for 67.41 percent of foreign business revenue in 2023. In the announcement, Medici said that under the background of a greater decline in the scale of new orders for the company's preclinical research business, the impact on the scale of domestic business in 2023 was more obvious, with the company's domestic revenue falling 22.44 per cent year-on-year and overseas revenue falling only 2.59 per cent year-on-year.

Further, in 2023, the gross margins of Medici's domestic and foreign drug discovery and pharmaceutical research businesses were similar and varied in magnitude, but the major segments of the domestic and foreign preclinical research business were different, resulting in a lower gross margin for the domestic preclinical research business (26.66 per cent) relative to overseas (49.14 per cent). But overall, the gross profit margin of Medissi's domestic and foreign businesses fell to less than 30% in 2023, and the gross profit margin of these two markets will be above 40% in 2022.

Facing "difficulty in getting money back"

at a time when the profit margin of new orders is compressed, some of the stock orders of medisi are facing "difficulties in repaying".

The announcement shows that the scale of accounts receivable has increased since 2022, with new accounts receivable of about $0.491 billion and $0.484 billion in 2022 and 2023, respectively, with an average payback cycle of 89 days and 164 days, and a post-period payback ratio of 43.13 percent and 40.96 percent, respectively. In response to the inquiry, Medissi stated that the increase in accounts receivable was mainly due to the overall increase in the company's operating scale, and some customers were more conservative and stable in payment due to the risk of uncertainty in the future.

in 2023, the total balance of accounts receivable of the top five customers of medisi accounts receivable was about 0.127 billion yuan, the age of the accounts was less than one year, and the total amount of bad debt provision was about 6.3508 million yuan, of which two customers did not pay back after the period. During the same period, the balance of accounts receivable of the company's top five customers who have not paid back for a long time (with an age of more than 2 years) totaled about 16.1315 million yuan, of which the bad debt reserve of the customer with the largest amount (5.1422 million yuan) was 3.273 million yuan, and there was no later payment. The customer was mainly engaged in the research and development, production and sales of chemical drugs, biological drugs and modern traditional Chinese medicine in the fields of tumor, anti-inflammatory and other diseases, for Wuhan 2018 "science and technology giant" enterprise. At the end of 2023, Medisi's accounts receivable were approximately $0.647 billion million, with a post-period repayment ratio of 30.66 percent.

And on the cost side, Medissi's investment has continued to increase over the past year. On the one hand, during the reporting period, the company's labor costs increased by about 18% year-on-year to 0.489 billion yuan, accounting for 47% of operating costs from 42.26 in 2022. In terms of the number of employees, Medissi will have 2600 employees in 2023 and 3298 in 2022 (up 35.16 percent year-on-year), but Medissi explained that the overall salary level of the company's business personnel will increase in 2023, with the average monthly number of business personnel increasing 1.03 percent year-on-year, resulting in an increase in labor costs in 2023.

on the other hand, the company's manufacturing costs increased by 47.03 year-on-year in 2023, accounting for 19.93 percent, mainly due to the increase in depreciation of fixed assets and long-term amortization expenses caused by the company's purchase of professional equipment and the completion of the renovation and acceptance of the laboratory building.

In its reply to the inquiry letter, Medissi admitted that rigid costs such as depreciation of fixed assets and long-term amortization expenses still exert pressure on the company's operating results in the short term. Superimposed on the decline in order prices, it is estimated that in the coming period, the company expects gross margin to decline compared to previous years. Under the combined influence, there is a possibility that the downward trend in the company's net profit level will continue. In the first quarter of 2024, Medissi's revenue fell 42.51 percent year-on-year and net profit fell 136.98 percent year-on-year.

In fact, the impact of the weakening of industry investment and financing and the slowdown in market demand growth on revenue is not the words of the Medisi family.

Kanglong Huacheng (300759.SZ) said in its first quarterly report in 2024: "Affected by the market environment of the global pharmaceutical and health industry's investment and financing phase cold and the temporary slowdown in customer demand growth, the company's operating income declined during the reporting period." Zhaoyan New Drug (603127.SH) said in the announcement that in 2023, due to the weakening of investment and financing in the industry and the slowdown of demand growth in the pharmaceutical market, competition in the same industry intensified, the pressure to sign orders increased, the profit margin of sales orders was compressed, the rise in experimental model prices and labor costs could not be fully transmitted to customers, and the company's revenue was under pressure.

According to the statistics of the medical Rubik's Cube, in the first quarter of this year, there were 319 investment and financing events in the primary market of the domestic medical and health field, a year-on-year decrease of 30%, and the total financing amount was 19.69 billion yuan, a year-on-year decrease of 9%.

Since the beginning of this year, Pengli Biomedical Technology (Shanghai) Co., Ltd., Yunzhou Biotechnology (Guangzhou) Co., Ltd., and Shanghai Xihua Testing Technology Service Co., Ltd. have withdrawn their listing applications on the CRO track.