Modern Chinese Medicine Maker Tasly Pharmaceutical: An Old Stock in a New Package?
Tasly Pharmaceutical, founded in 1994 and listed on SSE in 2002, is valued at CNY 26.9 billion – a market cap that the company once achieved ten years ago. But did the company merely spin in circles during the last decade?
► Tasly has been not performing well since 2015, due to the change of the senior management and tightened policies.
► New hope has come out because Tasly is selling its commerce business and planning a Hong-Kong IPO for the biotech segment.
Chinese pharmaceutical companies are either stuck in an impasse or are working to shift their development strategies. In China, the healthcare policy impact is decisive and industry-wide. Since 2018, a series of healthcare reforms have come into effect.
A broader spectrum of healthcare insurance, restrictions on auxiliary drugs, '4+7' centralized procurement, strengthened quality consistency valuation for generic drugs … these policies are orienting pharmaceutical companies to take on a more competitive path.
So is Tasly Pharmaceutical, a national brand name known for modern Chinese medicine. The company climbed to a historically high valuation of over CNY 6 billion in 2015 shortly before falling as the whole A-share market sank. Recent years saw it flow and shift along with the volatile Chinese stock market.
A not good-looking fundamental outline
Tasly Pharma started from modern Chinese medicine and is now repositioning its business anchor in chemical medicines and innovative biological drugs.
The revenue split above clearly shows that the company is still mainly relying on medical commerce and Chinese medicines in the medical industrial segments. In a brief look, the revenue grew at an impressive CAGR of 49.7% during the last three years. Indeed, not many Chinese medicine makers have achieved a growth like Tasly Pharmaceuticals.
However, total revenues cannot reflect the company's operation quality. By a fundamental analysis of the company's historical ROE, it is not hard to conclude that it was not performing well during the period 2017 – 2019. The four-year ROE average was 23.28% before 2015 and then shrank to 13.59% after 2015.
A direct reason to explain the fall is the decreased net margin – a profitability issue. The net margins fell substantially, from 17.8% in 2015 to 8.74% in 2019. In 2015, Mr. Xijun Yan, the founder & CEO of Tasly Pharmaceutical, yielded the management position to his son, Mr. Kaijing Yan. The new CEO focused on developing chemical, biological medicines and acquisitions, which strategy has provided extra returns according to recent annual reports.
From this perspective, it makes sense that the company spent more on investment to enter a new business with more significant potential and greater difficulty.
Another way to check operation efficiency is to review selling expenses. In the 2019 annual report, the company recorded its total selling expense as CNY 2764.82 million. This billion-level expenditure only included four sub-items, from compensation, marketing promotions, logistics fees and others. Compared to the R & D expenditure of CNY 551.2 million, the selling expenditure has remained at 4.7 x to 5 x times the R & D expense amount.
Even though efficiency has improved, it is mainly from the medical commerce business. National Medical Products Administration has tightly supervised the distribution area of medicines. The centralized procurement policy aims to clean up the gray areas in the pharmaceutical distribution business.
Generally, the fundamental analysis is not attractive and the large-scale expenditure on marketing and promotions undoubtedly hurt the company’s profitability capabilities.
Challenges – with opportunities alongside
However, the policy impact gives a hint about the future, even though the negative impact has hurt many pharmaceutical companies in the short run, unveiling some promising business areas.
Tasly Pharmaceutical has been negatively impacted by healthcare reform, especially the centralized procurement policy. Over 30% of the company's revenue comes from medical commerce – a business that significantly relies on marketing and selling channels.
In the 2019 annual report, Tasly Pharmaceutical announced it would sell out the medical commerce segment and focus on the innovative drugs in the following few years. In 2019, the medical commerce segment only contributed a 10% gross margin, while the medical industrials contributed 74.63%. When the external environment indicates the pharmaceutical distribution business is not potential nor profitable, it is the right time to change in a more decisive manner.
After selling out the commerce department, Tasly will have more time and resources to develop its medical industry involvement. So far, it has engaged in pharmaceutical solutions in cardiovascular diseases, digestive metabolism and chemotherapy, and plans to go on a four-pivot R & D strategy integrating independent self-R & D, importing products, and cooperative R & D investment aspects.
Tasly Pharmaceutical has invested in many promising biotech companies and obtained excess returns. Yongtai Biological (06978:HKEX), one of Tasly's investees, focuses on cellular immunotherapy. The core product specific to the reoccurrence of post-surgery liver cancer has entered into the second clinical trial phase, arousing much expectation of future commercialization. This biotech went on to file an IPO on the Hong Kong Stock Exchange on July 10th. As a cornerstone investor of Yongtai Biological, Tasly’s stock grew to a new price range between CNY 18 to CNY 18.5 around the IPO time.
In the future, there are many things to expect from Tasly. First, the company will experience an organizational restructuring. It will potentially help the company get rid of the unprofitable parts of the business and improve its internal operation.
For example, the considerable accounts receivable will probably go back to the normal level after the commerce business is sold out, since distribution businesses usually have a very long capital chain and large accounts receivables.
Second, the planned IPO for its biological business will help the company reorganize the business and re-impress the market. Since the company has showed the ambition to develop innovative medicines in the natural pharmaceutical area, splitting the business to go on to undertake an IPO is a promising strategy.
Third, the centralized procurement policy benefits Tasly in the Chinese medicine segment. The goal of the policy is actually to go parallel with the healthcare reform by selecting those competitive pharmaceutical companies who can provide high-quality and low-cost medicines.
As a veteran in Chinese medicine manufacturing, Tasly has six products chosen in the national procurement this year. On the other hand, it has developed sophisticated methodologies to keep the raw material supplies (mostly Chinese herbs) under control.
In general, this old national brand is accelerating the adaptation process in the new era after receiving some policy shocks. Moreover, in this turbulent world, it is more important to find the right path. It seems that Tasly is getting close to the right track.