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Not all roses for Edding

Eton Pharmaceutical’s Hong Kong Stocks "Three Enters the Palace"
January 02, 2022 18:08:23


Nowadays, the capital market is more demanding on the assessment of listed companies. In other words, it is much more difficult to get money from investors than in the primary market. Therefore, it is still unknown whether the "Three Enters" of Eton Pharmaceuticals will succeed in the end.

In the past 2021, although many companies succumbed on the way to go public and then fought again, there are not many companies with the spirit of "three-minded", and Eton Pharmaceutical is one of them.

On December 15, 2021, the Hong Kong Stock Exchange reported that Eton Pharmaceutical Group Co., Ltd. (hereinafter referred to as Eton Pharmaceutical) submitted a listing application to the Hong Kong Stock Exchange.

Prior to this, on September 23, 2020 and March 29, 2021, Eton Pharmaceutical submitted listing applications to the Hong Kong Stock Exchange, and passed the hearing on June 25, 2021, but no subsequent IPOs took place. The prospectus lost its validity in September.

The prospectus submitted by Eton Pharmaceutical this time has updated relevant data for 2021 and explained some topics that investors are concerned about.

According to the prospectus, Yiteng Pharmaceutical's 2017, 2018, 2019, and 2020 revenues will be 1.787 billion yuan, 1.478 billion yuan, 1.874 billion yuan, and 1.768 billion yuan; gross profit will be 604 million yuan, 538 million yuan, and 8.6 billion yuan respectively. 100 million yuan, 1.063 billion yuan.

In addition, Yiteng Pharmaceutical's annual profits for 2017, 2018, 2019, and 2020 were -38.54 million, -215 million, 173 million, and 86.94 million respectively; the profit rates for the year were -2.2% and -14.6%, respectively. , 9.2%, 4.9%. Yiteng Pharmaceutical's 2020 annual profit dropped by nearly 50% compared with the same period of the previous year.

In the first half of 2021, Yiteng Pharmaceutical's revenue was 853 million yuan, with a profit of 26.94 million yuan; the revenue for the same period in 2020 was 595 million yuan, and the loss during the period was 43.61 million yuan.

It is such a pharmaceutical company that was originally just an ordinary process of listing and financing, but because of the "three times of entering and leaving the Hong Kong Stock Exchange" experience, many media and investors are very curious.

"Bullet Finance" found that if you carefully analyze the business and corresponding management model of Eton Pharmaceuticals, you will find that this company is not favored by the capital market. There are indeed reasons for this.

Starting from an agency, transforming through acquisitions

According to the information on the official website of Eton Pharmaceuticals, the company was founded in 2001, focusing on the three major therapeutic areas of anti-infection, cardiovascular disease and respiratory system. Famous leading anti-infective drugs.

However, what surprised investors and the media was that until October 2019, these two drugs belonged to the internationally renowned Eli Lilly Pharmaceuticals Group. At that time, Eton Pharmaceuticals was only the general agent of Eli Lilly in China. In January 2017, the two drugs were promoted and sold in China.

Strictly speaking, Eton Pharma is a CSO company in the pharmaceutical field, which is also a so-called outsourcing company for drug sales. Due to the lack of understanding of the Chinese market by foreign pharmaceutical companies, they will choose local pharmaceutical CSOs for marketing when opening up the market, which has become a domestic CSO company.

At that time, Yiteng Pharmaceutical gradually became a domestic CSO giant by virtue of its cooperation with foreign pharmaceutical companies. Therefore, it was favored by capital and received investment from well-known investors such as Sequoia Capital and Aobo Capital.
Following the implementation of the "two-invoice system" and "VAT reform" in China, the pharmaceutical CSO industry has been hit, and Eton Pharmaceuticals is also forced to start its transformation.

In October 2019, Eton Pharmaceuticals acquired the qualifications of Eli Lilly and Company to produce and sell antibiotic products Xikerao and Wencheng in mainland China through the acquisition, as well as the Xikerao production plant in Suzhou; in 2020, Eton Pharmaceuticals will GlaxoSmithKline acquired the core respiratory system product FPN; in addition, Eton Pharmaceuticals also authorized the introduction of three drugs, Vascepa, Mulpleta and EDP 125.

Stable and credible, that is, vancomycin hydrochloride for injection. This drug is used to treat methicillin-resistant Staphylococcus aureus infections. It is a powerful drug-resistant bacteria. It is mostly found in ICUs and other intensive isolation wards of hospitals. It is usually associated with invasive procedures or equipment (such as surgery, intravenous catheters or Artificial joints).

Methicillin-resistant Staphylococcus aureus infection is very common in severe hospital areas, especially orthopedic or surgical wards. Therefore, anti-infective treatment of this unique bacteria is the fastest growing segment of the antimicrobial drug market Market, and Wenxin is the market leader in the treatment of this infection.

According to the Frost & Sullivan report disclosed in the prospectus of Eton Pharmaceuticals, based on the sales revenue in 2020, it is believed that the market share of this kind of pathogen infection drugs is 27.3%.
Xikerao is a cefaclor drug, which is generally used for the treatment of respiratory tract infections and urinary tract infections in adults and children. In 2020, the market share of Xikerao is calculated based on the sales revenue in the general infection treatment market in China. It is 25.9%.

FPN is the latest generation of hormone nebulizer for the treatment of asthma. It was launched in China in 2017 and is currently the most effective drug for controlling airway inflammation. Eton Pharmaceuticals started exclusive sales of FPN in November 2019, and acquired this drug from GSK in May 2020.

According to the Frost & Sullivan report, in addition to FPN, there are only two ICS (inhaled corticosteroids) nebulizers currently sold in China. FPN is the only non-fake version that is included in the National Medical Insurance Catalog.

In addition, the above report also pointed out that the anti-infective field that Eton Medicine is good at has become the fastest growing therapeutic field in China. In 2020, anti-infection is the fourth largest therapeutic field in China, with a market size of RMB 174.2 billion, accounting for 12.0% of the entire Chinese pharmaceutical market.

Today, Eton Pharmaceuticals is a comprehensive pharmaceutical company that has established a high-quality product portfolio containing six core products, including three commercialized original brand products and three innovative new drugs under development. However, all of its core commercial products (ie, Xikerao, Wencheng and FPN) are original brand-name drugs without patent protection.

In the first half of 2021, Xikerao and Wentong generated revenues of 273 million yuan and 324 million yuan respectively, accounting for about 70% of Yiteng Pharmaceutical's revenue in the first half of 2021.

However, since the patent protection of these two drugs has expired, this has become an important place for investors to have doubts about the future development of Eton Pharmaceuticals.

What's worse, the current research and development of Eton Pharmaceuticals' new products is lagging behind. Currently, the six drug patents that are core products are all purchased, and no self-developed drugs are being sold.

Rely on foundry and sales system

Unlike major manufacturers such as Harbin Pharmaceutical Group and Baiyunshan Pharmaceutical, Eton Pharmaceuticals has a weak ability to produce medicines. Most of its medicines are produced and packaged by third parties, and then sold by themselves.

This is the so-called CMO asset-light operation model. (Editor's note: The full name of CMO is Contract Manufacture Organization, that is, "Global Biopharmaceutical Contract Manufacturing")
In the prospectus, Eton Pharmaceuticals explained this, and included the changes and potential impacts of the manufacturer into the risk items.

The prospectus shows that both Wencheng and FPN are produced by CMO's foundry companies for the full version. Among them, FPN also imports part of the raw materials from overseas and then delivers them to the final foundry for production.

Only Hitlau was produced by Eton Pharmaceuticals itself. The reason was that when Hitlau was bought out from Eli Lilly, the condition given by Eli Lilly was to take over the factory in China, which is still in operation. None of the management team has changed.

"According to the information we understand, the people of Eton Pharma didn't think about taking over the operation of the factory, but it found that the yield rate dropped too much after it sent someone to take over, so it switched back to the original management team. The CMO model is in It is not common in the medical field, and the practice of Eton Pharmaceuticals does appear to be quite risky." Liu Yanru, a well-known Hong Kong investment bank analyst, told Bullet Finance.

However, objectively speaking, compared with other pharmaceutical groups, Eton Pharmaceutical's marketing capabilities are quite good. According to the prospectus of Eton Pharmaceuticals, its sales and marketing network has more than 1,000 sales representatives, including more than 22,000 hospitals in 30 provinces in China, enabling the company to obtain sustainable sales and cash inflows.

In Liu Yanru's view, this is probably the important basis for Eton Pharmaceuticals to "break the Hong Kong stock market three times." "This is actually similar to many new consumer Internet brands. They are all empowered by brands. Merchants are only responsible for designing products, and third parties help to produce them, and then sell them through a strong marketing network." Liu Yanru said.

However, Liu Yanru believes that such companies will likely show certain disadvantages in the financial report data. "Generally, companies with strong sales capabilities will account for a very high proportion of sales expenses, and the same is true for Eton Pharmaceuticals."
Data from the prospectus shows that in 2020, Etton Pharmaceutical's marketing expenses will exceed 173 million yuan, and in the first half of 2021, it will set a record of more than 224 million yuan.

Due to high sales expenses, the company has been losing money with annual revenue of more than one billion yuan. In 2017 and 2018, the company lost 38.53 million yuan and 215 million yuan respectively, but it turned losses into profits in 2019 with a profit of 172 million yuan.
It is worth mentioning that many multinational pharmaceutical companies are now stripping off core assets and selling expired patent drug businesses to reduce cost pressure. In this context, still relying on the original pharmaceuticals with expired patents obtained from overseas to manufacture them in China, and then sell them under their own brands, how sustainable a business model such as Eton Pharmaceuticals really makes many investors feel disturbed.

The key is that under this model, Yiteng Pharmaceutical's cash flow has undergone some unsatisfactory changes.

The prospectus shows that as of June 30, 2021, Etton Pharmaceutical’s cash and cash equivalents were only 233 million yuan, and the accounts receivable were 594 million yuan, while short-term payables and bills were 101 million yuan, and other payables were 278 million yuan. Short-term loans of 718 million yuan.

It can be seen that its cash is far from being able to repay the short-term and medium-term costs of current liabilities, and even if it is guaranteed that the receivables are fully recovered, it cannot be offset against the books. What's more, it is impossible to recover all the receivables, and about 10% of them will generally be accrued for losses.


"When such financial reports are placed on the desk of any investment bank, it is impossible for investment banks to be interested in the stocks of such companies." Liu Yanru told Bullet Finance. She believes that the financial pressure on this company is too great. , Investors will feel the risk, "the decision-making will be more cautious."

Split R&D into the market

It stands to reason that pharmaceutical companies should focus on research and development, and even large-scale listed pharmaceutical companies lose money due to huge R&D investment.

Eton Pharmaceuticals is completely different from the model of these pharmaceutical companies. Its losses are caused by marketing expenses exceeding 30% of its income level, and the cash flow problem is also related to excessive receivables.

In terms of research and development expenses, this large pharmaceutical company with annual sales revenue of about 1.8 billion yuan, the corresponding expenditures shown in the financial report can be described as "a pitiful little."

In 2020 and the first half of 2021, Yiteng Pharmaceutical’s sales expense ratios were 24.2% and 26.3%, respectively, while the R&D expense ratios during the same period were only 3.4% and 5.4%, and the company's R&D relied on third-party pharmaceutical R&D companies.

In the first half of 2021, Eton Pharma’s marketing expenses exceeded 240 million yuan. While setting a record, it only spent less than 45 million yuan in research and development expenses.

In a sense, CRO (the full name of CRO is Contract Research Organization, that is, contract research organization) has become the "killer" of Eton Pharmaceuticals in response to regulatory requirements that pharmaceutical companies must invest in research and development. By entrusting third-party R&D, they can also control the cost of R&D investment, and reduce the cost of final drug production by requiring tripartite research institutions to provide the lowest-cost drug combination.

However, it cannot be said that Eton Pharmaceuticals has no research and development at all. Ni Xin was the founder of Eton International and started as a pharmaceutical sales company. In 2010, he also founded Eton Medicine's "brother unit" Eton Jingang.

For a long period of time, Eton King Ang only appeared as a unit of oncology drug R&D application of Eton Pharmaceutical R&D department, and the real scientific research expenditure and team fell under the name of Eton Pharmaceutical.

Beginning in 2019 when it was preparing to hit the Hong Kong stock market, Eton Pharmaceuticals has packaged the development of oncology drugs, which originally accounted for the bulk of scientific research expenses, into Eton King Ang. The reason may be to reduce the risk of loss, or to divest businesses that have not yet seen the ability to make money.


Eton King Ang is a bio-innovative drug company. There is no successful drug research and development, but it has 12 research projects, including type 1 HDAC selective inhibitor EOC103 (Entinolate), VEGFR inhibitor EOC315 (Terrati Ni), etc., covering multiple indications such as breast cancer and gastric cancer.

It is worth mentioning that while Eton Pharmaceutical will restart its impact on the Hong Kong stock market in 2020, it has also pushed Eton Jingang to the Science and Technology Innovation Board. However, due to unclear business and high R&D risks, the Science and Technology Innovation Board eventually terminated the company's declaration.

"This is already the third time that Eton Pharma has hit Hong Kong stock IPOs. In June this year, it has passed the Hong Kong Stock Exchange's hearing and can proceed to the next stage of raising funds from the capital market and negotiating with investment banks. However, Eton Pharma has Choosing to terminate the listing process." Lin Xi, a well-known Hong Kong analyst, told Bullet Finance that this is actually the result of Eton Pharmaceutical's judgment on the market.

In his view, on the one hand, the financial report of Eton Pharmaceuticals shows that there will be a big problem with the cash flow. On the other hand, there are almost no new products. The products it sells are all based on patents bought from abroad, and these patents have expired. Exclusive enjoyment, "Such an enterprise is not very attractive to investors in the capital market, and the risk is too high."

"Edden Pharmaceuticals is also aware of this. It is now reopening its IPO application and has added a lot of content describing its business prospects." Lin Xi added that he is still not optimistic about the listing process of Eton Pharmaceuticals, thinking that it is now The state of development of medicine is still far from the bottom line in the minds of investors.

"They have now split the research and development of oncology drugs. In fact, this area is attractive to many investors, because those drugs must be patented and sold exclusively after the listing of Eton Pharmaceuticals." Lin Xi said.

Of course, in his opinion, it is understandable for Eton Pharmaceuticals to dismantle this part. After all, this part of investment is too large. "If this part is added, the originally unsightly financial report will appear even more unsightly."

He believes that the key is how investors will think about it in the future. "There is a high probability that it will pass the hearing of the Hong Kong Stock Exchange. This depends on the development of the securities market in Hong Kong after the hearing. It may succeed in listing, otherwise it is dangerous."

In addition, he also speculated that Eton Pharmaceuticals is now hurriedly listing in Hong Kong, and it is a "three-in-one", which is likely to be related to short-term liquidity tensions.

Nowadays, the capital market is more demanding on the assessment of listed companies. In other words, it is much more difficult to get money from investors than in the primary market. Therefore, it is still unknown whether the "Three Enters" of Eton Pharmaceuticals will succeed in the end. (Source: Bullet Finance)

https://www.hstong.com/news/detail/22010211290167632