On April 23, Zhifei Biotech crashed by 12% in a single day and continued to fall by 3.3% for the next 2 trading days. Looking at it for a long time, the current price has retracted 77% from its historical peak in May 2021, and the market value has evaporated by 280 billion yuan.

Currently, Zhifei Biotech's latest PE was 10.9 times, while at its peak in 2020 it reached more than 120 times, the latest PB was 2.5 times, and the peak in 2020 was nearly 50 times. Both PE and PB hit new lows since their launch in 2010.

Why did the market “cut” a vaccine leader to such a cheap valuation level? How have the fundamentals of Zhifei Biotech changed?

01

In 2023, Zhifei Biotech's revenue was 52.92 billion yuan, up 38.3% year on year, and net profit to mother was 8.07 billion yuan, up only 7% year on year. As always, the revenue scale achieved rapid growth and reached a record high, but net profit to mother was far below the 10 billion mark peaked in 2021.

Revenue increased by only 2% in the first quarter. This is the worst first-quarter performance since the company acted for MSD's HPV vaccine in 2017.

This made the market particularly wary, worried about the ceiling of the HPV vaccine market, and was also one of the important factors in the sharp drop in stock prices on the 23rd. Net profit to mother fell sharply by 28.3%, the first negative increase in the first quarter since 2011.

The main reason for the sharp decline in net profit is that sales of the quadrivalent HPV vaccine have declined relatively, and the share of the nine-valent HPV vaccine has increased. However, the profit ratio between the nine-valent HPV and quadrivalent HPV vaccines is different, which is reflected in financial reports. Revenue has not changed much, but profits have shrunk sharply.

Let's look at profitability again. By the end of the first quarter of 2024, the company's gross margin was 26%, a record low since listing in 2010, and a sharp drop of more than 67% from the end of the first quarter of 2017. The reason for this is, on the one hand, that the gross margin of independent products was as high as 89.38%, but their share of revenue fell sharply to less than 2%. On the other hand, the gross margin of agent products continued to decline to 25.68%, due to changes in the agency product structure.

In fact, even with the same product, MSD intends to reduce the profit margins of intermediary agents; after all, the scale of agents is getting bigger and bigger.

In terms of net interest rate, the first quarter of 2024 was 12.79%, almost the lowest in history, and the downward trend is very obvious. In fact, the total cost of sales ratio (three fees+R&D rate) also continued to decline during the period and hit a new low, but gross margin fell sharply, which ultimately led to poor net interest rate performance. As a result, the company's ROE level has also been in a downward channel in recent years.

In terms of dividends, Zhifei Biotech's 2023 dividend amount was 1,915 billion yuan, accounting for 23.7% of net profit. Compared to itself, it is slightly higher than 9.4% in 2021 and 10.6% in 2022. Compared horizontally to pharmaceutical peers, this ratio is also significantly lower. For example, Watson Biotech's dividend payment rate reached 33.75% in 2023.

In summary, Zhifei Biotech's performance growth has encountered some bottlenecks, and profitability continues to decline, indicating that fundamentals have deteriorated, and it is also the core driving force behind the continued decline in stock prices.

02

Before 2017, Zhifei Biotech was still a vaccine company with a very small revenue volume and had almost no say in the industry. Performance was also tepid, with revenue falling from 737 million yuan in the year of listing in 2010 to 446 million yuan in 2016.

After 2017, there was an inflection point in the company's development. Back then, Zhifei Biotech and MSD signed exclusive agency rights for the HPV vaccine, which also marked the first time that a foreign-funded HPV vaccine would enter the Chinese market. Since then, the company's performance soared, and revenue soared from 1.34 billion yuan in 2017 to 52.9 billion yuan in 2023.

From 2017 to 2019, China's HPV market soared from 900 million yuan to 9.9 billion yuan. During this period, only 2 foreign-funded vaccine products were approved for marketing, including MSD's HPV quadrivalent and nine-valent HPV, and GlaxoSmithKline HPV bivalent and quadrivalent. Because the nine-valent vaccine is more popular in the market, MSD has almost monopolized the domestic supply of HPV vaccines. At that time, Zhifei Biotech can be described as having achieved a laid-back victory.

Since then, domestically produced HPV vaccines have been approved for marketing. Wantai Biotech HPV was approved at the end of December 2019. It was officially launched for sale in May 2020, breaking MSD's patent barriers. It also has high production and affordable prices, and has strong strength to seize the HPV vaccine market cake. In 2021, Wantai's bivalent vaccine was only on the market for more than a year and a half, accounting for 65% of the HPV market, far exceeding 30% of MSD.

In March 2022, Watson Biotech's bivalent HPV vaccine was approved for marketing, joining the competition for the HVP vaccine market cake. Since then, two domestic seedlings have gone on the market, continuously encroaching on MSD's market share.

MSD didn't sit back and wait to die either. In August 2022, the company announced that it would extend approval for nine-valent HPV to women aged 9 to 45. Previously, the age limit for people receiving this type of vaccine in China was 16 to 26.

This trick is quite lethal to domestic bivalent vaccine manufacturers. Because the nine-valent vaccine covers more and more complete types of viruses, the age range has now been expanded to the same as the bivalent vaccine, which will naturally increase market competition.

In order to seize the market, the two domestic manufacturers escalated the price war. In 2023, the winning bid price for Wantai Biotech's bivalent drug procurement was 116 yuan/branch — 344 yuan/stick, while in 2022 it was 329 yuan/branch — 344 yuan/stick.

In March 2024, according to the results of the Guangdong HPV vaccine procurement project for girls enrolled in 2023, Wantai Biotech won the bid for about 1.35 million doses at a price of 116 yuan/stick. In the same month, according to the Jiangsu Government Procurement Network, Wantai won the bid for the 499,206 bivalent HPV vaccine procurement project with 86 yuan/branch. This price also hit a record low in the bid price for domestically produced HPV vaccines.

In just 4 years, the price of Wantai bivalent vaccine dropped from 329 yuan/branch at the beginning of listing to less than 100 yuan, a drop of 74%. This indicates that no one can win in the HPV vaccine market. The era of high margins is over.

Against this backdrop, Wantai Biotech and Watson Biotech both showed Waterloo's revenue and profits last year. Zhifei Biotech's performance growth is quite steady, but more serious challenges are yet to come.

03

According to Frost & Sullivan data, the domestic HPV market is expected to reach 69 billion yuan in 2030, with a compound growth rate of 17.7% from 2020 to 2030.

With such a huge market cake, domestic vaccine manufacturers are speeding up research and development progress. Currently, there are quite a few companies that have deployed nine-valent vaccines. The main companies that have entered Phase III clinical research include Wantai Biotech, Watson Biotech, Recreation Guard, Shanghai Zerun, and Ruike Biotech.

In April of this year, Wantai Biotech completed on-site work for the phase III main clinical trial V8 of the nine-valent HPV vaccine (a total of 12 visits) was completed, and specimen testing is ongoing. Recently, the company also received preliminary analysis results of the main data delivered by a third-party statistics company. The main results were in line with expectations. At the same time, the company is simultaneously preparing application materials for new drug registration.

Furthermore, the timeline for the promotion of Leisure Guard Wantai Biotech's nine-valent HPV vaccine is very close. In December 2023, the company said that the site work for the phase III main clinical trial V8 of its nine-valent HPV vaccine has been completed, that specimen testing is ongoing, and that it can be declared for marketing as an iterative vaccine.

In order to speed up the marketing of domestically produced HPV vaccines, the policy also provided support. In July of last year, the State Drug Administration issued the “Technical Guidelines for Clinical Trials of Human Papillomaviruses Vaccine (Trial)”, which relaxes clinical trial standards for HPV vaccines, which is conducive to shortening the R&D cycle for companies that have already been approved for the HPV vaccine and marketed.

According to domestic expert predictions, it is hoped to see the first domestically produced nine-valent vaccine go on the market as soon as the second half of this year. Once on the market, this will probably increase the competitive pressure on Zhifei Biotech, because most of its revenue comes from proxy products, and most of the proxy products are nine-valent.

In the future, as more domestically produced nine-valent seedlings are listed, the market may experience the same internal dilemma as bivalent seedlings, and prices will drop sharply due to collection and fierce market competition. Furthermore, MSD will not be the exclusive supplier of nine-valent vaccine, and issuance volumes are likely to slow drastically, so the agent Zhifei Biotech may experience a “sharp drop in volume and price” situation in the near future.

Due to the question of sooner or later, the basic business market of Zhifei Biotech will face a serious impact. This is also a source of concern for the current market.

04

In the future, the size of the HPV market in China may not be as optimistic as currently anticipated by brokerage agencies due to influencing factors such as policies and prices. For example, in terms of policy, as early as April 2022, the WHO (WH0) published news on its official website. The WHO Immunization Strategy Advisory Expert Group (SAGE) held a meeting to review the evidence of a single dose of HPV vaccination and came to the conclusion that a single dose of HPV vaccine can provide reliable protection, which is comparable to the effectiveness of a 2- or 3-dose vaccination plan.

In March of this year, MSD announced plans to conduct clinical trials of the nine-dose HPV vaccine to evaluate the protective efficacy and safety of the single-dose vaccination plan compared to the approved 3-dose vaccination plan.

If, as recommended by the WHO, three doses of the HPV vaccine were changed to one dose, plus a potential decline in sales prices, the size of the HPV market would be drastically reduced. In the future, Zhifei Biotech's business as an agent for HPV will inevitably deteriorate.

Of course, Zhifei Biotech has other potential growth points. First, cooperate with more major foreign manufacturers to sell vaccines as agents. In October 2023, the company announced the signing of an exclusive distribution and joint promotion agreement with GlaxoSmithKline. According to the agreement, from 2024 to 2026, the purchase amount of the recombinant shingles vaccine agreed by the two parties will exceed at least 20 billion yuan. You should know that GSK's shingrix shingrix vaccine is also one of the top ten varieties sold globally.

Second, proprietary vaccine products are expected to contribute a certain amount, including the pneumonia vaccine, rabies, and influenza vaccine, but they are too small.

However, the above two potential growth points are still insufficient to hedge against the risk of a potential decline in the HPV agency business.

Therefore, from a comprehensive perspective, Zhifei Biotech's future performance may continue to face greater pressure. Currently, the fundamentals have yet to see signs of bottoming out, and I'm afraid holders will need to be prepared to continue to wait patiently for the dawn. (End of full text)