The leading vaccine maker lost 280 billion.

On April 23rd, Chia Tai Biological's stock plummeted by 12% in a single day, followed by a further 3.3% decline over the next two trading days. Looking at a longer time frame, the current price has retraced 77% from its historical peak in May 2021, resulting in a market value loss of 280 billion yuan.

Currently, the latest PE ratio of Chia Tai Bio is 10.9 times, while it was over 120 times at its peak in 2020. The latest PB ratio is 2.5 times, while it was nearly 50 times at its peak in 2020. Both PE and PB have hit a new low since the company went public in 2010.

Why has the market slashed the valuation of a leading vaccine company to such a cheap level? What changes have occurred in the fundamentals of Chia Tai Bio?

In 2023, Chia Tai Bio's revenue was 52.92 billion yuan, a year-on-year increase of 38.3%, and the net profit attributable to the parent company was 8.07 billion yuan, an increase of only 7% year-on-year. The revenue scale continued to achieve high-speed growth as usual, reaching a historical high, but the net profit was far below the peak of over 10 billion yuan in 2021.

The revenue in the first quarter only increased by 2%. This is the worst quarterly performance since the company represented Merck's HPV vaccine in 2017.

This has raised particular concerns in the market, worrying about the ceiling of the HPV vaccine market, which is also one of the important factors for the sharp drop in stock price on the 23rd. The net profit attributable to the parent company fell sharply by 28.3%, marking the first negative growth in the first quarter since 2011.

The main reason for the sharp decline in net profit is that the sales of the quadrivalent HPV vaccine have relatively decreased, while the proportion of the nonavalent HPV vaccine has increased. However, the profit margins of the nonavalent and quadrivalent HPV vaccines are different, which is reflected in the financial report with little change in revenue but a significant decrease in profit.

Looking at the profitability, as of the end of the first quarter of 2024, the company's gross profit margin was 26%, hitting a new low since its listing in 2010, and dropping by over 67% compared to the end of the first quarter of 2017. The reasons for this are, on the one hand, the gross profit margin of proprietary products is as high as 89.38%, but the proportion of revenue has dropped significantly to less than 2%. On the other hand, the gross profit margin of represented products continued to decline to 25.68%, due to changes in the structure of represented products.

In fact, even for the same product, Merck intentionally compresses the profit space of middlemen, given the increasing scale of representation.

In terms of net profit margin, the first quarter of 2024 was 12.79%, almost hitting a historical low, and the downward trend is very obvious. During this period, the total sales expense ratio (three expenses + R&D expense ratio) has also been continuously decreasing and hitting a new low, but the gross profit margin has dropped significantly, ultimately leading to a weak performance in net profit margin. As a result, the company's ROE level has also been on a downward trend in recent years.

In terms of dividends, in 2023, the dividend amount for Chia Tai Biological was 1.915 billion yuan, accounting for 23.7% of the net profit. Compared to its own performance, it is slightly higher than 9.4% in 2021 and 10.6% in 2022. When compared horizontally with pharmaceutical peers, this proportion is significantly lower. For example, Watson Biotech's dividend payout ratio reached 33.75% in 2023.

Overall, Chia Tai Biological's performance growth has encountered some bottlenecks, and its profitability continues to decline, indicating a deterioration in its fundamentals, which is also the core driver of the continuous decline in stock prices.

Before 2017, Chia Tai Biological was a company with a very small revenue volume and almost no influence in the vaccine industry. Its performance was also mediocre, with revenue declining from 737 million yuan in its first year of listing in 2010 to 446 million yuan in 2016.

After 2017, the company's development took a turning point. That year, Chia Tai Biological signed an exclusive agency agreement with Merck for the HPV vaccine, marking the first entry of foreign HPV vaccines into the Chinese market. Subsequently, the company's performance soared, with revenue skyrocketing from 1.34 billion yuan in 2017 to 52.9 billion yuan in 2023.

From 2017 to 2019, the size of the Chinese HPV market surged from 900 million yuan to 9.9 billion yuan. During this period, only 2 foreign HPV vaccine products were approved for listing, including Merck's HPV quadrivalent and nonavalent vaccines, and GlaxoSmithKline's HPV bivalent and quadrivalent vaccines. Because the nonavalent vaccine was more popular, Merck almost monopolized the domestic HPV vaccine supply. At that time, Chia Tai Biological could be said to have achieved effortless success.

Later, domestic HPV vaccines were successively approved for listing. Wantai Biopharm's HPV bivalent vaccine was approved at the end of December 2019 and officially launched for sale in May 2020, breaking through Merck's patent barriers, with high production capacity and affordable prices, possessing strong capabilities to seize the HPV vaccine market share. In 2021, Wantai's bivalent vaccine, which had been on the market for just over a year, accounted for 65% of the HPV market, far exceeding Merck's 30%.

In March 2022, Watson Biotech's HPV bivalent vaccine was approved for listing, joining the competition for the HPV vaccine market. Since then, the two domestic vaccine manufacturers have continuously eroded Merck's market share.

Merck did not sit idly by. In August 2022, the company announced the expansion of the age range for the use of its nonavalent HPV vaccine to women aged 9 to 45. Previously, the age limit for the use of this type of vaccine in China was 16 to 26.

This move has a significant impact on domestic bivalent vaccine manufacturers. Because the nonavalent vaccine covers more and a wider range of virus types, and now the age range has been expanded to be the same as the bivalent vaccine, it will naturally intensify market competition.

In order to seize the market, the two domestic manufacturers have escalated the price war. In 2023, Wantai Biopharm's bivalent vaccine was awarded a bid price of 116 yuan per dose to 344 yuan per dose in centralized drug procurement, compared to 329 yuan per dose to 344 yuan per dose in 2022.

In March 2024, according to the results of the 2023 HPV vaccine procurement project for female students in Guangdong Province, Wantai Biopharm was awarded approximately 1.35 million doses at a price of 116 yuan per dose. That month, according to the Jiangsu Government Procurement Network, Wantai was awarded 499,206 doses of bivalent HPV vaccine at a price of 86 yuan per dose. This price also set a new historical low for the bidding price of domestic HPV vaccines.

In just 4 years, the price of Wantai's bivalent vaccine has dropped from 329 yuan per dose at the beginning of its listing to less than 100 yuan, a decrease of up to 74%. This marks the end of the era when no one can effortlessly win in the HPV vaccine market with high profit margins.

Against this backdrop, both Wantai Biopharm and Watson Biotech saw a decline in revenue and profits last year. Chia Tai Biological's performance growth is still relatively stable, but even more severe challenges lie ahead.

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

With such a huge market opportunity, domestic vaccine manufacturers are accelerating their research and development progress. Currently, there are many companies involved in the development of nonavalent vaccines, and the companies entering Phase III clinical trials are mainly Wantai Biopharm, Watson Biotech, Kanglixin, Shanghai Zerun, and Ruikang Biopharm.

In April this year, the on-site work of the phase III clinical trial of Wantaibio's nine-valent HPV vaccine V8 visit (a total of 12 visits) has been completed, and the specimen testing work is in progress. Recently, the company has received the preliminary analysis results of the main data delivered by a third-party statistical company, and the main results are in line with expectations. At the same time, the company is also working on the writing of new drug registration application materials.

In addition, the timeline for the promotion of Wantaibio's Contergan Wantaibio nine-valent HPV vaccine is very close. In December 2023, the company announced that the on-site work of the V8 visit of the phase III clinical trial of its nine-valent HPV vaccine has been completed, and the specimen testing work is in progress, and it can be declared for market approval as an iterative vaccine.

In order to expedite the market approval of domestic HPV vaccines, policy support has also been provided. In July last year, the National Medical Products Administration issued the "Technical Guidelines for Clinical Trials of Human Papillomavirus Vaccines (Trial)" to relax the clinical trial standards for HPV vaccines, which is conducive to shortening the R&D cycle of approved HPV vaccine manufacturers in the development of higher-order vaccines.

According to domestic experts' predictions, the first domestically produced nine-valent vaccine is expected to be on the market as early as the second half of this year. Once on the market, this may pose a significant competitive pressure on Chia Tai Tianqing Biological, as the majority of its revenue comes from agency products, and the main product is the nine-valent vaccine.

In the future, with the introduction of more domestically produced nine-valent vaccines, the market may face a situation similar to that of the bivalent vaccine, with a significant drop in prices in centralized procurement and intense market competition. In addition, Merck will no longer be the exclusive supplier of the nine-valent vaccine, and the volume of issued prescriptions may also significantly decrease, putting the agency Chia Tai Tianqing Biological in a "dilemma of simultaneous decline in quantity and price" in the near future.

The timing issue is a matter of sooner or later, and the business foundation of Chia Tai Tianqing Biological will face a more serious impact, which is also a cause for concern in the current market.

04

In the future, the size of the Chinese HPV market may not be as optimistic as currently expected by brokerage institutions, due to factors such as policies and prices. For example, in April 2022, the World Health Organization (WHO) had already published on its official website that the WHO Strategic Advisory Group of Experts on Immunization (SAGE) held a meeting to review the evidence for single-dose HPV vaccination, and the conclusion was that a single dose of HPV vaccine can provide reliable protection, with the same effectiveness as the 2-dose or 3-dose vaccination schedule.

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

If, as recommended by the WHO, the three doses of HPV vaccine are reduced to one dose, coupled with the potential downward shift in sales prices, the size of the HPV market will be significantly reduced. In the future, the agency business of Chia Tai Tianqing Biological for HPV will inevitably deteriorate.

Of course, Chia Tai Tianqing Biological still has other potential growth points. Firstly, it can collaborate with more multinational companies to sell vaccines. 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 minimum purchase amount for the recombinant herpes zoster vaccine agreed upon by both parties is over 20 billion yuan. It is worth noting that GSK's herpes zoster vaccine Shingrix is also one of the top ten best-selling vaccines globally.

Secondly, self-operated vaccine products are expected to contribute some incremental growth, including pneumonia, rabies, and influenza vaccines, but the volume is too small.

However, these two potential growth points are still not enough to offset the potential decline in the agency business of HPV.

Therefore, overall, the future performance of Chia Tai Tianqing Biological may continue to face greater pressure, and there are no signs of a bottoming out in its fundamentals at present. Holders may need to be prepared to continue patiently waiting for the dawn.

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