Zhejiang Haisheng Pharmaceutical Files for Beijing Stock Exchange IPO, Seeking RMB 679 Million to Expand API Production

Zhejiang Haisheng Pharmaceutical Co., Ltd. (hereinafter referred to as “Haisheng Pharmaceutical”), a veterinary drug manufacturer, has seen new progress in its initial public offering (IPO),The Listing Committee of the Beijing Stock Exchange is scheduled to review the listing application of Haisheng Pharmaceutical Co., Ltd. (hereinafter referred to as “Haisheng Pharmaceutical”) on November 15, 2023.

Haisheng Pharmaceutical this timeProposed Fundraising: RMB 679 Million, of which RMB 439 million was allocated to the technological transformation and expansion project with an annual production capacity of 800 tons of sulfachlorpyridazine sodium (SPDZ), 200 tons of 3,6-dichloropyridazine (DCPD), and 200 tons of celecoxib (CELB); as well as the technological transformation project for 200 tons of 4-hydrazinobenzenesulfonamide hydrochloride (4-SAPH), 3 tons of benzbromarone, 3 tons of bupivacaine, and 3 tons of gemcitabine. RMB 210 million was allocated to the project with an annual production capacity of 500 tons of sulfadiazine (sodium) (SD(Na)) and 500 tons of doxycycline hyclate; the automation (intelligent) upgrade of the existing annual production capacity of 300 tons of sulfadimethoxine (sodium) (SDM(Na)) and 70 tons of 4-amino-2,6-dimethoxypyrimidine (ADMP); and the technological transformation project with an annual production capacity of 300 tons of sulfamonomethoxine (sodium) (SMM(Na)). RMB 30 million was allocated to the CDMO workshop construction project.

It is reported that Haisheng Pharmaceutical (870656.NQ) had its listing application accepted on April 28, 2023, entered the inquiry stage in May, and has since undergone four rounds of regulatory inquiries. Previously, Haisheng Pharmaceutical had planned an IPO on either the Shanghai or Shenzhen Stock Exchange; it announced the commencement of listing tutoring in November 2020, with plans to list on the ChiNext board.On November 18 last year, Changjiang Securities, the sponsoring institution, changed the proposed listing board from the ChiNext to the Beijing Stock Exchange.

Haisheng Pharmaceutical, established in 2007 and located in the High-Tech Industrial Development Zone of Quzhou City, Zhejiang Province, is a national high-tech enterprise primarily engaged in the research, development, and production of active pharmaceutical ingredients (APIs) for human and veterinary use, as well as intermediates. Since its inception, it has gradually grown intoA manufacturer of veterinary active pharmaceutical ingredients (APIs) centered on antimicrobial and antiparasitic agents, and pharmaceutical APIs focused on antipyretic analgesics and antibacterials, has achieved simultaneous development in both veterinary and pharmaceutical API sectors.advantages.

The company operates four GMP-certified workshops, equipped with more than 10 chemical synthesis production lines and over 100 reaction kettles with a total volume exceeding 400 cubic meters, most of which are controlled by Distributed Control Systems (DCS). It also features a 3,000-square-meter warehouse for finished products and raw materials, as well as a liquid raw material storage tank farm with a capacity of 4,000 cubic meters.

Since its establishment, the company has focused on the fields of veterinary active pharmaceutical ingredients (APIs), pharmaceutical APIs, and intermediates, with its business maintaining a stable growth trend. From 2020 to the first half of 2023, Haisheng PharmaceuticalThe main business revenues were RMB 207 million, RMB 269 million, RMB 264 million, and RMB 127 million, respectively., with net profits of RMB 79 million, RMB 117 million, RMB 113 million, and RMB 54 million, respectively. From 2020 to 2022, the company's compound annual growth rates (CAGR) for revenue and net profit were 12.97% and 19.06%, respectively.

 Haisheng Pharmaceutical Revenue Data Source: Company Prospectus

The company’s operating revenue growth was primarily driven by an increase in product sales. According to Haisheng Pharmaceutical, the company isOne of the most competitive enterprises in the industry with the longest industrial chain and the most comprehensive product portfolio for sulfonamide active pharmaceutical ingredients (APIs) and intermediates., independently mastering the synthesis technologies for key products across the industrial chain of sulfonamide active pharmaceutical ingredients (APIs) and intermediates derived from basic chemical raw materials.

Data compiled from the prospectus reveals that the company’s R&D intensity is relatively low. From 2020 to the first half of 2023, R&D expenditure as a percentage of revenue stood at 3.26%, 3.36%, 3.62%, and 3.91%, respectively. Nevertheless, this proportion has been rising year by year, with the year-on-year growth rate of R&D intensity reaching 8% in 2022.

According to the prospectus, leveraging its advantages in synthesis and purification/crystallization technologies, Haisheng Pharmaceutical possesses strong competitiveness in the active pharmaceutical ingredient (API) and pharmaceutical intermediate industries. The company’s main products are categorized into APIs and pharmaceutical intermediates, with APIs further subdivided into human pharmaceutical APIs and veterinary pharmaceutical APIs.

The company manufactures veterinary active pharmaceutical ingredients (APIs) such as sulfachlorpyridazine sodium, the sulfathiazole series, and sulfachlorpyrazine sodium; it also produces pharmaceutical APIs including crystalline sulfanilamide and celecoxib, as well as intermediates such as p-acetamidobenzenesulfonyl chloride. Among these,Revenue from active pharmaceutical ingredients (APIs) for veterinary drugs accounts for approximately 70% of the company's total revenue.

Haisheng Pharmaceutical’s Main Business Revenue Source: Company Prospectus

In recent years, while consolidating its competitive position in sulfonamide products, the company has actively expanded its portfolio of non-sulfonamide active pharmaceutical ingredients (APIs) and intermediates. In the field of veterinary drug APIs, it has successively added products such as diclazuril and neostigmine methylsulfate. Meanwhile, in the human pharmaceutical API sector, the company has built up reserves of benzbromarone, bupivacaine, and other varieties; in the intermediates segment, it has added 4-chlorophthalic acid and other products.

Notably, since initiating its IPO process, Haisheng Pharmaceutical has undergone four rounds of inquiries from the Beijing Stock Exchange (BSE). According to documents released by the BSE, the primary issues raised in these inquiries concerned, on one hand, the company’s lack of patents, and on the other hand, its significantly higher gross profit margin compared to industry peers, as well as a lower R&D expense ratio relative to competitors.

This not only reflects concerns about the sustainability of Haisheng Pharmaceutical’s profitability, but also underscores the increasingly stringent and standardized listing requirements, highlighting the heightened focus on R&D investment in innovation as China’s biopharmaceutical industry continues to evolve.

According to the prospectus, from 2020 to 2022, the gross profit margins of Haisheng Pharmaceutical's main business were 52.67%, 57.51%, and 52.73%, respectively, which are significantly higher than the average gross profit margins of comparable companies in the same industry, which were 37.95%, 35.49%, and 33.3%, respectively.

Comparison of Gross Profit Margins Between Haisheng Pharmaceutical and Comparable Companies Data Source: Compiled from the Company’s Prospectus and Financial Reports

In response, Haisheng Pharmaceutical stated in its reply to the inquiry letter that the company possesses a complete production line spanning from basic chemical raw materials to finished products. The key intermediates required for the production of its main products are primarily self-manufactured, whereas other companies in the industry mainly produce subsequent stages by directly purchasing intermediates. Therefore, the company’s higher gross profit margin is reasonable.

In 2019, Haisheng Pharmaceutical carried out technological upgrades for ASC (Acetylsalicylic Chloride), optimizing the production process and achieving in-house production of acetanilide. As ASC is a key intermediate for both pharmaceutical and veterinary active pharmaceutical ingredients (APIs), this move reduced the cost of downstream products, leading to a significant increase in the gross profit margins of various segmented products in 2020.

Furthermore, according to the application materials and responses to feedback, Haisheng Pharmaceutical places significant emphasis on quality in its research and development efforts, while not neglecting cost control. In addition to improving production processes, the company has implemented a series of cost-control measures, such as optimizing production workflows and reducing raw material costs, thereby ensuring product quality and competitiveness.

Furthermore, according to the prospectus, Haisheng Pharmaceutical also faces the risk of excessive customer concentration. In its response to the third round of inquiry letters, Haisheng Pharmaceutical stated that its downstream customers are relatively concentrated, and given the long-standing relationships with its major clients, the overall compensation level for its sales personnel is relatively low. This factor has, on one hand, facilitated cost control in sales operations, and on the other hand, further highlights the issue of earnings sustainability, which has drawn regulatory attention.

How to balance R&D innovation while sustaining healthy revenue growth and profit margins will be a question the company needs to address.

Whether for expanding production capacity or increasing R&D investment, this IPO fundraising represents a significant milestone for Haisheng Pharmaceutical.. This is because the market size of active pharmaceutical ingredients (APIs) for veterinary drugs in China continues to expand, and the industry remains in its early stages. With significant disparities among enterprises in terms of scale, R&D capabilities, and technological proficiency, new opportunities continue to emerge within the sector.

According to statistics from the China Veterinary Drug Association, by the end of 2021, there were 136 manufacturers of veterinary drug active pharmaceutical ingredients (APIs) in China. Among them, 93 were medium-sized enterprises, accounting for 68.38%, while large enterprises represented a relatively small proportion. However, sales revenue was predominantly generated by large enterprises, which accounted for 72.14% of total sales. In terms of profitability, the share of gross profit increased gradually with enterprise size; large enterprises had the highest share of gross profit, whereas small enterprises had the lowest.

Driven by market growth, China’s markets for veterinary active pharmaceutical ingredients (APIs) and human pharmaceutical APIs have experienced steady expansion in recent years. According to statistics from the China Veterinary Drug Association, sales revenue in China’s veterinary API industry grew from RMB 10.806 billion in 2016 to RMB 18.285 billion in 2021, representing a compound annual growth rate (CAGR) of 11.09%. Among these, antimicrobial drugs accounted for the largest share, with sales revenue reaching RMB 15.332 billion in 2021, constituting 83.85% of the total market value.

In addition, the global active pharmaceutical ingredient (API) market has maintained a certain growth rate. According to data from Precedence Research, the global API market size reached USD 204.04 billion in 2022 and is projected to grow at a compound annual growth rate (CAGR) of 6% from 2023 to 2032, reaching USD 363.68 billion by 2032.

Along with the rapid development of China’s veterinary drug active pharmaceutical ingredient (API) industry, domestic manufacturers—including the Company—have not only met the production needs of domestic veterinary drug formulation enterprises but have also actively expanded their export businesses. Against this backdrop, the year-on-year increase in Haisheng Pharmaceutical’s overseas sales proportion serves as a positive signal. According to the prospectus,The proportion of overseas sales in Haisheng Pharmaceutical's main business revenue is also gradually increasing., the proportions during the reporting period were 28.59%, 36.05%, 50.26%, and 54.83%, respectively. The Company's products cover overseas markets including Europe, Oceania, Asia, and South America.

Currently, the competitive landscape of China’s veterinary drug industry remains unsettled, yet a trend toward consolidation is emerging. Particularly amid significant pressure on biopharmaceutical investment and financing, the veterinary drug sector is also facing demand-side challenges. Leading companies in the industry, bolstered by healthier cash flows and superior operational capabilities, are better positioned to gain recognition from pharmaceutical enterprises. This constitutes one of Haisheng Pharmaceutical’s key advantages.

In the future, after addressing the challenges of high interest rates and R&D investment, Haisheng Pharmaceutical will still have the opportunity to become a key player in China’s veterinary active pharmaceutical ingredient (API) sector. To capture a share of the continuously growing market, the company must be bold in its R&D spending. This is a long-term endeavor that requires even greater determination.