Sales expenses have become the focus of inquiries. This year, 25 pharmaceutical companies have terminated their IPOs. Under the anti-corruption storm, companies | pharmaceutical companies | sales expenses
The anti-corruption storm has swept across the entire pharmaceutical industry, and the IPOs of pharmaceutical companies have also been affected.
Since October 2022, Chengdu Beite Pharmaceutical Co., Ltd. has experienced a regulatory storm in the A-share issuance market due to issues such as abnormal original vouchers for some business promotion fees, unrealized sales and promotion activities, and inadequate internal controls related to business promotion fees during the IPO process. After being issued warning letters by the China Securities Regulatory Commission, Beite Pharmaceutical and its sponsoring institutions have been severely investigated for their "sales expenses".
Since the second half of last year, pharmaceutical companies have experienced frequent setbacks in their IPOs, and this year, the termination of IPOs by pharmaceutical companies has become even more prominent. According to statistics from Pengpai News, as of August 15th this year, a total of 25 pharmaceutical or device related companies on the Shanghai, Shenzhen, and North Stock Exchanges have terminated their IPOs, exceeding the total of 21 companies for the whole of last year. In addition, five pharmaceutical companies have terminated their IPOs since July, following the outbreak of the anti-corruption campaign in the pharmaceutical industry.
Pengpai News found that among the 25 pharmaceutical companies that have withdrawn or not, except for 6 that have not yet responded to inquiries and 3 that have not generated sales revenue, the remaining 16 pharmaceutical companies are all related to sales or promotion expenses in their inquiries. That is to say, sales expenses, especially marketing expenses, are almost the focus of regulatory scrutiny and continuous questioning during inquiries.
Moreover, among the 25 pharmaceutical companies that have been withdrawn, except for 3 companies that did not incur sales expenses, 5 companies had a sales expense rate of over 40% in the most recent complete accounting year, of which 4 companies exceeded 50%. Among the 14 pharmaceutical companies that have gone public this year, except for 2 that have not yet incurred sales expenses, only 2 of the 12 companies have a sales expense ratio of over 40%, and no company has a sales expense ratio exceeding 50%.
A person from a pending pharmaceutical IPO company sighed to Pengpai News that in the current anti-corruption storm, the company is like a "frightened bird", worried that the company's sales expenses will be "misread" by the outside world.
25 pharmaceutical companies terminate IPOs
On July 21st, the National Health Commission, together with 10 departments including the Ministry of Public Security and the State Administration for Market Regulation, jointly held a video conference to deploy a one-year nationwide campaign to address corruption in the pharmaceutical industry. A pharmaceutical anti-corruption storm is gradually sweeping across the pharmaceutical industry.
The A-share issuance market is seen as a barometer of regulatory policies. According to insiders, starting from the second half of 2022, pharmaceutical related companies will undergo IPOs and strict inspections of sales expenses.
Pengpai News has noticed that starting from the second half of 2022, the number of pharmaceutical IPO withdrawals has begun to rise. According to Wind data, according to Pengpai News, in 2022, a total of 21 pharmaceutical companies on the Shanghai, Shenzhen, and North Stock Exchanges withdrew their IPOs, of which 13 companies, or more than 60%, terminated their IPOs in the second half of the year.
Since the beginning of this year, as of August 15th, a total of 25 pharmaceutical companies on the Shanghai, Shenzhen, and North Stock Exchanges have terminated their IPOs, surpassing the total number of companies listed last year.
Among them, 3 pharmaceutical companies on the main board terminated their IPOs, 6 on the Science and Technology Innovation Board, 12 on the Growth Enterprise Board, and 4 on the Beijing Stock Exchange. It is worth noting that after the start of the anti-corruption campaign in July, 5 pharmaceutical companies terminated their IPOs.
Since the beginning of this year, the situation of withdrawing pharmaceutical companies has been illustrated by Qi Yeyun and Data Rushing News. Through sorting through the Shanghai, Shenzhen, and North Stock Exchanges, it was found that among the 22 pharmaceutical companies that terminated their IPOs, 9 companies had a sales expense ratio of over 20% in the most recent complete accounting year, and 4 companies had a sales expense ratio of over 50%.
According to Wind data, a total of 53 pharmaceutical companies went public in 2022. As of August 16th, there are only 14 pharmaceutical companies listed this year. According to statistics from Pengpai News, except for 2 companies that have not yet incurred sales expenses, 4 out of 12 companies had a sales expense rate of over 20% in 2022. Among them, Xinghao Pharmaceutical and Baili Tianheng-U exceeded 40%, accounting for 48.05% and 46.11% respectively. In addition, pharmaceutical companies that have not been listed this year have a sales expense rate of over 50% in 2022.
There are 14 pharmaceutical companies listed this year. Cartography: Qi Yeyun. Currently, under the anti-corruption storm in the pharmaceutical industry, there are still 89 pharmaceutical companies in the process of IPO. Among them, 71 companies are under review, 10 companies have passed the meeting, and 8 companies have submitted registration.
18 companies that have passed the meeting or submitted registration. Cartography: Qi Yeyun, there are still doubts about the successful issuance of data from 18 companies that have either passed the meeting or submitted for registration. Pengpai News noticed that these 18 companies, especially pharmaceutical companies on the ChiNext board, generally have longer queue times.
As of August 17th, a total of 15 companies on the ChiNext board have passed the meeting or submitted registration, of which more than half, or 8 companies, passed the meeting last year. Among them, two companies have been queuing for 10 months but still have not submitted registration. Among the 6 companies that have submitted registration, 1 company has been waiting for more than 17 months without obtaining approval, and 4 companies have been waiting for nearly 8 months without obtaining approval.
There are only two companies on the Science and Technology Innovation Board that have not incurred sales expenses, and they are just one step away. Harbin Sizherui Intelligent Medical Equipment Co., Ltd. and Guangzhou Beibeite Pharmaceutical Co., Ltd. both submitted their registrations in June, and have been queuing for more than a month now.
Furthermore, it is worth noting that since July, except for Shanghai Xiaofang Pharmaceutical Co., Ltd., which has held a meeting on the main board of the Shanghai Stock Exchange, no other sector has held a meeting so far.
Up to 23 sub questions to inquire about sales promotion expenses
Sales expenses, especially marketing expenses, are almost a question that regulatory authorities will inevitably inquire about.
Pengpai News found that among the 25 pharmaceutical companies that have withdrawn or not, except for 6 that have not yet responded to inquiries and 3 that have not generated sales revenue, the remaining 16 pharmaceutical companies are all related to sales or promotion expenses in their inquiries.
Under the current trend, the most noteworthy is Shanghai Rongsheng Biopharmaceutical Co., Ltd., which withdrew its IPO application materials on August 7th. Unlike the other 24 companies that terminated their IPOs, Rongsheng Biotechnology was the only company to withdraw its IPO application materials after a meeting on December 26, 2022.
Rongsheng Biotechnology is a high-tech enterprise engaged in the research and development, production, and sales of vaccines and in vitro diagnostic reagents. Its products are mainly used for the prevention and diagnosis of infectious diseases. In 2021, the sales expenses of Rongsheng Biotechnology were 84.5658 million yuan, accounting for 32.28% of the revenue. 87.05% of the sales expenses were for vaccine promotion services.
At the review meeting of the Shanghai Municipal Party Committee on the Science and Technology Innovation Board, the Shanghai Municipal Party Committee inquired about two major issues on site, both focusing on sales expenses. Firstly, they requested Rongsheng Biotechnology to explain the specific method of confirming the authenticity of the frequency of service provider's promotion activities. Secondly, they explained the sales situation corresponding to the top five provinces in terms of promotion frequency each year, and whether the promotion activities and sales performance match.
Fujian Mindong Lijiexun Pharmaceutical Co., Ltd., a company that also terminated its IPO at the forefront of the storm, withdrew its IPO application on July 31. A few weeks ago, Li Jiexun had just completed the response to the second round of audit inquiries and updated its 2022 annual financial data the week before the withdrawal.
Pengpai News has noticed that the sales expense ratio of Lijiexun is relatively high, ranking among the top three pharmaceutical companies that have been withdrawn or not since the beginning of this year. According to the prospectus data, from 2020 to 2022, the sales expenses of Lijie Xun were RMB 174 million, RMB 199 million, and RMB 214 million, accounting for 47.60%, 46.11%, and 44.93% of the operating revenue, respectively. Moreover, over 90% of the sales expenses of Lijiexun are for promotional services.
In the two rounds of inquiries by Lijiexun, regulatory authorities targeted many details about the promotion service fee, involving 23 sub questions before and after. It is the most detailed regulatory inquiry among pharmaceutical companies that have been withdrawn or not since the beginning of this year. The level of detail includes explaining the specific content of conference services, research services, information collection, and collection of visit and promotion fees during the reporting period, including the organization, activity theme and content, per capita cost situation, and analyzing whether it is reasonable. Intermediary agencies are required to explain the development of verification plans for promotion service fees, sample selection standards, selection methods, and selection processes, etc.
Beijing Huahao Zhongtian Biomedical Co., Ltd., which voluntarily withdrew its IPO application materials, has the highest sales expense ratio among the 25 companies that withdrew or disbanded. In 2021, the company's sales expense ratio was 81.73%. However, Huahao Zhongtian stated that the reason for the high sales expense ratio in that year was that the company's product, Youti Delong Injection, was only launched for sale and achieved revenue in March 2021, and the sales expenses during that period were expenses for the entire period of 2021.
However, regulatory authorities have requested Huahao Zhongtian to explain in their inquiries that the average salary of sales personnel is lower than the average level of comparable companies in the same industry, and the reasons and reasonableness for the salary decline in the year of the listing of Youti Delong in 2021; The specific details of marketing promotion fees, corresponding promotion activities, and specific payment targets, whether they include promotion fees paid to third parties, and whether there is any direct or disguised commercial bribery to customers or their key personnel.
The four pharmaceutical IPO termination cases on the Beijing Stock Exchange all occurred in the first quarter of this year. Among them, Guizhou Weimen Pharmaceutical Co., Ltd. is the second highest sales expense ratio among pharmaceutical companies that have been discontinued since the beginning of this year. From 2019 to 2021 and the first six months of 2022, the company's sales expense ratio reached 52.97%, 57.34%, 56.13%, and 60.84%. Based on the standard of 2021, the sales expense ratio is higher than that of other listed companies in the same industry, such as Xintian Pharmaceutical, Guizhou Sanli, Weikang Pharmaceutical, Xidian Pharmaceutical, and Buchang Pharmaceutical. Weimen Pharmaceutical stated that comparable companies in the same industry have a higher sales expense rate, mainly based on professional chemical technology promotion models, ranging from about 32% to 65%, which is a characteristic of the industry's sales model.
The regulatory authorities believe that the specific disclosure of Weimen Pharmaceutical's market and academic promotion models is insufficient. In the inquiry, they requested multiple details to be supplemented, and also requested Weimen Pharmaceutical to explain the rationality of the change in the measurement model of market academic promotion costs.
However, industry insiders believe that although the withdrawal actions of the aforementioned pharmaceutical companies may involve sales expenses, the reason for the withdrawal is not entirely due to sales expenses.
"Rongsheng Biotechnology has been involved in bribery cases involving public officials, and its performance supported by huge sales expenses has also been questioned for its authenticity and sustainability. Weimen Pharmaceutical, on the other hand, was once one of the nine tripod investment enterprises under investigation, and one of the actual controllers, Yang Huai, was also involved in bribery cases many years ago. During his tenure as the Director of the Drug Registration Office of the Guizhou Provincial Food and Drug Administration, Luo Zhi received benefits from some companies in the name of New Year's greetings or festive occasions, including Weimen Pharmaceutical. Industry insiders believe that the pharmaceutical anti-corruption storm is only the" last straw "for pharmaceutical companies to withdraw their IPOs.".
Another person close to the decision to withdraw from the company revealed to Paper that some companies are planning to change their teams and restart their IPO plans.
Sales promotion fees for both major exchanges simultaneously
Industry insiders have revealed that sales promotion fees may conceal commercial bribery and have always been the focus of strict scrutiny and inquiries by regulatory authorities. Recently, with the intensification of the repeated storms in the pharmaceutical industry, the Shanghai Stock Exchange and the Beijing Stock Exchange have coincidentally proposed four key verification points to intermediary agencies for the promotion of pharmaceutical IPO sales.
According to Pengpai News, in the latest "Shanghai Stock Exchange Listing Review Dynamics", the Shanghai Stock Exchange has raised four key points of concern to intermediary agencies regarding "medical enterprises carrying out sales promotion activities", requiring intermediary agencies to verify the legality and compliance of sales promotion activities under different modes, the authenticity of expenses, the effectiveness of internal control, related relationships, and transaction fairness.
In the latest issue of the "Issuance and Listing Review Update" by the Beijing Stock Exchange, it was stated that some companies have withdrawn their applications due to insufficient verification of company promotion fees during the recent review. The ratios of marketing promotion expenses to operating revenue for each period of T Company during the reporting period were 54.25%, 59.57%, 62.09%, and 67.04%, respectively; During the reporting period, the proportion of marketing expenses to operating revenue for each period of Company W was 53.90%, 53.49%, and 52.58%, respectively.
The Beijing Stock Exchange also raised four key points of concern, including whether the internal control system is sound and effective, whether the occurrence of abnormal promotional business is true and reasonable, whether abnormal fund transactions are effectively eliminated through fund flow verification, and whether relevant external evidence is fully obtained. The top five promoters of Company T have undergone significant changes, with some promoters having a relatively short establishment time, some promoters receiving over 70% of their income from Company T, and some promoters having business subcontracting. The sponsoring institution failed to identify abnormal promoters and verify their financial flow. The actual controller of Company W has personal financial transactions with key promoters, and the sponsoring institution has not explained the reasonableness of the relevant financial transactions.
