As Covid subsides, China’s drugs services industry has been reverting to low-speed growth. But the pandemic is still having unforeseen ripple effects.
One of the pharmaceutical research companies that posted healthy earnings during the Covid years took investors by surprise last Friday with a warning of plunging profits, derailed by moves during the pandemic to shore up its supply of lab monkeys.
Joinn Laboratories (CHINA) Co. Ltd. (OTCPK:JNNLY) (OTCPK:JOLCF) (6127.HK; 603127.SH), China’s leading non-clinical contract research organization (CRO), said first-half profits would fall between 70.4% and 80.4% from the same period a year earlier, as the value of its lab animals has slumped.
On the first trading day after the profit warning, the stock sank by the daily limit on the Shanghai exchange and closed 9.99% lower. The daily trading volume exceeded 300 million yuan ($41.75 million) for two straight days, far higher than the average daily turnover.
Meanwhile, the Hong Kong stock market was suspended on the day of the announcement due to a typhoon. But once trading resumed, the company’s shares went into a tailspin for two trading days, with a cumulative loss of more than 5%. Investors dumped the stock even though the company issued an upbeat revenue forecast for the half year. It predicted revenues would rise between 25.3% and 35.3% year on year, to between 973 million yuan and 1.05 billion yuan.
In fact, the company’s revenue rose solidly in the first quarter, growing 36.3% to 369 million yuan from the year-earlier period. First-quarter net profit climbed nearly 50% to 188 million yuan. But the second quarter was a completely different story. The company forecast a net loss for the quarter ranging between 78 million yuan and 115 million yuan.
Addressing the rapid reversal of fortune, Joinn Lab said: “Biological assets held by the company declined due to market prices, and the loss from fair value changes had a negative impact on the results.” It estimated the resulting loss to be between 177 million yuan and 189 million yuan.
Joinn Lab’s core business is providing non-clinical pharmaceutical research services for the drugs industry. That involves researching and testing substances before they enter clinical trials, including assessing safety and efficacy. In 2022, the company’s non-clinical contract CRO business brought in 2.2 billion yuan in revenue, 97.6% of the total, according to the firm’s earnings reports.
The work requires live animal subjects such as mice and monkeys. To ensure a reliable supply of test subjects the company expanded into the upstream business of breeding lab animals. In April 2022, it acquired two lab animal suppliers, Yinmore Bio-tech in Yunnan province and Weimei Bio-Tech in Guangxi province, for 1.8 billion yuan. By the end of 2022, Joinn Lab had about 24,000 monkeys, according to the annual report.
During the pandemic, lab monkeys were in short supply as companies rushed to develop vaccines and Covid drugs. The average price per monkey spiked from 15,000 yuan in the latter half of 2019 to nearly 200,000 at the end of 2022. A large pool of these valuable “biological assets” pumped up the figures in the company’s accounts. By the end of last year, the fair-value change was 330 million yuan, up nearly 166% from a year earlier, compared to a net profit of 1.07 billion yuan.
Big sell-off by investors
But the windfall gave way to an earnings squeeze when the price of lab monkeys started to fall, as supply better matched demand. The lifting of pandemic controls and shifting policies for the use of wild animals took a toll. In April, the Chinese government published a new round of tenders for rhesus monkeys, with an average price of around 123,000 yuan. On July 14, the price of long-tailed macaques fell to 80,000 yuan when Beijing University of Chemical Technology released its tenders. The value of the company’s lab monkeys has thus plummeted from the 2022 highs.
Aside from the price plunge, opposition to live-animal testing is growing in the medical research community. Last September the U.S. Senate unanimously adopted proposals to revoke federal authorization for animal testing for new drugs and to scale back the use of lab animals in the next few years. Although there is no better alternative to lab animals right now, the company’s business faces challenges going forward, putting its 1.8 billion yuan animal investment at risk.
The company listed on the Hong Kong Stock Exchange in February 2021 at a price of HK$151 per share with 10 cornerstone investors including leading medical investment funds such as Lake Bleu Capital and Sequoia Capital. However, its stock tumbled 9% on the IPO debut day and continued to decline afterwards. As of now, the share has lost more than 85% of its value.
Core investors worried about the outlook seem to be jumping ship as well. On the A-shares market, four investors auctioned off 40.96 million shares from April to November 2022 at prices ranging from 59.45 yuan to 126.9 yuan, generating 253 million yuan. On July 7, the company said that Zhou Zhiwen, one of its controlling shareholders, had sold off 10.99 million A-shares in the previous six months through bulk trades and competitive auctions, accounting for 2.05% of total equity.
Shareholders can have different reasons for selling down their stakes, whether driven by disappointing revenue growth, or to cash in from market rebounds or when sector stock prices are not supported by long-term fundamentals. But in this case it is curious that investors are selling out at a point when there is still room for growth.
In terms of valuations, Joinn Lab’s Hong Kong price-to-earnings (P/E) ratio is around nine times, below the 13 times for Pharmaron Beijing (3759.HK; 300759.SZ). Joinn Lab’s core business is growing steadily but it is unclear whether the company can restore investor confidence in its outlook.
Disclosure: None.
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