Key Takeaways:
- Viva Biotech’s eked out a scant 5% revenue growth in the first half of the year and fell into the red, even as other peers in China’s CXO sector performed much better
- Changing values of the company’s investments are largely behind big fluctuations in its performance in recent years
y Molly Wen
Despite broader malaise for Hong Kong’s bustling field of pharma stocks, one group that’s feeling quite strong these days are Contract X Organizations (CXO), companies that help drug makers do everything from R&D to sales and marketing on a contract basis. A case in point is Joinn Laboratories (6127.HK; 603127.SH), which expects its first-half profit to grow up to 161.8% year-on-year. Then there’s Asymchem Laboratories (6821.HK; 002821. SZ), which is estimating even higher 306% profit growth.
But one CXO that’s notably absent from the party is Viva Biotech Holdings (1873.HK). The company issued a profit warning earlier this month, saying it expects to post a loss of up to 100 million yuan ($14.8 million) in the first half of this year, reversing a net profit of 95.8 million yuan in the same period of 2021.
In 2021, Viva Biotech integrated its original contract research organization (CRO) business with the contract development and manufacturing organization (CDMO) business it acquired through its purchase of Langhua Pharmaceutical. The newlywed companies enjoyed a great honeymoon, pumping up Viva Biotech’ revenue more than 200% to 2.1 billion yuan in 2021.
But that honeymoon didn’t last long. In its latest profit warning, Viva Biotech said its revenue grew just 5% in the first half of the year to about 1.08 billion yuan. Within that total, revenue from its original CRO business grew more than 25%, while its CDMO business was basically flat.
The company blamed its anemic performance on three factors. Topping the list was recurring Covid-19 flareups in China, which led to restrictions on delivery of its products and services. It also blamed market volatility that undermined the fair value of its equity interests in other startups. And last but not least, it fingered foreign exchange losses.
Headquartered in Shanghai, Viva Biotech has R&D and production bases in the interior city of Chengdu and also closer to its home in the city of Jiaxing. Shanghai was locked down to control a Covid-19 Omicron outbreak from late March until June, which Viva Biotech said made it difficult to operate normally.
That said, another Shanghai-based CXO company, WuXi AppTec (2359.HK; 603259.SH), didn’t suffer nearly as much, logging revenue and net profit growth of 68.5% and 73.3%, respectively, in the first half of the year from a year earlier.
Heavy investment in startups
As a CXO, Viva Biotech provides drug discovery services to many biopharmaceutical startups. Since many of those clients are cash-poor, Viva Biotech often uses an equity-for-service model for some of its payments, allowing it to also benefit if such clients do well.
Viva Biotech’s financial results last year show that it invested in 10 companies during the period, and approximately 14% of its revenue, or 85.79 million yuan, in drug discovery services was settled in the form of customer equity. By the end of 2021, Viva Biotech had invested in a relatively large total of 87 startups.
According to its latest annual report, the change in fair value of the invested companies generated 36.5 million yuan in revenue in 2021. Those large investments also helped to beef up the total value of Viva Biotech’s assets. For instance, the item called “financial assets at fair value through profit or loss” in the company’s latest annual report amounted to 1.25 billion yuan, mostly attributable to equity investments in unlisted startups.
But under-performance by biopharmaceutical stocks has put a damper on valuations for such startups this year. Growing difficulty in raising capital may have forced Viva Biotech’s investments to lose value, leading it to say that “market fluctuation resulting in negative fair value changes in the group’s equity interest in incubation portfolio companies” was a factor behind its swing into the red in the first half of the year.
The wild gyrations in Viva Biotech’s performance aren’t limited to the latest reporting period. The company’s financial reports from the last three years show its performance has varied widely, from a net profit of 265 million yuan in 2019, to a net loss of 387 million yuan the next year, and then back to a 287 million yuan profit last year. The company blames the financial roller coaster on changes in the value of its assets.
The fair value gains aren’t just limited to its investment in startups. Viva Biotech issued two convertible bonds worth a combined $460 million in 2020, but later took a 547 million yuan loss due to change in their fair value last year.
Plunging cash pile
In addition to the two convertible bonds, Viva Biotech also owes 1.05 billion yuan in bank debt, giving it a debt-to-asset ratio of 51.4%. Servicing that debt caused its cash and cash equivalents to plummet 65.3% by the end of last year to 800 million yuan. The trio of slowing business as China’s economy slows, declining values of its startup investments and dwindling cash flow will all put major pressure on Viva Biotech’s future development.
Viva Biotech was highly sought by investors in early 2019, when its Hong Kong IPO was more than 100 times oversubscribed and priced at HK$4.41, the upper limit of its range. Many believed the company would be a game changer in its sector. When the Covid-19 pandemic first hit in early 2020 and put the entire pharmaceutical sector in the spotlight, Viva Biotech’s shares rode the bigger tide to rise as high as HK$11.
But waning enthusiasm for pharmaceutical stocks since the middle of last year has put a damper on Viva Biotech’s stock. Even after a slight CXO industry rebound since the middle of this year, investors have shown little interest in Viva Biotech, leaving its shares hovering around the HK$2 level in recent months – less than half of their IPO price.
Viva Biotech now trades at a price-to-sales (P/S) ratio of just 1.53 times, based on last year’s sales. That’s much lower than ratios for peers Joinn Laboratories and Asymchem Laboratories, which trade at multiples of 15 times and 9 times, respectively. The company may have to bring its high debt under control, and also find a way to stabilize its overall performance, to win back investor confidence.
