"M&A man" Lepu Medical (300003.SZ) seems to be showing signs of hidden dangers in its development.

On August 24th, Lepu Medical disclosed its performance report for the first half of 2024. During this period, the company achieved operating income of approximately 3.384 billion yuan, a year-on-year decrease of 21.33%; net profit attributable to shareholders was approximately 0.697 billion yuan, a year-on-year decrease of 27.48%; and net profit after deducting non-recurring gains and losses was 0.647 billion yuan, a year-on-year decrease of 28.48%.

Looking at a longer time frame, this may be the largest decline in the company's semi-annual report in the past 3 years - the revenue of Lepu Medical decreased by 18.20%, 19.35%, and 21.33% year-on-year in mid-2022, mid-2023, and mid-2024, respectively, while the net profit attributable to shareholders decreased by 26.69%, 24.96%, and 30.53% year-on-year.

(Data source: choice)

As the saying goes, "Autumn can be discerned from a falling leaf," and the decline in the performance of any company is not without reason. As a leading medical enterprise with multiple listed subsidiaries, there must be many hidden mysteries. It is reported that Hong Kong stock Xintai Medical (02291) and STAR Market's SinoGenoMax Biotechnology (688117.SH) are both listed companies spun off from Lepu Medical.

Along with the continuous decline in performance, the stock price of Lepu Medical Technology obviously could not hold up: from the peak of 45.8 yuan in July 2020, it has fallen to less than 10 yuan now, a cumulative decline of more than 78%.

So, what happened to the "acquisition maniac" Lepu Medical Technology?

Pharmaceutical revenue has dropped significantly, and cash flow is facing pressure to shrink.

Lepu Medical Technology was founded in 1999 and listed on the GEM of the Shenzhen Stock Exchange in 2009.

The company is a comprehensive solution provider covering the entire lifecycle of cardiovascular diseases, with business segments including medical instrument services (including cardiovascular disease treatment products, new interventional diagnosis and treatment business, in vitro diagnostic reagents, and medical product distribution), pharmaceutical business, and medical services and health management.

Based on the performance of the interim report, it is obvious that the simultaneous decline in the performance of the three major businesses in the first half of 2024 is the key factor leading to the overall decline in the company's performance.

Specifically, during the reporting period, the medical instrument segment, which had the largest revenue scale, achieved revenue of 1.754 billion yuan, a year-on-year decrease of 13.01%; the pharmaceutical segment achieved revenue of 1.135 billion yuan, a year-on-year decrease of 29.05%, which is the largest decrease among the three segments; the medical services and health management segment achieved revenue of 0.496 billion yuan, a year-on-year decrease of 27.80%.

Regarding the performance mentioned above, at this performance briefing, Lepu Medical Technology stated that "the performance fell short of expectations mainly due to the promotion of the 'four same policies' for pharmaceuticals, hindered retail delivery, and reduced pharmacy marketing income, and it is expected that channel price adjustments and digestion of channel inventory may take 1-2 quarters."

Looking further, the medical instruments sector is the largest revenue-generating sector in the company's business, with segmented business sectors including cardiovascular intervention, in-vitro diagnostics, and surgical anesthesia. The performance decline in the first half of this year is mainly due to the drag from the in-vitro diagnostics business. In the first half of 2024, Lepu Medical Technology's in-vitro diagnostics business achieved operating income of 19.8 billion yuan, a year-on-year decrease of 57.15%. The main reasons are the high base of epidemic-related products in the same period last year, and intensified competition leading to price declines for some products. In addition, revenue from surgical anesthesia business declined by 3.87% year-on-year, while revenue from cardiovascular intervention increased by 16.92% year-on-year.

As for the pharmaceutical sector, which experienced the largest decline, there are mainly two reasons: first, the continuous advancement of drug centralized procurement policies has greatly reduced drug prices, resulting in overall revenue impact despite increased sales volume; second, increased R&D investment has not translated into actual economic benefits in the short term. The long R&D cycle of new drugs and high uncertainty are also contributing factors.

In the financial report, Lepu Medical Technology pointed out that the adjustment of the drug business due to retail channel inventory clearance may need to continue for 1-2 quarters. The annual forecast predicts that the active pharmaceutical ingredient business is expected to remain stable year-on-year, with revenue from the formulation sector likely to decrease to around 15-16 billion. After the clearance of channels, excluding innovative drugs, the expected recovery of pure sales of related products is expected to drive a slight rebound in revenue from the formulation sector.

Furthermore, the decline in revenue from medical services is mainly due to a decrease in demand for related medical equipment products used for domestic life index monitoring at home, post-pandemic. The company's demand for this business has evidently shifted from continuous revenue growth to achieving stable profitability, indicating a lack of growth potential for this business.

The negative impact of the aforementioned performance decline is also reflected in the cash flow of Lepu Medical Technology.

According to relevant financial data, in the first half of 2024, the company's cash receipts from sales of goods and services amounted to 312.9 billion yuan, a year-on-year decrease of 28.14%. Net cash flow from operating activities was 15.9 billion yuan, while net cash flow from investing activities was -82.2 billion yuan. The net increase in cash flow for the period was -64 billion yuan, further reflecting the current cash flow pressure on the company.

(Data source: wind)

From the above, it can be seen that there are multiple factors contributing to the decline in performance of Lepu Medical in the first half of this year. On one hand, there is no lack of policy regulation resulting from the "Four Sameness Policies". On the other hand, there is no lack of reasons such as its own weak growth, long R&D cycle of new drugs not yet translated into actual economic benefits, etc. However, overall, the "butterfly effect" of Lepu Medical's declining performance has already begun to emerge.

High goodwill risks are emerging, facing a greater risk of impairment.

It is worth mentioning that, compared with the decline in performance, Lepu Medical is facing a more worrying and greater hidden danger.

That is the "aftermath" of mergers and acquisitions.

According to the observation of the Securities Times APP, after Lepu Medical's listing, compared with the previous emphasis on research and development innovation, there has been a shift in focus towards capital operation, attempting to take the "buying for growth" route.

For example, in 2010, the company successively acquired Wei Jinfan Medical, Beijing Sida, and held a stake in Qinming Medical Instruments, entering the market of heart valve and diagnostic equipment. In 2011, the company acquired and controlled the Dutch company COMED B.V.

According to incomplete statistics, from 2010 to 2019, Lepu Medical made more than 30 mergers and acquisitions, obtained equity in approximately 30 companies, with a total transaction value exceeding 6 billion yuan.

Under the trend of mergers and acquisitions, the short-term growth effect is obviously evident - Lepu Medical has gradually developed into a leading domestic cardiovascular health industry platform, and at that time its performance also grew rapidly. Its revenue scale increased from 1.669 billion yuan in 2014 to 6.36 billion yuan in 2018, and net income increased from 0.423 billion yuan in 2014 to 1.22 billion yuan in 2018.

However, the aftermath of the operation of "buying for growth" has also brought many problems.

On the one hand, the scale of debt remains high. From 2020 to the first half of 2024, the company's total debt levels were 7.619 billion yuan, 8.425 billion yuan, 8.114 billion yuan, 7.525 billion yuan, and 7.856 billion yuan, respectively. With such a high level of debt, accompanied by declining revenue and a reduction in cash flow, the company is likely to face significant short-term liquidity pressure.

(Data source: Wind)

On the other hand, the risk of impairment looms under high goodwill. It is reported that under the model of mergers and acquisitions for growth, Lepu Medical's goodwill has been continuously rising in recent years. By the first half of 2024, the company's book value of goodwill has reached 3.948 billion yuan. With such a high level of goodwill, coupled with the decline in performance of some subsidiaries, the risk of impairment is already significant.

For example, Lepu Pharmaceutical, Zhejiang Lepu Pharmaceutical, and Bingkun Medical are all major subsidiaries of the company in 2023, and their impact on the company's net income exceeds 10%. Based on the data disclosed in the financial reports, Lepu Medical has made impairment provision for the goodwill formed by these subsidiaries in recent years, but now the performance of some subsidiaries has shown a clear downward trend.

According to relevant financial report data, in the first half of 2024, Lepu Pharmaceutical's revenue decreased by 40.28% year-on-year, Kun Medical's operating income decreased by 1.99%, while Zhejiang Lepu Pharmaceutical's operating income increased by only 1.42% year-on-year. Correspondingly, the end-of-period goodwill balances for Lepu Pharmaceutical, Zhejiang Lepu Pharmaceutical, and Bingkun Medical were 0.311 billion yuan, 0.375 billion yuan, and 0.533 billion yuan respectively, and none of them have been impaired since 2019. Therefore, it is evident that Lepu Medical faces the risk of impairment under the influence of the decline or weak growth of these three major companies.

In summary, there is always a reason behind a groundless rumor. As a leading domestic medical and health industry group, Lepu Medical has long laid the groundwork for the decline in its future performance through the short and frequent route of "buying for growth". After all, for a medical enterprise, strengthening research and development innovation, optimizing product structure, expanding market channels, and striving to improve the company's core competitiveness are the key to achieving sustainable development.