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Preface:
In China, there may not be any other industry except the medical and pharmaceutical industry, and it is full of two almost completely opposing images: it is an industry that affects the lives and health of all people, and it is an industry entangled in negative events such as medical representatives, kickbacks, and high-priced drugs. It has to be admitted that there are many factors that cause this negative impression, not only related to the high degree of information asymmetry in China's medical and pharmaceutical industry in the past, but also related to the low degree of closure and openness and transparency of the entire medical and pharmaceutical system. In recent years, with the emergence of some major changes and systems in the entire industry, such as the two-invoice system, centralized procurement, etc., the space for black box operations has been greatly compressed, and the negative phenomenon mentioned above has been reduced. This has also ushered in an era of real strength in the medical and pharmaceutical industry. With the launch of the science and technology innovation board, it has given a huge boost to this industry. According to the author's statistics, as of September 30, 2021, the pharmaceutical and biological industry has become one of the industries with the largest number and highest proportion of listed companies on the science and technology innovation board.
(Source: Wonder Database)
However, the reduction of the negative phenomena mentioned above does not mean that they disappear, and these problems are still "high-voltage lines" when medical and pharmaceutical companies want to go public. Specific to the IPO review, the company's sales expenses have become the focus of attention. In order to facilitate statistics and comparison, the author selected a subdivision of the medical and pharmaceutical industry: in vitro diagnostics (IVD, abbreviation for In-Vitro Diagnostic) in medical devices. The reason why the author chose this field is because this segment has a large number of listed companies on the science and technology innovation board, which is highly comparable, and it also shows some commonalities in sales expenses of medical and pharmaceutical companies.
1. Do in vitro diagnostic companies listed on the STAR Board have a big difference in sales expenses?
When comparing the sales expenses of this group, we use one of the most common financial indicators to measure, this indicator is the sales expense ratio. The author summarizes the sales expenses and sales expense ratios of 17 in vitro diagnostic companies listed on the Science and Technology Innovation Board in order of listing time, as follows:
(Source: Wonder Database)
It should be said that although this group is all engaged in vitro diagnostic business, there are great differences in sales expenses, ranging from Ambipine with a sales expense rate of more than 40%, to Aotai Biotech and PIIP Biologics with a low to less than 5%. Basically, one conclusion that can be drawn is that in terms of indicators, there is no red line in terms of sales expenses, and more importantly, how these sales expenses are spent. Next, we will analyze this problem in more detail.
2. How does the STAR Board inquire and respond to sales expenses during IPO review?
We comprehensively sorted out the 17 in vitro diagnostic companies currently listed on the STAR Board, and the inquiries and responses during the IPO review process, and found that the exchange and the CSRC have formed mature inquiry ideas for this group, namely.
(i)
The probability of this question being mentioned in inquiries from exchanges or CSRCs is quite high, and it basically revolves around the following three ideas:
(1) Comparison with the overall expenses of listed companies in the same industry;
(2) If there is a difference, what is the reason, and reasonable performance cannot be explained?
(3) whether the overall matching of sales expenses and operating income shows the same trend, and whether the speed of change is consistent; If not, what caused it.
In order to facilitate the understanding of readers and friends, we have compiled some representative real questions and reply ideas as follows:
(ii) Inquiries on sub-accounts of selling expenses
A very simple truth, companies spend money on sales in order to do business. Then the audit department's attention logic to this point is very clear, the core is to ask two questions: is the business made by spending these sales expenses real or false? Is the money spent legally compliant?
Specific to the questions asked, the inquiry about the subdivision of sales expenses focuses on four key points:
(1) Whether the sales expenses are commercially bribed or profit-transmitted
(2) Whether the occurrence of marketing expenses (marketing fees or publicity fees) is reasonable and whether there is commercial substance
(3) The matching and assessment method of sales personnel's salary and operating income
(4) If there is a distribution model, sales commission and rebate
III. Conclusion and Outlook:
From the subdivided but not niche field of in vitro diagnosis listed on the Science and Technology Innovation Board, we can derive some commonalities and laws in the medical and pharmaceutical industry, especially on the extremely sensitive issue of sales expenses. China's medical and pharmaceutical industry companies are still relatively young as a whole, and are in or have just experienced the stage of product power, moving towards the stage of brand power. The establishment of brand recognition requires long-term accumulation and effort, and the expense in this process is a normal logic. Judging from these cases that have been listed, it can be said that the review authority is also very clear about this logic, so medical and pharmaceutical companies should not regard sales expenses as a flood beast because they are preparing to go public, and the money that should be spent must be willing to spend. However, spending money should not be arbitrary, and the red line that should be guarded must also be guarded. Only when more and more companies in this industry establish this awareness, the competition in the industry is benign, and will we really pay attention to the improvement of products and brands. The medical and pharmaceutical industry as a whole is getting better and better, and our society will become better and better, and we, the investment banks and personnel, also hope to accompany the medical and pharmaceutical industry to sail into the sea of stars.
Source: David Zhao, Zhichao Sun