Frontier Biotech has responded to the Shanghai Stock Exchange's 2025 annual report inquiry letter, providing clarifications on issues including revenue recognition adjustments, distributor inventory, R&D investment, and cash flow. The reply reveals the practical pressures the company faces regarding its core product growth, channel health, and cost control.
Revenue Adjustment and Distributor Inventory: Off-Take Falls Short, Channel Stock Remains High
In April 2025, Frontier Biotech issued a correction to its performance forecast, reducing reported operating revenue by 20.282 million yuan. The revised full-year revenue stands at 123 million yuan, a downward adjustment of 14.12%. This revision stemmed from the company's review of its top five customers, which revealed that the end-user off-take progress for distributor "Customer D" during the reporting period did not meet expectations. Consequently, the company reassessed the related revenue recognition based on the principle of prudence.
Customer D, established in 1998, is a pharmaceutical distribution company with comprehensive operational qualifications. It began collaborating with Frontier Biotech in January 2025, responsible for supplying the drug Aikening® to retail pharmacy channels in regions including Sichuan, Hunan, Jiangxi, Chongqing, and Suzhou. In 2025, this distributor's actual sales volume was 20,984 units (after deducting the 50,000 units related to the adjustment), with a sales value of 8.6438 million yuan. Its ending inventory was 11,594 units. The company stated this inventory level aligns with its positioning as a cross-regional DTP pharmacy service provider and is commercially reasonable. As of the date of the inquiry reply, the related accounts receivable have been fully collected. Since 2026, Customer D has achieved end-user off-take of 3,508 units, and the 50,000 units of product corresponding to the adjusted revenue have been transferred via market-based allocation to another partner for continued distribution.
Looking at the overall situation of the top ten distributors, Customer A ranked first with sales of 85,000 units and a value of 35.2002 million yuan. Its ending inventory was 41,628 units, a relatively high level. Several distributors hold substantial inventory, raising questions about whether the actual end-user digestion capacity can match the current distribution pace, a point requiring ongoing observation. The company stated it has established a distributor management system covering entry assessment, price management, incentives, elimination, and channel behavior control, implementing unified factory pricing and credit sales models. The annual audit firm, after verification, deemed the relevant systems sound and effectively implemented.
Operating Performance: Core Product Revenue Declines, Capacity Utilization Remains Low
In 2025, Frontier Biotech achieved operating revenue of 123 million yuan, a year-on-year decrease of 4.70%. Net profit attributable to shareholders was a loss of 268 million yuan, compared to a loss of 201 million yuan in the same period last year, representing a 33.10% widening of the loss. Adjusted net profit was a loss of 302 million yuan.
The core product Aikening® contributed revenue of 105 million yuan, accounting for 85.47% of total revenue. However, revenue from this product fell by 7.62% year-on-year, which was the primary reason for the overall revenue decline. The gross margin for Aikening® was 34.76%, an increase of 5.77 percentage points year-on-year, but this improvement could not offset the impact of the sales volume drop. Revenue from other businesses was 16.7682 million yuan, up 44.57% year-on-year, but its limited scale meant it contributed little to overall revenue.
On the production side, the Aikening® formulation production base had an actual annual capacity of 1.62 million units in 2025, with actual production of 254,000 units, resulting in a capacity utilization rate of only 15.69%. The company explained that low capacity utilization leads to high fixed costs per unit. Coupled with the complex production process for Aikening®'s large-molecule active pharmaceutical ingredient and direct material costs accounting for approximately 47.96% of costs, these factors jointly constrained the gross margin level. The company anticipates that formulation costs may decrease as API costs decline and capacity gradually increases.
R&D and Sales Expenses: Expense Ratios Remain Elevated, Cash Flow Relies on External Funding
In 2025, the company's R&D expenses were 142 million yuan, a year-on-year increase of 3.16%, accounting for 114.71% of revenue. This included 88.1435 million yuan in third-party R&D service fees, constituting 62.28% of the total, primarily used for preclinical research on small nucleic acid drugs. Cumulative R&D expenses over the past three years reached 493 million yuan.
Regarding sales expenses, the company's 2025 sales expenses were 86.7475 million yuan, with a sales expense ratio of 70.31%. The company explained that this ratio is higher than industry peers mainly due to rigid costs in the early commercialization phase and investments in cultivating the HIV drug market. Currently, the company's revenue primarily relies on the single product Aikening®, and the revenue base is still in a growth phase.
In terms of cash flow, net cash flow from operating activities in 2025 was -227 million yuan, compared to -173 million yuan in the same period last year, indicating an expansion in outflow. Cumulative net operating cash outflow over the past three years was approximately 666 million yuan. The year-end balance of accounts receivable was 62.1372 million yuan, with overdue amounts of 22.6524 million yuan, showing a growth rate of 69.87%, significantly higher than the revenue growth rate. The company attributed this mainly to temporary payment delays from Customer D and a distributor in Hainan. As of the date of the reply, these overdue amounts have been fully collected, with subsequent collections of 49.8821 million yuan.
Licensing Deal Provides Interim Funding, Core Business Cash Flow Yet to Improve Substantially
In February 2026, Frontier Biotech entered into an exclusive licensing agreement with GlaxoSmithKline PLC (GSK) for two small interfering RNA (siRNA) pipeline products. GSK obtained exclusive global rights for the development, production, and commercialization of the two products. According to the agreement, Frontier Biotech will receive a $40 million upfront payment and a $13 million near-term milestone payment, with the potential for up to an additional $950 million in milestone payments based on development, regulatory, and commercial progress, plus tiered royalties on global net sales. As of March 2026, the company has received the $40 million upfront payment.
This licensing agreement provides interim cash flow support for the company. However, excluding this non-recurring factor, the cash flow situation of the core business itself has not yet achieved substantial improvement. Whether Aikening® end-user sales can recover, channel inventory can be effectively digested, and expense outlays can be controlled remain key variables determining the company's future operational trajectory.
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