Jiahe Biotech “competes” against PricewaterhouseCoopers, whether misappropriation of public funds by former employees affects control transactions

Photo source: Visual China

Blue Whale News, February 6 (Reporter Wang Jianwen)At a critical juncture in the advancement of major mergers and acquisitions and the audit of annual reports, the listed company Jiahe Bio-B (hereinafter referred to as Jiahe Bio-B, 06998.HK) fought a war of words with the auditor PricewaterhouseCoopers (PwC Hong Kong), which has been cooperating for many years.

On January 22, Jiahe Biotech announced that due to reasons such as failure to reach a consensus with auditor PricewaterhouseCoopers on the 2024 audit schedule, the company’s board of directors proposed to remove PricewaterhouseCoopers and appoint Ernst & Young as the new auditor.

However, PricewaterhouseCoopers does not agree with Jiahe Bio’s views. On February 4, PricewaterhouseCoopers issued a statement refuting Jiahe Biotech’s previous reasons for dismissal. PricewaterhouseCoopers also disclosed in a statement that during the process of participating in Jiahe Biotech’s acquisition of Yiteng Pharmaceutical, a former employee was discovered suspected of embezzling public funds, involving net funds of nearly 10 million yuan.

As a former star and innovative pharmaceutical company, Jiahe Biotech was popular in the market at the beginning of its listing in 2020, with a market value of HK$14 billion. However, in the following years, the company’s core drug research and development and commercialization frequently failed, its performance continued to lose money, and its market value fell to less than HK$1 billion.

In this context, Jiahe Biotech chose to sell shells to Yiteng Pharmaceutical, which has been listed many times without success. If the transaction is successfully completed, Ni Xin, founder of Yiteng Pharmaceutical, will replace Hillhouse Capital as the new controlling shareholder of the company.

Jiahe Biotech and PricewaterhouseCoopers have their own opinions on replacing auditors at critical nodes”

This time, Jiahe Biotech proposed to change its auditor, it was at a critical juncture in its annual report audit work. In fact, Jiahe Biotech’s reason for removing PricewaterhouseCoopers is related to the preparation of the annual report.

Jiahe Biotech stated in the announcement that it had failed to reach a consensus with PricewaterhouseCoopers on the 2024 audit timetable, so the board of directors proposed to remove him. In addition, the company’s board of directors also confirmed that apart from preliminary planning work on the 2024 consolidated financial statements, PricewaterhouseCoopers has not yet started any substantive review or audit work, and the change of auditor will not have a significant impact on the company’s annual audit and results release.

As the other party in this recall incident, PricewaterhouseCoopers and Jiahe Biotech have been working together for many years. PricewaterhouseCoopers served as its auditor long before the latter’s listing and was renewed four consecutive times between 2021 and 2024. When Jiahe Biotech was suddenly dismissed, PricewaterhouseCoopers also refuted it in a targeted manner.

On February 4, an announcement by Jiahe Biotech published PricewaterhouseCoopers’s statement. PricewaterhouseCoopers said that as early as December 27, 2024, it held a meeting with Jiahe Biotech’s Review Committee., tentatively scheduled to release financial results on March 28, 2025. On January 2, 2025, it received another verbal notice from the chief financial officer of the listed company, hoping to advance the performance announcement date. However, PricewaterhouseCoopers did not raise unachievable objections.

Regarding Jiahe Biotech’s statement that PricewaterhouseCoopers has not yet started any substantive review or audit work, PricewaterhouseCoopers also stated that it is inconsistent with the facts.

In addition, PricewaterhouseCoopers also disclosed in the statement a case in which a former employee of Jiahe Biotech was suspected of embezzling public funds. As the auditor of Jiahe Biotech, PricewaterhouseCoopers also participated in the acquisition of Yiteng Pharmaceutical by a listed company. During the course of work, PricewaterhouseCoopers found that there was an unexplained difference between the balances of Jiahe Biotech’s two bank accounts and the balances recorded in the company’s books, with an amount of approximately 8.5 million yuan.

In November 2024, PricewaterhouseCoopers reported the matter to Jiahe Biological. After investigation, this situation was due to a cashier of the company (resigned in November 2024) suspected of embezzling funds from the company’s account and forging bank statements and other documents. Further investigation showed that the employee misappropriated net funds of approximately 9.8 million yuan from August 2022 to November 2024.

In an announcement on February 4, Jiahe Biotech also responded to this incident. The company stated that the incident had no impact on the company’s daily business operations and did not expect the incident to have a material adverse impact on the company’s cash flow and financial condition. In addition, the company is still determining the impact of the incident on the 2024 financial report.

Blue Whale News has also called Jiahe Biotech many times to verify whether this suspected misappropriation of public funds will affect the acquisition case between the company and Yiteng Pharmaceutical, but no reply has been received as of press time.

Jiahe Biotech has no choice but to sell its shells after four consecutive years of listing”

Jiahe Biotech, the protagonist in this incident, was established in 2007 and is one of the earliest pharmaceutical companies in China to deploy the biomedical industry.

After its establishment, Jiahe Biotech laid out various types of drug pipelines such as biosimilars and innovative drugs. When it was submitted to the Hong Kong Stock Exchange in 2020, the company had three core products, including infliximab biosimilar GB242 (TNF-), innovative drug GB221 (HER2) and GB226 (PD-1). Among them, GB226 was accepted by the State Food and Drug Administration in 2022, becoming the first PD-1 product in China to apply for an indication for peripheral T-cell lymphoma.

In addition, Jiahe Biotech received bets from well-known capital and pharmaceutical companies such as Hillhouse Capital, Conn Bay, and Watson Biotech. The company successfully landed on the Hong Kong Stock Exchange in October 2020, with its share price reaching a maximum of nearly 14 billion Hong Kong dollars.

But after listing, Jiahe Biotech fell into Waterloo. In June 2023, GB226 was finally not approved by the State Food and Drug Administration for marketing, becoming the first PD-1 drug to be rejected by the State Food and Drug Administration for marketing. Although GB242 was approved for listing in 2022, it has never been able to achieve stable income. In addition, the 2024 mid-year report showed that internal development of the company’s other core drug, GB221, has been suspended.

The road to product commercialization is not smooth, and Jiahe Biotech’s performance continues to lose money. From 2021 to 2023 and the first half of 2024, the company’s operating income was RMB 16 million and RMB 14 million respectively; net losses attributable to the parent company were RMB 865 million, RMB 730 million, RMB 674 million, and RMB 126 million respectively.

At the same time, Jiahe Biotech’s share price also continued to fall. At the beginning of the listing, the company’s share price once exceeded HK$30/share. However, after four years of continuous decline, by the end of September 2024, the company’s share price had dropped to approximately HK$1.65/share, leaving a total market value of only about 900 million yuan., evaporated by more than 13 billion yuan compared with the beginning of the listing.

In this context, Jiahe Biotech finally chose to sell shells. In October 2024, the company announced that it would acquire Yiteng Pharmaceutical, a CSO (Contract Sales Organization) company, through a merger, and the new company after the merger will be renamed Yiteng Jiahe.

The transaction will be conducted through a share swap and will not involve cash transactions. In order to acquire Yiteng Pharmaceutical, Jiahe Biotech will issue 1.821 billion shares to shareholders of the company at a consideration of HK$2.90 per share. After the share swap is completed, the original Yiteng Pharmaceutical shareholders will hold 77.43% of the company’s shares, and the shareholding ratio of the original Jiahe Biotech shareholders will be reduced to 22.57%. The company’s controlling shareholder will also change from Hillhouse Capital to Ni Xin, the controlling shareholder of Yiteng Pharmaceutical.

Compared with Jiahe Biotech, Yiteng Pharmaceutical already owns commercialized core products such as vancomycin hydrochloride for injection, cefaclor, and inhaled glucocorticoids, and its performance has continued to grow in recent years. From 2020 to 2022, the company achieved operating income of 1.768 billion yuan, 2.073 billion yuan, and 2.074 billion yuan respectively; net profit attributable to the parent company was 94 million yuan, 157 million yuan, and 306 million yuan respectively.

For Jiahe Biotech, if the transaction is successfully completed, the company may receive assistance from Yiteng Pharmaceutical, and the commercialization process of its products may achieve breakthroughs. For Yiteng Pharmaceutical, which has submitted to the Hong Kong Stock Exchange four times but failed to successfully list, if it can successfully merge with Jiahe Biotech, the company’s institutional shareholders will also have the opportunity to exit through the capital market.

But at present, it seems that this backdoor listing may be difficult to implement in the short term. On January 24, Jiahe Biotech announced that as the company needs more time to determine the financial information of the target company and the financial information of the expanded group, the company will postpone the original deadline for new listing application from January 31 to June 30, the final deadline for the completion of the merger was postponed from May 30 to December 31.