In a recent media open day, Yuan Zhengyu, the chairman of Mengke Pharmaceutical (688373.SH), expressed a glimmer of hope amidst continuing struggles with profitabilityHe stated that once their fourth-generation drug receives approval for market launch, the company expects a significant improvement in profitability, potentially marking the end of their ongoing lossesHowever, he cautioned that navigating the period leading up to this approval would be challenging.

Since its inception, Mengke Pharmaceutical has dedicated itself to combating the growing issue of antibiotic resistance, which has become a pressing concern globallyTheir flagship product, MRX-1, commercially known as Youxitai, is a next-generation oxazolidinone antibioticApproved in 2021 and included in the medical insurance catalog, it targets infections caused by multidrug-resistant Gram-positive bacteriaDespite this significant achievement, the company has remained entrenched in financial struggles.

A closer look at Mengke's financial performance reveals a complex narrative

As of the third quarter of 2024, the company reported nearly 100 million yuan in revenueYet, this success is overshadowed by an approximate 300 million yuan loss that remains unmitigatedThis ongoing deficit can be attributed primarily to the insufficient sales volume of Youxitai in relation to the company's hefty expenses, particularly in research and development (R&D).

According to financial reports, Mengke has committed a staggering 244 million yuan to R&D in the first three quarters of the year, reflecting a 20% increase compared to the previous yearThis substantial investment underscores the importance Mengke places on developing its pipeline, as well as the hurdles it faces in striking a balance between innovation and financial sustainability.

Li Zhile, the CFO and Board Secretary of Mengke, elaborated on the company's strategy to manage R&D costsThere is a concerted effort to adjust the development timelines of non-essential pipelines, with the goal of maintaining R&D expenditures within reasonable limits

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However, the company is dealing with several key pipelines that are currently in the critical Phase III of clinical trials, necessitating continued financial outlays.

Regarding Youxitai's commercial performance, Li explained that the ideal usage scenario for the drug is in inpatient settings, where it is aimed at hospitalized patientsUnfortunately, multiple factors have complicated this strategy, resulting in approximately 80% of its current sales coming from pharmacies insteadThis highlights the challenges that new pharmaceutical products face in penetrating hospital markets.

Li anticipates that Mengke's losses may persist for another two yearsRather than focusing solely on the turnaround, the company is targeting operational efficiency and cost reduction as immediate priorities, with a primary aim of reducing lossesThe CEO noted that the principal focus is to minimize losses for now, while looking ahead to the anticipated approval and launch of the “fourth-generation drug.”

This fourth-generation drug, referred to during the event as MRX-4, is seen as a pivotal product for the company

It is a water-soluble prodrug of Youxitai that transforms into the active compound through intravenous administrationCurrent trials for MRX-4 are advancing in global and Chinese multi-center Phase III clinical studies, with expectations for market approval in China around 2026.

Yuan Zhengyu highlighted the significance of progressing from an oral formulation to an injectable oneThis shift is anticipated to align more closely with hospital requirements, targeting serious, hospitalized patients who are at risk of postoperative infections or secondary infections after viral illnessesHe expressed optimism that once MRX-4 is launched, it would facilitate easier access into domestic hospitals, and the anticipated higher pricing for this injectable formulation could substantially bolster the company’s overall profitability.

Nevertheless, the prevailing issue of hospital access remains a critical challenge

Yuan acknowledged that the industry landscape is unlikely to change dramatically in the short term, emphasizing the necessity for the company to cultivate its internal capabilities to enhance the likelihood of successHe remarked that this space resembles a “blue ocean” market with a long product lifecycle, positing that if the company can solidify the performance of its products and address unfulfilled clinical needs, it would be positioned well to compete effectively both domestically and globally.

International expansion is also a significant component of Mengke's growth strategyLi Zhile pointed out that the U.Spharmaceutical market is more mature and has comparatively lower barriers for hospital access, compounded with a higher demand for treatments addressing resistant bacteriaAccordingly, Mengke is proactively seeking partnerships with various overseas distributors to expedite their market outreach.

However, Li also noted the considerable financial stakes involved in Phase III international trials, stating that with the current limitations on the company’s cash-generating ability, they would be adopting a cautiously measured approach to overseas expansion in the short term