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Frontage Holdings Announces 2020 Interim Results

Hong Kong,  August 28, 2020Frontage Holdings Corporation ( “Frontage Holdings” or “the Group”, stock code: 1521.HK), a contract research organization (“CRO”) providing integrated, scientifically-driven research, analytical and development services with presence in both North America and China, today announces its unaudited interim results for the six months ended June 30, 2020.

 

Since March 2020, the number of COVID-19 cases continued to rise in the United States, which negatively affected the Group’s business. The global pandemic has limited the full capacity of the Group’s employees performing laboratory services and lowered its delivery efficiency. The Group has employed various mitigation measures focusing on the safety and well-being of its employees, customers and partners, and the continuity of its business operations to minimize the adverse impact of the pandemic. The Group’s facilities in the United States continue to operate at a reduced utilization rate.

The Group primarily offer bioequivalence and bioanalytical services in China which are both inextricably related to operations of clinical trials in hospitals and other clinical sites. The outbreak of the COVID-19 pandemic reached its peak in February 2020 in China, which limited medical staff and facility resources available for the conduct of clinical trials as hospitals and clinical sites had to divert significant healthcare resources away from the conduct of clinical trials to focus on mitigating the impacts of the pandemic. However, as the pandemic began to subside from the beginning of March 2020 in China, the Group has mobilized internal resources and leveraged its project execution capabilities aiming to accelerate temporarily delayed projects and to reduce the impact to profitability. To date, the Group had resumed normal operations in China according to the local government’s guidelines.

 

The Group also leveraged strength in providing innovative, flexible and cost-effective bioanalytical services in speeding up the development process and combating COVID-19, such as providing integrated and science-driven product development services in inventing potential cocktail PK assay for hydroxy-chloroquine, chloroquine and azithromycin in human plasma, supporting research projects including the development of the assay kit to detect COVID-19 within 15 minutes, as well as provision of biomarker testing to numerous pharmaceutical companies and universities for developing COVID-19-related studies.

 

 

Financial Highlights

 

  • Recorded revenue growth of 2.0% year-on-year to US$50.7 million
  • Revenue from operations in North America increased by 5.8% year-on-year to US$36.6 million. Excluding the impact of currency translation, revenue from operations in China decreased by 3.4% to RMB99.1 million
  • Gross profit margin was 28.9%, compared to 38.7% in the first half of 2019. Gross profit margin in North America and China were 24.6% and 40.0%, compared to 33.0% and 51.8% in the first half of 2019, respectively
  • Recorded net profit of US $4.5 million, representing a 51.6% decrease year-on-year. Adjusted net profit1 decreased by 59.5% to US$4.9 million. Net profit and adjusted net profit margins were 8.8% and 9.7% compared to 18.7% and 24.3% in first half 2019
  • Recorded US $138.8 million contract future revenue as at June 30, 2020, representing an increase of 26.8% compared to US$109.5 million as at December 31, 2019 and an increase of 59.5% compared to US$87.0 million as at June 30, 2019.

 

Operational Highlights

 

  • Various mitigation measures have been employed to minimize the adverse impact of the COVID-19 pandemic. Actively participated in research projects to ease the challenges presented by the evolving COVID-19 pandemic.
  • The capabilities of bioanalytical and biologics segment was expanded by adding central laboratory services in Exton, PA, which include clinical collection kits, central laboratory testing, sample tracking, local lab normalization, biorepository, logistics, scientific operations, advanced therapy services, clinical, PK/PD, and COVD-19 testing. It is expected to be fully operational by the second quarter of 2021.
  • Continued construction for the new laboratory facility of approximately 71,000 sq.ft used for expanding CMC and Bioanalytical services in Exton, PA. The facility is targeted to be fully operational in the first quarter of 2021.
  • Completed the upgrade of the existing bioanalytical lab facility of approximately 16,000 sq.ft in Shanghai, China, dedicated to the bioanalytical support of biologic services including proteins, cell and gene therapy, and biomarkers.
  • A new research facility of approximately 215,000 sq.ft used for conducting DMPK, non-GLP and GLP PK and toxicology studies was rented in Suzhou, China. The design process of the facility has been initiated.
  • Capabilities of DMPK, especially expertise in transporter assay and drug-induced liver injury was expanded by acquisition of Biotranex, LLC (“Biotranex”) on March 31, 2020
  • Capabilities in organic synthesis, medicinal chemistry and process research and development was expanded by acquisition of Acme Biosciences, Inc. (“Acme”) on July 2, 2020.
  • A highly requested quantitative whole-body autoradiography (“QWBA”) center of excellence established at Exton PA facility, is now fully operational for conducting QWBA studies and providing dosimetry projections for human radiolabel clinical studies.

 

 

 

 

 

1 Excludes the share-based compensation expenses, listing expenses and gain on disposal of associates

 

Management Comments

 

Dr. Song Li, Founder and Honorary Chairman of Frontage Holdings, commented: “Despite the unprecedented challenges due to the impact of COVID-19 pandemic, during the first half of 2020, we maintained revenue growth in most of our segments. We attribute this to the combination of the mitigation measures we employed, the ongoing efforts of our dedicated staff, and the effectiveness of our comprehensive business continuity plans. We were also pleased that our contract future revenue reached a record high of US$138.8 million as at June 30, 2020, representing an increase of 59.5% compared to US$87.0 million as at June 30, 2019, which evidenced that there has been ongoing demand across most of our business segments.

 

We are also  expanding the Group’s capacities and capabilities through organic growth and acquisitions. Our capacities and capabilities of bioanalytical and biologics segment were further expanded by adding central laboratory services in Exton, PA, and the completion of the upgrade to our existing bioanalytical lab facility of approximately 16,000 sq.ft in Shanghai, China. The construction process for our new laboratory facility of approximately 71,000 sq.ft, which will be used for expanding CMC and bioanalytical services in Exton, PA is also in progress. We have also initiated the design of a newly rented research facility of approximately 215,000 sq.ft which will be used for conducting DMPK, non-GLP and GLP PK and toxicology studies in Suzhou, China. In addition, we have further expanded our DMPK capabilities, in particular expertise in transporter assay and drug-induced liver injury, with the acquisition of Biotranex in March and we have expanded into drug discovery of organic synthesis, medicinal chemistry and process research and development with the acquisition of Acme Bioscience, Inc in July. We believe all these integral expansions and strategic acquisitions will give us access to valuable scientific expertise and complementary capabilities that will enhance our ability to partner with clients across the drug discovery and development continuum.

 

We are of the view of that the outbreak of the COVID-19 pandemic has raised public awareness for disease control and healthcare management, has highlighted the significance of innovative drugs and has generated additional market opportunities. Thus, we remain firmly committed to our development strategy, which includes focusing on the performance of our core existing business, expanding our capacities and capabilities to meet more demands from our customers, as well as expanding our service geographical range to more regions, so as to achieve sustainable growth in the future.”

 

 

1H 2020 Interim Results

 

Revenue increased by 2.0% year-on-year to US$50.7 million in the first half of 2020. Revenue from operations in North America increased by 5.8% year-on-year to US$36.6 million in the first half of 2020. Excluding the impact of currency translation, the revenue from operations in China decreased by 3.4% from RMB102.6 million in the first half of 2019 to RMB99.1 million in the first of 2020. The growth of revenue was mainly attributable to (i) marketing efforts made by the Group, resulting in sustainable marketing performance in North America and China; and (ii) a gradual increase in the DMPK services provided by RMI and BRI, which were newly acquired in the second half of 2019. The slight decrease in the China market was mainly due to the delay or suspension of some clinical trial projects caused by the outbreak of the COVID-19 pandemic in China starting early February 2020.

 

Gross profit decreased by 24.0% to US$14.6 million while gross profit margin was 28.9%, compared to 38.7% in the first half of 2019. Gross profit margin in North America and China were 24.6% and 40.0%, compared to 33.0% and 51.8% in the first of 2019, respectively. The decrease in the gross profit and gross profit margin were mainly attributable to the COVID-19 pandemic as it negatively affected our performance. Particularly, as the outbreak of the COVID-19 pandemic reached its peak in February 2020 in China, limited medical staff and facility resources were available for the conduct of clinical trials as hospitals and clinical sites had to divert significant healthcare resources away from the conduct of clinical trials to focus on mitigating the impacts of the COVID-19 pandemic in China. In addition, patients became less willing to participate in clinical trials out of concern for potential infection at clinical services. Also, the widespread lockdowns, closure of workplaces and travel bans across China during the COVID-19 pandemic caused temporary interruption of our onsite services in general. As at June 30, 2020, all our employees in China have been back to work in our offices, our on-site facilities or at relevant clinical sites, and all our departments and business functions in China have resumed their respective work and operations.

 

In the United States, the COVID-19 pandemic has limited the full capacity of our employees performing laboratory services and lowered our delivery efficiency. Moreover, the COVID-19 pandemic has reduced transportation services and disrupted the manufacturing and logistics networks in the United States, which have adversely affected our suppliers’ and our customers’ suppliers’ abilities to manufacture drug candidates and other supplies necessary for our services in the United States. As at June 30, 2020, we have been actively taking remedial measures to ensure our facilities in the United States continue to operate at a stable utilization rate and normalize our operations.

 

Net profit decreased by 51.6% to US$4.5 million in the first half of 2020. The net profit margin was 8.8%, compared to 18.7% in the first half of 2019. The lower net profit and net profit margin were primarily due to the impact of the COVID-19 pandemic. The unprecedented nature of the global pandemic has presented significant challenges and uncertainties to the global economy and across industries, including healthcare. Specifically, our revenue growth has been adversely affected by delays or suspensions of our ongoing or future projects, lowered delivery efficiency.  We were not be able to proportionately reduce our costs and expenses as, among other reasons, we may choose to continue to maintain our existing employee base and compensation levels and incur other operating expenses in line with historical levels. However, considering that (i) we have notified all our employees in China to work in our offices, our on-site facilities or at relevant clinical sites and all our departments and business functions in China have resumed their respective work and operations; (ii) we have been actively taking remedial measures, such as having employees work at home but remain the necessary lab scientists in the lab for urgent projects to ensure our facilities in the United States continue to operate at a stable utilization rate and normalize our operations, we aim to maintain or increase our net profit for the year ending December 31, 2020.

 

Adjusted net profit, (excluding the share-based compensation expenses, listing expenses, gain on disposal of associates) decreased by 59.5% to US$4.9 million in the first half of 2020. Adjusted net profit margin was 9.7%, compared to 24.3% in the first half of 2019. The lower adjusted net profit and adjusted net profit margin in the first half of 2020 follows the same set of reasons as disclosed in the above paragraph.

 

Basic and diluted EPS in the first half of 2020 amounted to US$0.0022 and US$0.0021, compared to US$0.0058 and US$0.0057 for the first half of 2019. Adjusted basic and diluted EPS in the first half of 2020 amounted to US$0.0024 and US$0.0023, compared to US$0.0076 and US$0.0074 for the first half of 2019.

 

 

About Frontage Holdings Corporation

 

Frontage Holdings Corporation is a fast-growing CRO providing integrated, scientifically-driven research, analytical and development services throughout the drug discovery and development process to enable pharmaceutical companies to achieve their drug development goals. The Company benefits greatly from having operations in both North America and China – the two largest markets for CRO services in the world and is well placed to capture growth opportunities in both markets.

 

Forward-Looking Statements

 

This presentation may contain certain “forward-looking statements” which are not historical facts, but instead are predictions about future events based on our beliefs as well as assumptions made by and information currently available to our management. Although we believe that our predictions are reasonable, future events are inherently uncertain and our forward-looking statements may turn out to be incorrect. Our forward-looking statements are subject to risks relating to, among other things, the ability of our service offerings to compete effectively and our ability to meet timelines for the expansion of our service offerings. Our forward-looking statements in this presentation speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements except as required by applicable law or listing rules. Accordingly, you are strongly cautioned that reliance on any forward-looking statements involves known and unknown risks and uncertainties. All forward-looking statements contained herein are qualified by reference to the cautionary statements set forth in this section.

 

Use of Adjusted Financial Measures

 

We have provided adjusted net profit, adjusted net profit margin, adjusted basic and diluted earnings per share (excluding the share-based compensation expenses, Listing expenses and gain on disposal of associates) as additional financial measures, which are not required by, or presented in accordance with, the IFRS. We believe that the adjusted financial measures used in this presentation are useful for understanding and assessing underlying business performance and operating trends, and we believe that management and investors may benefit from referring to these adjusted financial measures in assessing our financial performance by eliminating the impact of certain unusual, non-recurring, non-cash and/or non-operating items that we do not consider indicative of the performance of our business. However, the presentation of these non-IFRS financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the IFRS.  You should not view adjusted results on a stand-alone basis or as a substitute for results under IFRS, or as being comparable to results reported or forecasted by other companies.