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Why China Medical Systems FY2025 Profits Dropped Despite Growth · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Imagine opening a financial report, right? You're looking at a company you are
• 0:12
  invested in, and you see they just sold like 10% more products. Yeah.
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  Demand is just through the roof. Exactly. They are moving more volume than ever before.
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  But then you look down a few lines and you see their profits somehow plummeted
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  by double digits. I mean, that is definitely a shock to the system for any shareholder.
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  It really is. Today, we are opening the FY 2025 books on China medical system holdings.
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  You'll usually hear them referred to as CMS.
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  And we need to figure out why the numbers seem to be, well, lying to us.
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  Right. It is the ultimate lesson in why reading just the headline of an earnings
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  release is, it's never enough. Totally.
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  When a company is undergoing a structural pivot of this magnitude,
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  the surface level math rarely tells the whole story. Thank you.
• 0:58
  You know, you are looking at a business that is aggressively tearing down its
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  old foundation while simultaneously building a skyscraper right on top of it.
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  Okay, let's unpack this because our mission for this deep dive today is to look
• 1:10
  at these documents strictly from your perspective as an investor.
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  You know, we have a huge stack of their financial documents,
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  their pipeline updates, the strategic reports.
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  We just need to separate the noise from the signal here. So let's start with
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  that contradictory top line because the growth is undeniably strong.
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  Their turnover, meaning their revenue, is up 9.9% to 8.2 billion RMB.
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  And actually, if you count all the medicines they sell directly,
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  it crosses 9.3 billion RMB. So the market footprint is clearly expanding.
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  Right. The demand is definitely there. They are pushing more therapeutics through
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  their distribution channels across the board.
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  But that top line success makes the bottom line look incredibly jarring.
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  It does. It really does. I mean, that is the massive elephant in the room for you as a shareholder.
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  If revenue is up by nearly 10 percent, how on earth did the profit for the year
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  drop 10.5 percent, down to 1.44 billion RMB?
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  Yeah, seeing top line growth accompanied by double digit profit decline usually
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  sets off massive alarm bells. Exactly.
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  It makes it look like the underlying business model is just breaking.
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  Which brings us to the footnotes. What's fascinating here is the stark difference
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  between the reported profit and the normalized profit.
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  OK, normalized profit. Break that down for us. So the drop you're seeing isn't
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  an operational failure where the core business suddenly forgot how to make money.
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  It is almost entirely due to a retroactive accounting shock.
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  Wait, how big of an accounting shock are we talking about here?
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  We are talking about a 278.8 million RMB tax hit.
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  Just hitting the 2025 books all
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  at once. Oh, wow. Almost $300 million just wiped out in one go. Exactly.
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  To explain the mechanics here, one of CMS's subsidiaries had negotiated and
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  enjoyed a local income tax concession.
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  That covered the years 2022 through 2024. Okay.
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  But then, in 2025, circumstances changed, and they were required to repay that
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  entire multi-year concession, plus all the related late payment surcharges.
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  And so it's just a massive one-off penalty.
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  They are paying for three whole years of tax discounts in a single quarter.
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  That is the core of it. Yeah. If you strip away that 278.8 million RMB penalty
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  to look at the actual ongoing health of the business, what we call the normalized
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  profit, it tells a completely different story.
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  Right. Because that money isn't an ongoing expense.
• 3:28
  Exactly. And that normalized profit is actually up 3.6% to nearly 1.78 billion RMB. Wow, okay.
• 3:35
  That drastically changes the picture. And, you know, I noticed a massive signal
• 3:39
  from management that really backs up your point about the underlying health of the business.
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  The dividend, right? Yes. They actually increased the total dividend for the
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  year by 9%, up to 0.2921 RMB per share.
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  I mean, you generally do not hike your dividend and hand more cash back to your
• 3:56
  shareholders if your core business is deteriorating and you're worried about survival.
• 3:59
  Absolutely not. A dividend hike is the ultimate put your money where your mouth
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  is metric. It proves the cash generation engine is humming along.
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  However, even with the normalized profit looking healthy, there is a structural
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  headwind we really need to address.
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  Their growth profit margins did compress slightly, dropping from 72.6% to 71.5%. Yeah, I saw that.
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  I was trying to think of how to explain this margin squeeze to our listeners.
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  It's like, well, imagine having Walmart as your only customer,
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  right? Wow, that's a good way to look at it.
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  Right. They will buy your entire inventory, guaranteeing you massive volume,
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  but they hold so much leverage that they force you to sell it to them at a huge discount.
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  You win the bid, you survive, but your margins are just crushed.
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  And if you lose, you go out of business.
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  That analogy captures the leverage dynamic perfectly.
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  In the Chinese pharmaceutical market, this system is called VBP.
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  That stands for volume-based procurement.
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  Volume-based procurement. Okay, so how does that play out for CMS?
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  Basically, the government acts as a single centralized buyer for the massive
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  public hospital network.
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  They gather up the demand for older off-patent drugs, you know,
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  the legacy medications that CMS built its early business on. Right.
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  And then they force all the pharmaceutical companies into a brutal bidding war.
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  So the government just says, hey, we have millions of patients who need this
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  generic blood pressure medication. Who is going to give it to us the cheapest?
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  Exactly. And if you don't slash your prices to win that bid,
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  you get locked out of the public hospital system for that drug entirely. Wow.
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  That's harsh. It is. This program has fundamentally reset the pricing landscape in China.
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  So the slight margin dip we see for CMS from that 72.6 down to 71.5 percent
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  is the lingering effect of their older traditional drugs facing these VBP price cuts.
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  Got it. So they are selling more volume, but making slightly less profit per pill.
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  Precise. Which means the old playbook is officially dead. You cannot just keep
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  selling cheaper and cheaper generic pills forever and expect to grow a massive,
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  highly profitable enterprise.
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  You really can't. And if we connect this to the bigger picture.
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  VBP is the exact catalyst that is forcing CMS's radical transformation.
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  Ah, so the margin squeeze is pushing them into that pivot we talked about. Right.
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  They realized years ago that the era of easy margins on non-exclusive trolls was ending.
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  To command high margins and escape the VBP auction block, you need absolute
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  leverage. And leverage in pharma means having something no one else has.
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  Exactly. Leverage comes from innovation. You need exclusive,
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  novel therapeutics that do not have direct competitors yet.
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  Because, well, you can't have a price war if you are the only one making the
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  weapon. Right. That makes total sense.
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  And when you look at the portfolio numbers from the report, this pivot to innovation is undeniably working.
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  Oh, the numbers are striking. Yeah, the report notes that innovative and exclusive
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  products now make up nearly 60% of their direct sales.
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  And more importantly, that specific high margin segment grew a massive 44.1% year over year.
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  It is a textbook execution of a portfolio transition.
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  The growth engine has officially been handed over to the new therapeutics.
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  But let me push back for a second here.
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  Putting myself in the shoes of a skeptical investor. Sure, go for it.
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  That 44% growth in innovative products sounds fantastic on paper.
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  But innovation is notoriously expensive and incredibly risky.
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  I'm looking at their cash flow statement, and their net cash from operating
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  activities dropped 40.2%.
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  And at the exact same time, their R&D research and development expenses skyrocketed
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  by 77.3% to 585 million RMB. It's a huge jump. Yeah.
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  I mean, total R&D expenditures crossed 1 billion RMB.
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  Are they burning through cash too fast, chasing this innovation dream?
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  Honestly, that is the most critical question an investor can ask right now.
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  A 77% jump in R&D expense looks highly aggressive.
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  But what's fascinating here is how they are spending that capital.
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  Okay, so it's not just a blank check to a lab. Far from it.
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  CMS isn't just locking scientists in a room for a decade hoping for a miracle discovery.
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  They utilize what they call a collaborative development plus in-house R&D model.
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  Explain the mechanics of that dual-engine approach. How does that mitigate the
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  risk of just burning all this cash?
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  Well, pure in-house discovery takes 10 to 15 years and has like a 90% failure
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  rate. It's basically a lottery ticket.
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  So CMS mitigates that by actively partnering with global biotech firms.
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  They find promising drugs that have already passed early clinical trials in Europe or the U.S.
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  They license the rights for the Asian market, and they co-develop the final stages.
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  Oh, I see. So you are essentially buying a project that is already on the 80-yard line. Exactly.
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  You run the final bridging trials in China and get it to market years faster
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  and much cheaper than starting from scratch.
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  Meanwhile, they still fund their own early-stage labs to build long-term value.
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  So they're essentially importing de-risked innovation while incubating their
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  own. That's the perfect way to phrase it.
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  And we are already seeing this massive R&D spend yield tangible regulatory wins.
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  The report highlights several recent NDAs.
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  Yeah, and for anyone newer to the biotech space, an NDA is a new drug application. Right.
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  It's basically the finish line of the R&D marathon. You hand all your clinical
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  trial data to the government regulators, in this case, China's National Medical
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  Products Administration, and ask for permission to commercialize and sell the drug.
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  And CMS actually crossed that finish line twice in just the first quarter of 2026.
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  That's huge. In January, they received approval for Lumerix.
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  This is a massive milestone. It is the very first topical JAK inhibitor approved
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  in China for vitiligo, which is a chronic autoimmune condition causing the loss of skin pigment.
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  Okay, well, let's break down why being the first JAK inhibitor matters so much
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  to the bottom line here. How does that protect them from those VBP price cuts
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  we talked about earlier?
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  Well, vitiligo treatments has historically been pretty limited.
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  A J inhibitor works by actually interrupting the specific inflammatory signaling
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  pathways that cause the immune system to attack the pigment cells.
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  So it's a completely new way of treating it. Exactly.
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  Because it is a novel mechanism of action, and because CMS is the first to get
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  a topical version approved in China, they essentially have a monopoly period. Ah, no competition.
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  Right. VBP requires multiple generic competitors to force an auction.
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  Lumerix has no direct generic competitors yet. Therefore, CMS dictates the price,
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  ensuring those high margins.
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  Man, and here's where it gets really interesting.
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  Just two months later, in March 2026, they got another massive approval.
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  Disaduced that tablets. Yeah, that was a huge win.
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  This is a novel oral treatment for anemia in patients with chronic kidney disease
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  who aren't on dialysis yet. That is a massive patient population with a significant
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  unmet medical need. It is a massive market.
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  And beyond those two concrete approvals, they have six more NDAs currently sitting
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  under review with regulators, plus about 50 programs advancing through the pipeline. Wow, 50. Yeah.
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  So the R&D spend is heavy, yes, but it is building a highly visible,
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  diversified safety net of future blockbusters. So the R&D strategy is sound.
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  And that success, particularly with dermatology treatments like Lumerix,
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  sets up arguably the most dramatic strategic move in this entire annual report.
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  Oh, absolutely. There is one specific division inside CMS that is outperforming
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  the rest of the company so dramatically that management is pulling the trigger
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  on a major corporate restructuring just to capitalize on it.
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  You are looking at Dermavon. Dermavon, yes.
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  This is CMS's skin health and dermatology business. And the numbers here are frankly staggering.
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  Revenue for Dermavon exploded by 73.2% year over year, officially crossing the
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  1 billion RMB mark. That's incredible growth.
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  They have innovative prescription drugs for serious autoimmune conditions.
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  They have dermatology-grade consumer skincare products.
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  I mean, they have built a powerhouse in the Chinese skin health sector.
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  They've really created a vertical ecosystem.
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  If a patient goes to a dermatologist for a severe condition,
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  they get a Dermavon prescription.
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  Then, when that condition clears up and they just need daily maintenance skincare,
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  they buy a Dermavon consumer product.
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  Wow. So it captures the entire life cycle of the patient. Exactly.
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  And because this division is growing so aggressively, CMS has proposed spinning off Dermavon.
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  They want to list it completely separately on the main board of the Hong Kong Stock Exchange.
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  Right. But if you are holding CMS stock right now, why would you want them to
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  take your fastest growing, star-performing cash cow and separate it?
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  Doesn't that just weaken the parent company you invested in?
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  I know. It absolutely seems counterintuitive at first glance.
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  But this raises an important question about how the stock market actually values
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  complex conglomerates.
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  Often, a high-growth, highly specialized unit gets penalized when it is buried
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  inside a larger, slower-growing parent company.
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  Okay. How does that penalty work in practice, though? Think about the institutional
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  investors. They look at the parent company, CMS.
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  They see a diversified pharma company. They see the legacy VVP pricing risks
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  we discussed, and they assign the entire stock a moderate valuation multiple, say 10 times earnings.
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  Okay, 10x makes sense for a legacy pharma. Right, but Dermavon isn't a legacy
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  pharma division. It is a hyper-grossed dermatology innovator.
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  Pure play dermatology companies with 70% growth rates often trade at 30 or 40 times earnings.
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  Oh, wow. Yeah. So by keeping Dermavon trapped inside CMS, you are basically
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  forcing a 30x asset to be valued at a 10x multiple.
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  Oh, I get it. It's like having an authentic Picasso painting hanging in the
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  hallway of a nice but otherwise totally normal suburban house.
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  Exactly. Right. Like when the appraiser comes to value the property,
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  they price it based on the square footage, the neighborhood, maybe the new roof.
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  They largely ignore the masterpiece in the hallway. The only way to get the
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  true value of that painting is to take it out of the house and put it in an
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  art auction at Christie's.
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  That is a brilliant way to conceptualize it.
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  The spinoff is taking the painting to Christie's. By spinning Dermavon into
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  its own publicly traded entity, you unlock its standalone value.
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  Which means the market can finally price it correctly. Exactly.
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  The market can now price Dermavon purely against other high-growth peers.
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  And existing CMS shareholders generally receive shares in the new spinoff company.
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  Meaning they directly capture that sudden surge in unlocked market value. Yes.
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  Plus, having its own publicly traded stock gives Dermavon a dedicated currency.
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  They can use their highly valued stock to raise capital, acquire smaller dermatology
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  startups, and offer stock options to poach top-tier scientific talent.
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  Okay, so let's tally the scorecard so far. We have CMS successfully navigating
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  the VBP pricing pressures by pivoting to high-margin innovation.
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  We have them building a robust, de-risked R&D pipeline. We have them unlocking
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  massive shareholder value by spinning off Dermavon. That's a lot of smart moves. It is.
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  But dominating the Chinese domestic market, even with all these incredibly smart
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  moves, still leaves you exposed to a single government's regulatory whims.
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  To achieve long-term sustainable generational growth, you eventually have to
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  build a fortress outside your own borders.
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  And this is where CMS's strategy shifts from domestic defense to international
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  offense. The domestic market provides the cash flow, but the international market
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  provides the long-term security.
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  And the big glaring signal here was their secondary listing in Singapore in July of 2025.
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  They are now dual listed in Hong Kong and Singapore. But surely this isn't just
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  about finding a few new retail investors in Singapore, right?
• 15:41
  Oh, not at all. The capital raise is entirely secondary.
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  If we connect this to the bigger picture, the Singapore listing is the financial
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  and geographic anchor for what CMS calls their industrial internationalization strategy.
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  Industrial internationalization, that's a mouthful. It is, but it means they're
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  not just looking to hire a few sales reps to export boxes of pills overseas.
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  They are meticulously building an entire self-sustaining pharmaceutical ecosystem
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  across Southeast Asia and the Middle East, and they're using Singapore as the central command hub.
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  Okay, so what does that ecosystem actually look like on the ground?
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  It spans the entire pharmaceutical value chain, driven really by two major entities.
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  First, you have Resilient. This is their dedicated commercialization arm. Okay.
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  They are headquartered in Singapore, but they have boots on the ground navigating
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  the wildly different regulatory networks in Malaysia, Vietnam,
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  the Philippines, Indonesia, Thailand, and the UAE.
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  Wow, that's a huge footprint and a lot of different laws to navigate.
• 16:42
  Exactly. Their job is to take these global innovative therapies,
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  get them legally registered in these highly fragmented emerging markets,
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  and build the sales channels to get them to patients.
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  They already have nearly 20 registration applications filed across the region.
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  So Arxilliant is the diplomatic and sales engine.
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  They handle all the red tape and they talk to the doctors. But where are the
• 17:02
  actual drugs coming from? That is where the second entity comes in.
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  Pharmagend. This is an associate company where CMS holds a significant strategic stake.
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  Pharmagand operates as a CDMO. Okay, let's break down that abbreviation.
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  What is a CDMO model? How does that insulate their revenue? A CDMO is a contract
• 17:22
  development and manufacturing organization.
• 17:25
  Think of it like Amazon Web Services, but for the pharmaceutical industry. Oh, interesting.
• 17:29
  If you want to start a software company today, you don't build a massive server
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  farm, right? You just rent space on AWS.
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  In pharma, if you discover a great drug, building a factory to global regulatory
• 17:41
  standards takes years and hundreds of millions of dollars.
• 17:44
  Right. It's a massive barrier to entry. So instead, you hire a CDMO like Pharmagin
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  to manufacture it for you.
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  They have a massive 30,000 square meter manufacturing facility right there in Singapore.
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  They can churn out 1.5 billion tablets a year, and they're building new lines
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  for complex injectables and nasal sprays.
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  So let me make sure I have the architecture of this straight.
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  CMS uses their R&D engine to find or license a cutting-edge drug.
• 18:08
  They use Pharmagand in Singapore to manufacture that drug at global standards. Right.
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  And then they use Exilient to navigate the local laws and actually sell the
• 18:17
  drug across Southeast Asia and the Middle East.
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  It's a completely closed loop. It's a closed end-to-end loop operating entirely outside of China.
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  And from an investor's perspective, this is the ultimate risk mitigation strategy.
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  By building this international revenue stream, they are drastically reducing
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  their reliance on the Chinese domestic market. Because if the Chinese government
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  decides to introduce a new, aggressive round of VBP price cuts tomorrow...
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  CMS now has a rapidly growing, completely insulated revenue stream coming from
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  Indonesia, the UAE, Thailand, and beyond. Incredible.
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  So what does this all mean? We started this deep dive looking at a financial
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  report that, at first glance, seemed to show a company that was really struggling.
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  Profits were down, cash flow from operations dropped, and margins were dipping.
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  But once you unpack the context and look at the actual mechanisms driving those
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  numbers, you see a completely different reality.
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  You really do. You are looking at a company that is willingly taking short-term
• 19:15
  accounting and margin hits.
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  Fundamentally rebuild its architecture for the next two decades.
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  So to summarize for you, the investor listening, CMS took a one-time retroactive
• 19:26
  tax hit that masked their true profit growth.
• 19:28
  Yes, they are facing margin pressures on their older legacy drugs due to government
• 19:33
  procurement programs, but they are successfully replacing that vulnerable revenue
• 19:37
  with a fast-growing portfolio of exclusive, innovative drugs.
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  They are spending heavily on R&D, but it's calculated, backed by a dual-engine
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  model that is already yielding massive NDA approvals like Lumerix.
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  They are actively unlocking shareholder value by taking their star performer,
• 19:55
  Dermabon, and spinning it off to be valued as a hyper-growth asset.
• 19:58
  And finally, they're insulating themselves from domestic policy risks by building
• 20:02
  a massive end-to-end manufacturing and sales empire across Southeast Asia and the Middle East.
• 20:08
  It's an aggressive playbook. And before we wrap up, there is one more piece
• 20:11
  to this strategic puzzle you should really think about. We've talked extensively
• 20:15
  about the mechanics of the Dermabond spinoff.
• 20:17
  But if this spinoff works, if the market actually rewards Dermabond with a massive
• 20:22
  valuation multiple and creates significant wealth for CMS shareholders,
• 20:26
  look closely at CMS Vision.
• 20:28
  Ah, CMS Vision. That's their ophthalmology division, right? Exactly.
• 20:32
  CMS Vision is another highly specialized, rapidly growing unit.
• 20:36
  They recently signed a major deal with Novartis to commercialize established
• 20:40
  blockbusters like Lucentis, and they have their own innovative eye care drugs in the pipeline.
• 20:45
  Wow, so you're saying? If the Dermavon spinoff is a home run,
• 20:48
  we could be seeing the birth of an incubator playbook.
• 20:51
  CMS might no longer be just a pharma company. They could transition into a serial
• 20:55
  incubator that acquires, scales, and spins off high-growth specialty biotech
• 21:00
  firms to continuously unlock spandalone value.
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  It is a trend that every investor watching this stock needs to monitor closely.
• 21:08
  Transforming from a distributor to an innovator and now potentially to a biotech incubator.
• 21:13
  Incredible stuff. We will definitely be keeping a close eye on that evolution. Sure.
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  As always, thank you for joining us on this deep dive. And before we go,
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  we must provide the following statement.
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  This content is intended to search strictly and only as an informational,
• 21:27
  independent, objective summary of recent events and should in no way be interpreted,
• 21:32
  construed, or relied upon by any party as inside information or financial advice.