Executive Summary / Key Takeaways

• Zhengye Biotechnology Holding Limited (NASDAQ: ZYBT) is undergoing a significant strategic pivot, shifting from its historically dominant swine vaccine segment towards diversifying its customer base and expanding into high-growth areas like household animal and mRNA vaccines.
• The company's financial performance in 2024 reflected this transition, with total revenue declining to RMB186.4 million and gross profit margin contracting to 49%, primarily due to market adjustments in swine vaccines and a strategic reduction in reliance on its largest customer.
• ZYBT's core competitive advantage lies in its established regional expertise, robust R&D capabilities, and high-quality manufacturing, which are being leveraged to develop new, differentiated products, including two Category I New Veterinary Drugs approved in early 2025.
• Significant R&D investments, including an anticipated RMB13.1 million from IPO proceeds for specific new vaccines, are central to the company's future growth, particularly in advanced mRNA vaccine technology, which promises high efficacy and rapid development.
• Investors should monitor ZYBT's execution of its diversification strategy, the success of its new product launches, and its ability to mitigate risks associated with intense competition, customer concentration, and the complex Chinese regulatory environment, including recent NASDAQ compliance issues regarding its annual report filing.

Zhengye Biotechnology's Strategic Evolution in a Dynamic Market

Zhengye Biotechnology Holding Limited (ZYBT) operates at the forefront of China's intensely competitive veterinary vaccine industry, a sector characterized by rapid change and continuous innovation. For over two decades, the company, primarily through its operating entity Jilin Zhengye, has focused on the research, development, manufacturing, and sale of veterinary vaccines, with a foundational emphasis on livestock. This established presence has allowed ZYBT to cultivate a wide distribution network across 28 provincial regions in China and extend its reach to international markets such as Vietnam, Pakistan, and Egypt.

The company's overarching strategy is currently centered on a significant pivot: diversifying its customer base and expanding its product portfolio beyond traditional livestock vaccines into the promising household animal and advanced mRNA vaccine segments. This strategic realignment is a direct response to evolving market dynamics and aims to mitigate risks associated with customer concentration, a notable vulnerability for ZYBT. The company's historical journey, marked by long-term R&D collaborations with leading Chinese universities and research institutes, has been instrumental in shaping its current position and strategic responses to these market shifts.

Technological Edge and Innovation Roadmap

ZYBT's competitive differentiation is rooted in its robust technological capabilities and a proactive approach to innovation. The company operates three state-of-the-art veterinary vaccine production floors with 13 production lines, a quality examination center, and an animal facility, all adhering to Good Manufacturing Practices (GMP) for Veterinary Drugs and ISO standards. This commitment to high production quality ensures reliable, safe, and stable products, which is a critical factor in maintaining market competitiveness.

The company's research and development (R&D) department, comprising 52 experienced employees, has been a prolific source of innovation, securing 45 patents and 16 Registration Certificates of New Veterinary Drugs. ZYBT's R&D efforts are significantly bolstered by long-term cooperative relationships with prestigious institutions like China Agricultural University and Harbin Veterinary Research Institute. These collaborations have led to the successful commercialization of key products, including the Duck Tembusu Viral Disease Vaccine and the Swine Transmissible Gastroenteritis, Porcine Epidemic Diarrhea and Porcine Rotavirus G5 type Vaccine.

A cornerstone of ZYBT's future growth strategy is its expansion into new, high-demand product categories and advanced vaccine technologies. The company is actively developing vaccines for household animals, with clinical trials completed for a Feline Panleukopenia, FCV, Feline Viral Rhinotracheitis Triple Inactivated Vaccine and a Canine Distemper-Parvovirus Vaccine, Inactivated. Furthermore, ZYBT is exploring the cutting edge of vaccine science with mRNA technology, focusing on applications for feline infectious peritonitis, feline immunodeficiency disease, porcine epizootic diarrhea, and porcine reproductive and respiratory disorder syndrome.

mRNA vaccines offer several compelling advantages: high efficacy, rapid development capabilities, lower production costs, and enhanced safety. They simulate natural infection to elicit a stronger immune response and allow for multiple mRNAs to be packaged in a single vaccine, increasing applicability. This technology enables quicker responses to emerging epidemics and avoids the infection risks associated with traditional live or inactivated virus vaccines. While still in early-stage animal experiments, the potential of mRNA technology represents a significant long-term differentiator for ZYBT, contributing to a stronger competitive moat, potentially higher average selling prices (ASPs), and improved margins in the future.

Financial Performance and Operational Dynamics

ZYBT's financial performance in the fiscal year ended December 31, 2024, reflects a period of strategic adjustment and market challenges. Total revenue decreased by 12% to RMB186.4 million (US$25.5 million) in 2024, following an 18.70% decline in 2023. This reduction was primarily driven by veterinary vaccine market adjustments and a strategic realignment of sales practices aimed at diversifying the customer base and reducing concentration risk. The swine vaccine segment, historically the largest contributor, saw its revenue drop from RMB188.9 million in 2023 to RMB157.8 million (US$21.6 million) in 2024, accounting for 84.70% of total revenue.

The company's gross profit margin also experienced compression, decreasing from 55.50% in 2023 to 49% in 2024. This decline was mainly attributed to lower sales prices and unchanged fixed costs, highlighting the impact of market competition and the costs associated with maintaining production capacity during a transitional phase. Net income for 2024 was RMB13.5 million (US$1.8 million), down from RMB37.5 million in 2023 and RMB55.7 million in 2022.

Despite these revenue and profitability pressures, ZYBT demonstrated operational resilience in certain areas. Operating expenses increased modestly from RMB72.5 million in 2023 to RMB74.9 million (US$10.3 million) in 2024. This was influenced by an increase in sales and marketing expenses, driven by higher payroll for sales staff, marketing promotions, and entertainment, partially offset by reduced travel and advertising. General and administrative expenses decreased due to reductions in employee compensation and depreciation. Notably, R&D expenses increased from RMB11.9 million in 2023 to RMB12.8 million (US$1.8 million) in 2024, primarily due to increased material expenses, underscoring the company's commitment to its innovation strategy. The company also reported a reversal of credit loss of RMB1.8 million (US$0.2 million) in 2024, indicating stronger collection efforts.

Liquidity and Capital Allocation

As of December 31, 2024, ZYBT reported cash of RMB18.6 million (US$2.5 million) and restricted cash of RMB1,500 (US$206). The company believes its current cash and expected cash from operating and financing activities will be sufficient to meet its working capital and capital expenditure needs for the next twelve months. Net cash generated from operating activities was RMB41.0 million (US$5.6 million) in 2024, a healthy indicator despite declining net income.

Capital expenditures increased to RMB27.7 million (US$3.8 million) in 2024, primarily driven by investments in patents and office building projects, aligning with the company's strategy to enhance its technological infrastructure and operational footprint. The company successfully closed its Initial Public Offering (IPO) in January 2025, raising approximately US$6.9 million in gross proceeds, with net proceeds of about US$6 million. ZYBT intends to allocate approximately RMB13.1 million of these net proceeds to specific R&D projects, including the Feline Rhinotracheitis, Feline Rhinoconjunctivitis and Feline Panleukopenia Triple Inactivated vaccine and the Replicate-defective Human Adenovirus Type-5 Recombinant Rabies Glycoprotein Vaccine. The company does not anticipate paying cash dividends in the foreseeable future, preferring to retain earnings to finance business expansion.

Competitive Landscape and Strategic Positioning

The Chinese veterinary vaccine market is intensely competitive, with ZYBT facing established players, some of whom are large, well-capitalized companies with greater market share, resources, and experience. Key competitors include global giants like Zoetis Inc. (ZTS), Elanco Animal Health Inc. (ELAN), and Merck Animal Health (MRK), as well as other domestic and regional manufacturers. These larger rivals often possess superior R&D capabilities, enabling faster product development and broader global reach. ZYBT competes on factors such as price, value, customer support, brand recognition, reputation, and product functionality.

ZYBT's strategic positioning leverages its deep regional market expertise and cost-efficient operations within China. This localized approach allows for greater adaptability to domestic regulatory environments and stronger customer relationships. For instance, ZYBT's established export channels to countries like Vietnam, Pakistan, and Egypt provide a competitive edge in these specific emerging markets. However, ZYBT's smaller scale and more concentrated market focus present vulnerabilities compared to the diversified portfolios and global supply chains of its larger competitors. The company's dependence on a single major customer, Muyuan Foods Co., Ltd. (MYF), which accounted for 44.60% of its total revenue in 2024, remains a significant risk, despite strategic efforts to diversify.

Industry trends, such as increasing regulation and public perception of animal health products, also shape the competitive environment. While high R&D costs and stringent regulatory approvals act as barriers to entry, they also favor larger, more resourced players. ZYBT's investment in new technologies like mRNA vaccines is a strategic move to enhance its competitive standing and potentially create new market opportunities, but it must execute these initiatives effectively against rivals with substantial innovation budgets.

Risks and Challenges

ZYBT faces a multifaceted risk landscape. The inherent uncertainties in the interpretation and enforcement of PRC laws and regulations, coupled with the potential for rapid policy changes, could significantly impact its operations and the value of its shares. The Chinese government's substantial oversight and discretion over business activities, including data security and overseas listings, present ongoing compliance challenges. While ZYBT completed its CSRC filing for overseas listing on January 8, 2024, and does not anticipate being subject to cybersecurity review, the evolving regulatory environment, including the Network Data Security Management Regulations, introduces uncertainty. The Holding Foreign Companies Accountable Act (HFCA Act) also poses a delisting risk if the PCAOB is unable to inspect ZYBT's auditors for two consecutive years, although the PCAOB has recently secured access to inspect firms in mainland China and Hong Kong.

Operationally, the company's high customer concentration, with MYF representing a substantial portion of revenue, exposes it to significant fluctuations if this relationship changes. Furthermore, ZYBT currently lacks sufficient product liability insurance, which could lead to material financial harm if product defects cause injury. The company also received a NASDAQ notice on May 20, 2025, regarding the late filing of its 2024 annual report, indicating a non-compliance issue. This is compounded by a material weakness in internal control over financial reporting identified as of December 31, 2024, stemming from a lack of accounting staff with U.S. GAAP and SEC reporting expertise. ZYBT is actively addressing this by recruiting qualified personnel and implementing training programs.

Conclusion

Zhengye Biotechnology Holding Limited is at a pivotal juncture, actively transforming its business model to address market shifts and secure long-term growth. The company's strategic pivot towards customer diversification and aggressive R&D investment in household animal and mRNA vaccines is a clear response to declining revenue in its traditional swine vaccine segment and the intensely competitive landscape. While recent financial performance reflects the challenges of this transition, including revenue contraction and margin pressure, ZYBT's foundational strengths in high-quality manufacturing and established R&D collaborations provide a solid platform for future innovation.

The successful execution of its technological roadmap, particularly in advanced mRNA vaccines, coupled with the expansion of its sales network, will be critical in establishing new revenue streams and strengthening its competitive moat against larger, more diversified rivals. Investors should closely monitor ZYBT's progress in mitigating its customer concentration risk, resolving its internal control weaknesses, and navigating the complex regulatory environment in China. The company's commitment to reinvesting earnings into R&D, as evidenced by its planned IPO proceeds allocation and no foreseeable dividends, underscores its focus on building a sustainable, innovation-driven future in the global veterinary vaccine market.