Innovent Biologics’ HK IPO sells long-term value

The drug developer will be the second biotech firm to list in Hong Kong without any profits or revenues. It believes that China’s underpenetrated biologics market provides a massive opportunity in the long run.

Chinese biologic drug developer Innovent Biologics has decided to press ahead with plans to raise HK$3 billion to HK$3.3 billion ($377 million to $423 million) from an initial public offering in Hong Kong as it started its retail bookbuild on Thursday. It has been unfazed by the recent strong selloff in shares of newly listed biotech firms.

Should it be able to start trading on October 31, as scheduled, the seven-year-old company will become the fourth biotech firm to list in Hong Kong since the local stock exchange amended rules that permit biotech companies without any profits or revenues to sell shares to the public.

Three biotech firms, namely Ascletis Pharma, BeiGene and Hua Medicine, have made their way to the stock market since the new rules came into effect on April 30. Their secondary trading performance, however, has been disappointing.

Cancer drug discovery firm Ascletis Pharma has lost 53% of its value in less than three months since it started to trade on July 31. The Hong Kong-listed shares of Nasdaq-listed BeiGene, which completed a secondary listing in Hong Kong in early August, have traded down 28%, while shares of Hua Medicine were down 9% since its September debut.

Innovent Biologics, which also engages in biologic cancer drug development, is likely to face more headwinds when it comes to securing investment from public investors since it is set to be the second after Hua Medicine to list without any revenues at all.

That suggests the company could be further away from commercialization than Ascletis Pharma and BeiGene, which booked revenues of $1.3 million and $250,000 respectively last year.

The aftermarket performance of Ascletis Pharma and BeiGene shows that earnings visibility may be one of the deciding factors when public investors consider an investment. In addition, the market finds it hard to assume a valuation for a company without any track record of profitability, let alone companies in the science-driven biotech sector which many investors lack understanding.

But this is not to say that Hong Kong investors do not value the entire value chain in the biopharmaceutical sector.

In fact, the IPO of Wuxi Biologics, China’s largest contract manufacturing organisation for biologic and biosimilar drugs, turned out to be one of the most successful deals in recent years. Its shares gained 37% on their debut on June 13 last year, and the company’s valuation has more than tripled since then.

It should be noted, however, that Wuxi Biologics has a relatively more stable business. It helps drug developers to manufacture the product instead of directly engaging in early-stage development and clinical trials, which are often riskier and have higher failure rates.

VALUE PROPOSITION

In any case, Innovent Biologics argues that its value proposition is the strong pipeline of drugs that it currently has in its portfolio, including one antibody for cancer treatment. This already has new drug application (NDA) approval and is expected to launch in China next year.

The company said that the new antibody could address a market of nearly $9 billion currently shared between two medications, Keytruda and Opdivo, and which are developed respectively by Merck & Co and Bristol-Myers Squib.

Innovent Biologics’ 17-strong drug candidates also include three biosimilars in phase 3 clinical trials in China. All of them are expected to be submitted for NDA approval by the end of next year.

The company also argues that China is a hugely underpenetrated market for biologic drugs that provides a massive opportunity for its pipeline. As of the end of last year, China had approved only 26 monoclonal antibodies compared to 70 in the US.

But while public investors may be unsure about the company and the industry, Innovent Biologics has secured a star-studded cast of cornerstone investors to support its Hong Kong listing.

The company’s 10-strong cornerstone investor list includes Sequoia Capital ($60 million), Value Partners ($30 million), Prime Capital ($30 million), Cormorant ($25 million), Lilly Asia ($20 million), Greenwoods ($20 million), Vivo Captial ($15 million) and Rock Springs Capital ($5 million).

Singapore’s sovereign wealth fund Temasek and US investment firm Capital Group, both existing shareholders of Innovent, will subscribe to an additional $20 million worth of shares each through the IPO.

The total cornerstone commitment of $245 million accounts for about 58% to 65% of the IPO size.

Innovent’s Reg S/144A deal features 236.4 million shares at HK$12.50 to HK$14 each on a pre-greenshoe basis, which will give it a 21.1% free float and a post-money valuation of $1.9 billion to $2.13 billion.

The implied valuation represents an increase of about 46% to 61% to the $1.3 billion valuation tag when it sealed its last private funding round in April this year.

Retail and institutional bookbuild for Innovent’s IPO will both close on October 23.

Joint sponsors of the IPO are Morgan Stanley, Goldman Sachs, JP Morgan and China Merchants Securities

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