Key Takeaways:

InnoCare Pharma’s A-share IPO will make it the fourth innovative pharma company with shares traded in Hong Kong and on the mainland’s STAR Market
The company is flush with cash and continues to raise money at every opportunity to finance its R&D

By Molly Wen

China’s Nasdaq-style STAR Market has become fertile ground for fundraising by innovative yet profit-challenged pharmaceutical companies since its launch in 2019. Some 33 biomedical companies went public there last year alone, accounting for 20% of all new listings in 2021.

That honey pot has attracted yet another taker from the pharma space, with InnoCare Pharma Ltd. (9969.HK) announcing it received the regulatory green light for its planned IPO there last week. The company comes from a growing field of offshore-listed innovative Chinese drug makers tapping investors for cash to fund operations in their long drive to profitability. Many have discovered they can also raise cash more cheaply in China, where pharma companies are generally rewarded with higher valuations than their offshore-listed counterparts.

Following the April 12 receipt of regulatory approval for its IPO application, InnoCare is expected to submit registration information soon and make its trading debut not long afterwards. It will become the fourth Hong Kong-listed innovative pharmaceutical company to achieve an “A+H” dual listing, with shares traded in both Hong Kong and on the mainland A-share market.

The company specializes in molecular drugs targeting cancer and autoimmune diseases. Its key drug Orelabrutinib was conditionally approved for sale in China in December 2020. It began commercializing the drug last year, fueling a huge jump in its revenue to 1.04 billion yuan ($163 million) last year from just 1.4 million yuan in 2020.

Orelabrutinib raked in 241 million yuan last year from product sales and another $125 million from an up-front license-out payment. That payment came after the company granted the exclusive international license for the drug to Biogen last July. It could receive up to $813 million in additional milestone payments associated with the drug’s clinical development and commercialization.

That licensing revenue helped InnoCare narrow its losses from 400 million yuan in 2020 to 66.7 million yuan in 2021. But such income is a one-time source, and the company still operates deeply in the red. Its financials show that its outstanding accumulated losses reached 3.56 billion yuan by the end of last year.

Fundraising frenzy

InnoCare has proven quite adept at generating revenue and raising funds, leaving it flush with cash even as it gets set to raise more. It raised HK$2.09 billion ($268 million) from its March 2020 Hong Kong IPO. A year later it obtained another HK$3 billion by selling shares to institutional investors including Hillhouse Capital and Vivo Capital, which snapped up 211 million shares at HK$14.45 apiece. When it first filed for its STAR Market IPO last September, the company said it aimed to raise around 4 billion yuan.

All that fundraising has filled its coffers, which contained nearly 6 billion yuan at the end of last year, representing 80.51% of its total assets. The company said in its latest IPO prospectus that 1.2 billion yuan of the 4 billion yuan it aims to raise would be stashed away as more liquid cash, which it says is needed to optimize its capital structure and ensure sufficient operating capital for its future development.

Most innovative drug makers regularly raise money to fund their R&D and commercialization efforts, and InnoCare is no exception. In 2019, 2020 and 2021, the company spent 230 million yuan, 420 million yuan and 730 million yuan, respectively, on R&D alone.

Orelabrutinib aside, the company’s other products under development include 10 in different stages of clinical trials, and four to five in the pre-clinical trial phase. They cover a range of conditions, including angiomas, solid carcinoma and autoimmune diseases. The clinical trials needed to bring such drugs to market are a primary component of the company’s R&D expenses, leading it to budget more than half of the money raised from the STAR Market listing to R&D.

The company has also been building production facilities at a fast clip, including one in the southern China city of Guangzhou that is almost complete and getting ready for production of Orelabrutinib in the first half of this year.

Better value in Shanghai

InnoCare has two big-gun co-founders in Cui Jisong and Shi Yigong. Cui was previously general manager of BioDuro (Beijing), a company under contract research organization (CRO) PPD Inc. (NASDAQ:PPD), and a former head of the research team at U.S. pharmaceutical giant Merck (NYSE:MRK). Shi is a world-renowned structural biologist who once taught at Princeton and was vice chancellor of Tsinghua University, China’s leading sciences school. His other titles include membership in the prestigious Chinese Academy of Sciences and founding president of West Lake University in East China’s Zhejiang province.

The company’s STAR Market IPO would make it the fourth money-losing drug maker with A+H listings, alongside Shanghai Junshi Biosciences (1877.HK; 688180.SH), BeiGene (NASDAQ:BGNE) and RemeGen(9995.HK; 688331.SH).

Such companies tend to get higher valuations in the A-share market than Hong Kong. Shanghai Junshi Biosciences, BeiGene and RemeGen have price-to-sales (P/S) ratios of 19, 17 and 14 times, respectively, on the STAR Market, versus 9, 16 and 12 times in Hong Kong. Using an average of 17 times from the other three companies, InnoCare can expect a STAR Market valuation of about 17.7 billion yuan – roughly 30% higher than its current Hong Kong valuation.

The STAR Market has been very welcoming to innovative pharmaceutical companies. When Shanghai Junshi Biosciences listed there in July 2020, its price surged by three times soon after the market opened and closed up 172%, making it the first company in its category to break the 100 billion yuan valuation mark. But the high concentration of retail investors in the STAR Market has made the stock highly volatile, and its valuation is now down to 77 billion yuan.

With the early honeymoon period now over, the STAR Market has become a much harsher place for these pharmaceutical companies. When RemeGen went public last month, its shares sank from the start and finished their first day down 14.9%, a far cry from Shanghai Junshi Biosciences’ glorious opening.

Is InnoCare, with its big-name founders, destined to soar like Junshi or slump like RemeGen? The former looks less likely, at least for now, given currently cool sentiment towards the broader medical sector.

InnoCare Pharma Goes Back to Funding Trough With STAR Market Listing