Hengrui Medicine considers financing in the "overseas capital market", taking another "bold" move in its going-global strategy | Focus Analysis

Hengrui Medicine may be planning to go public in Hong Kong for the second time, which is probably one of the most concerned news in the pharmaceutical industry at the end of October. On the same day when the third quarterly report was released, the market spread the news that Hengrui Medicine will go public in Hong Kong and raise at least 2 billion US dollars (about 14 billion RMB).

In the A-share market, as there are almost no traditional pharmaceutical companies that can compete with it, Hengrui Medicine enjoys a high premium as an industry leader. However, going public in Hong Kong may not bring such a return to Hengrui Medicine. According to the current performance of the "A+H" premium rate, among the companies listed in both places, basically no Hong Kong stocks are more valuable than A-shares. If it really goes public in Hong Kong for the second time, it is likely to have a reverse impact on the A-share stock price and trading.

Therefore, on the day when the financing news came out, Hengrui Medicine's stock price once dropped by 5.7%, and its market value evaporated by nearly 13 billion RMB.

Hengrui Medicine had to come forward to respond: Recently, the company has indeed carried out research, consultation and other preliminary work on matters such as financing in the overseas capital market, but "the specific plan has not yet been determined". The main reason is to deepen the "scientific and technological innovation and international development strategy".

The internationalization exploration of Hengrui Medicine can basically be regarded as a typical case of the "big turn" of Chinese traditional pharmaceutical companies. Initially, Hengrui Medicine still believed in its own strength more, and it tried to establish overseas subsidiaries by itself, and also acquired Chinese innovative pharmaceutical companies whose products were being declared for overseas listing. At this stage, the tuition paid was greater than the harvest.

However, this year, many actions of Hengrui Medicine in going overseas have gradually reversed the market's impression that it has "been suffering losses". From the authorization of the GLP-1 pipeline to ignite the enthusiasm of domestic innovative drugs for going overseas to NewCo, to the recent introduction of a former senior executive of Johnson & Johnson as the "Head of Global Development Affairs", Hengrui Medicine has continuously shown the humble attitude of an established pharmaceutical company actively moving towards a new world.

Nowadays, although the overseas financing plan is still unclear, it can be seen that on the issue of going overseas, Hengrui Medicine has decided to actively embrace more partners, no matter in terms of people, products, forms, or money.

Increasing Capital Investment for Internationalization

At a recent industry conference, Zhang Lianshan, the director and deputy general manager of Hengrui Medicine, who has not spoken formally in front of the media for a long time, said that Hengrui Medicine is indeed changing its overseas strategy. In the past, like the "way of going overseas with the combination of Camrelizumab and Apatinib, we would not do this now because the cost is too high". Instead, "for any product, at any clinical stage, we will seek to cooperate with overseas for development".

Camrelizumab is an independently developed PD-1 by Hengrui Medicine, with outstanding sales performance, and it has also made Hengrui successfully become one of the initial "Four Strong" domestic PD-1s.

However, in the issue of going overseas, Camrelizumab has always lagged behind several similar products. The combination with Apatinib only started to cooperate with overseas enterprises for development when it reached the clinical phase III; in the first half of this year, the US FDA suspended the first-line treatment plan of this combination due to reasons such as defects in the inspection of the production site.

And now, opening up the cooperation space of products means that Hengrui Medicine first gains more initiative.

In terms of product types, it is an industry consensus that Hengrui Medicine has a high R & D efficiency and a wide range of products. In the first half of this year alone, the company is promoting more than 90 innovative products in clinical trials. According to 36Kr, for MNCs that come to China to "sweep up" innovative drugs, the data credibility of traditional pharmaceutical companies is higher, and they are also more experienced in process development, production and other links, and they are still a "golden sign" in the BD market.

In May this year, the combination of three GLP-1 products of Hengrui Medicine was successfully launched overseas in the form of NewCo with a total price of 6 billion US dollars. This is such an example. Different from the traditional BD authorization, NewCo often refers to the establishment of a new company by a domestic enterprise in cooperation with a US dollar fund, into which its original product pipeline is loaded, and a certain amount of cash and equity compensation is obtained.

If some small start-up Biotechs doing NewCo may not be able to solve the problem of the exit of investment institutions, for a mature pharmaceutical company like Hengrui Medicine with sufficient pipelines, this form is equivalent to getting the endorsement of overseas funds and having more opportunities to try and make mistakes. It is much more cost-effective than exploring the international market by itself "painfully".

From the perspective of personnel changes, it can also be seen that Hengrui Medicine currently attaches great importance to impacting the international market. In October, Hengrui Medicine appointed Jens Bitsch-Norhave, a former senior executive of Johnson & Johnson, as the head of the company's global development affairs. He has more than 20 years of work experience in the BD field, and his job location is Boston, USA.

This is the first time that Hengrui Medicine has introduced a foreign executive to be responsible for BD-related matters. In the industry's view, it has also become a signal that Hengrui Medicine is actively integrating into the mainstream pharmaceutical circle in the United States.

With these actions as a bedding, it seems to be a logical thing for Hengrui Medicine to turn its attention to the "overseas capital market".

It's just that no one knows which way Hengrui is going to take this time.

Going Public in Hong Kong May Not Be the Only Option for Financing

In the single quarter of the third quarter of this year, Hengrui Medicine's revenue was 6.589 billion yuan, with a year-on-year growth of 12.72%; the net profit attributable to the parent company was 1.188 billion yuan, with a slight year-on-year increase of 1.91%.

Although the revenue and profit in a single quarter basically no longer show a strong growth trend, from the perspective of the overall structure, Hengrui Medicine may not urgently need a company with a large inflow of several billion US dollars.

First of all, after all, from the quarterly performance, Hengrui Medicine has maintained a revenue of more than 6 billion yuan for four consecutive quarters, and these are real hard cash;

Moreover, if it just simply wants to get money to promote R & D, there seem to be other methods. For example, in the first half of 2024, Hengrui Medicine included the 160 million euros (about 1.2 billion RMB) down payment from the licensing transaction of two products reached with Merck at the end of last year into the income, directly driving a significant increase in the current profit; in the same period, the company disclosed that the total income of more than ten innovative drugs under it was 6.612 billion yuan.

Although the down payment and preferred stock equity consideration of more than 1 billion yuan for the GLP-1 product combination are included in the contract liabilities because the relevant performance obligations have not been completed, according to the convention of confirming income in the past six months or so, Hengrui Medicine may include it in the fourth quarter of this year.

Compared with the long process of IPO review, which method can "get money" faster seems to have an answer.

In addition, a pharmaceutical investor who pays attention to Hengrui Medicine mentioned that if Hengrui Medicine is willing at this stage, it may not be a less cost-effective choice to introduce long-term state-owned capital for endorsement. "For state-owned capital, Hengrui Medicine is undoubtedly a high-quality asset; for Hengrui Medicine, this is equivalent to a cooperation mechanism, at most it is equity dilution, and the enterprise will not change hands."

Therefore, compared with the financial value, the significance of listing in Hong Kong may lie more in adding a window to introduce foreign investment.

This may be more in line with the current development plan of Hengrui Medicine. However, the aforementioned investor believes that introducing such investors may not be a good thing for Hengrui Medicine. "For example, just adding foreign members to several committees such as the Strategic Committee and the Nomination Committee may lead to the company's governance becoming more complicated. If the company really wants to introduce overseas partners, there can be many forms, without affecting the company's governance."

It is worth noting that since its listing more than 20 years ago, Hengrui Medicine has never carried out additional issuance, and neither its operation nor investment decisions have been interfered by any external forces before.

Then, is Hengrui Medicine ready to break the status quo?