Tongyuan Kang Pharmaceutical (02410-HK) will be listed for trading tomorrow (August 20). As of 16:00, the dark market rose by 8.26% to HK$13.10, with a turnover of HK$13,000 and a total market value of HK$4.858 billion.

Overview of Tongyuan Kang Pharmaceutical

According to publicly available information,Tongyuan Kang Pharmaceutical is a clinical-stage biopharmaceutical company focusing on small molecule drugs and other innovative drug types, such as PROTAC, to address unmet needs in the field of cancer, especially in the treatment of lung cancer. The company has established a rich pipeline of 11 drug candidates, including two low-risk products: the core product TY-9591 and the key product TY-302. In addition, the pipeline also includes 5 innovative products under clinical evaluation, represented by TY-2136b, and 4 products in the preclinical research stage.

Currently, Tongyuan Kang Pharmaceutical is conducting two key clinical trials in China, both for TY-9591. One is a key Phase II clinical trial, studying TY-9591 as a monotherapy for the first-line treatment of brain metastases of epidermal growth factor receptor (EGFR) mutant non-small cell lung cancer (NSCLC). The other is a registrational Phase III clinical trial, studying TY-9591 as a monotherapy for the first-line treatment of locally advanced (stage IIIb to IV) or metastatic NSCLC with EGFR L858R mutation. According to Frost & Sullivan, TY-9591 is the only EGFR-TKI in the world that is undergoing head-to-head registration clinical trials, directly comparing its efficacy with osimertinib, showing its unique position and potential market competitiveness worldwide.

Years of losses, no products on the market

In recent years, the internal competition in the biopharmaceutical industry has been very fierce, and Tongyuan Kang Pharmaceutical is no exception, facing many challenges. In order to develop innovative products, Tongyuan Kang Pharmaceutical has made huge R&D investments, and therefore continued to lose money. In 2022 and January-September 2023, Tongyuankang Pharmaceutical achieved revenues of 44.242 million yuan and 0 yuan, respectively, while net losses reached 312 million yuan and 266 million yuan, respectively, with a cumulative loss of nearly 600 million yuan in two years. In addition, the commercialization process of innovative drug products is long and uncertain. As of the date of submission of the prospectus, none of Tongyuankang Pharmaceutical's candidate drugs have been approved for listing in China.

A large amount of R&D investment has forced Tongyuankang Pharmaceutical to seek a more difficult way to make a living, and it has "cut off its tail" twice to survive. In 2022, Tongyuankang Pharmaceutical's revenue of 44.24 million yuan mainly came from project cooperation authorization fees charged to Livzon Pharmaceutical. In addition, in January 2024, Tongyuankang Pharmaceutical sold shares of its wholly-owned subsidiary Shanghai Yabao Biotechnology Co., Ltd. and obtained 34.9 million yuan in funds.

However, the continuous losses in the early stage of the biopharmaceutical industry seem to be the norm in the industry, and the probability of turning losses into profits in the later stage is also not low.

Valuation is a mystery

According to publicly available information,Since Tongyuankang Pharmaceutical received angel round financing in 2018, it has gone through 7 rounds of financing, and its valuation has increased significantly. In January 2024, the company completed its last round of financing, with a valuation of 3.085 billion yuan, a 23-fold increase from 130 million yuan five years ago. However, as the valuation grew, the founding shareholders and angel investors began to sell off their shares and cash out.

In December 2021, Chengdu Boyuan divested its shares in the company to Jiaxing Xingren and Hunan Xiangyi, achieving a total liquidation of 30 million yuan. At the same time, Beworth Pharmaceuticals transferred shares to Ji Aining, securing 7.35 million yuan. Furthermore, Changxing Liyuan sold a total of 1.35 million shares to Shanghai Kaicheng and Ji Aining, realizing 5.67 million yuan. Subsequently, during the Series C financing round, which was completed in June 2022, the company's valuation reached 2.425 billion yuan. Notably, in January 2022, Chengdu Boyuan further reduced its equity stake. The shares that were transferred were then resold at a higher price by the recipients within just five months, thereby generating an investment return.

The financial situation of Tongyuankang Pharmaceutical is not optimistic. The company has lost nearly 600 million yuan for two consecutive years, and its current net debt is as high as 767 million yuan. In addition, the company has included a bet agreement with redemption privileges in multiple rounds of financing. As of January 2024, the company has used 80% of the financing funds.

Whether Tongyuankang Pharmaceutical's IPO can be successful is closely related to the overall performance of the Hong Kong stock 18A company sector. Since its launch in 2018, the 18A company sector has become Asia's largest biotech fundraising center, but many companies have not met market expectations in terms of operating performance and stock price performance. From 2018 to 2023, 63 biotech companies listed on the Hong Kong stock market raised a total of more than 120 billion yuan, but the overall losses have wiped out all the IPO financing. By the end of 2023, only nine companies' stock prices were higher than their IPO prices, and most companies' stock prices have been sluggish for a long time with low trading volumes.