6855.HK
The Chinese drug developer put a rocket booster under its share price after enlisting a Japanese rival as a new equity partner and unveiling plans for a U.S. listing.

The Chinese drug developer put a rocket booster under its share price after enlisting a Japanese rival as a new equity partner and unveiling plans for a U.S. listing

Key Takeaways:

  • Under the partnership, Japan’s Takeda International gets an option to market Ascentage’s promising leukemia drug outside of China
  • Without the capital infusion from Takeda, Ascentage was facing a liquidity crisis with just a year’s worth of cash

 

By Molly Wen

In the pioneering drug sector, where companies spend vast sums on untried treatments, hopes can be easily dashed but fortunes may sometimes change overnight.

A case in point is Ascentage Pharma Group International (6855.HK), which was one of the first companies to take advantage of relaxed listing rules in Hong Kong for innovative biotechs. However, the stock has struggled since the company’s 2019 IPO, losing more than half of its initial value.

But on June 14 the company fired up the market with news of an equity and drug partnership with Japanese pharmaceutical company Takeda International (4502.JP), fueling hopes of a bright future for a leukemia drug developed by the Chinese firm.

The agreement gives Takeda an exclusive option to develop and market the drug, olverembatinib, outside of China and Russia, for an initial payment of $100 million. If the option is exercised and regulatory approval granted, Ascentage stands to get milestone and other payments worth up to $1.2 billion, plus a double-digit percentage of future sales.

The pact has turned Takeda from a rival, with a competing leukemia drug on the market, into an ally. The Japanese company has taken a 7.73% equity stake in Ascentage to become its second-biggest shareholder, buying about 24.3 million newly issued shares for $75 million. The purchase price was about 25% above the average closing value for the 20 trading days before the subscription, signaling confidence about a return on investment. Ascentage said 90% of the funds would be used to develop olverembatinib and another leukemia product, APG-2575.

On the same day, Ascentage also announced it had filed a registration form to the U.S. Securities and Exchange Commission to prepare for a secondary listing in the United States.

The flurry of announcements sent Ascentage shares soaring, as investors cheered the improved prospects for the company’s flagship drug and the much-needed relief from a looming liquidity crunch. The share rose 11.8% on June 14 and jumped another 17.14% over the next three sessions, hitting a one-year trading high of HK$29.8 on June 17.

It is worth noting how the deal differs from standard licensing-out agreements. Under the arrangement, Takeda gets first refusal on rights to develop and market the Chinese drug overseas. Takeda has a competing drug, ponatinib, in the same class of third-generation BCR-ABL inhibitors and could face a higher risk of an antitrust inquiry with a typical licensing deal.

Could be a win win

BCR-ABL inhibitors target a chronic type of leukemia linked to a defective chromosome. Takeda’s ponatinib was approved for U.S. marketing in 2012 as the world’s first third-generation BCR-ABL inhibitor. But U.S. regulators only allowed the drug to be sold on condition that consumers were warned about its potentially toxic side effects. This caveat has limited take-up of the drug, which has not yet been able to reach $1 billion in annual sales.

The drug’s patent is also due to expire in 2026 to 2027. The Chinese drug offers Takeda the opportunity to leverage its sales team and resources, and to maintain its market share in the field of leukemia treatment.

Ascentage’s drug, olverembatinib, was approved for sale in China in 2021 to treat adult leukemia patients, overcoming drug resistance issues associated with first- and second-generation inhibitors. Clinical data indicate the drug has the potential to outperform other treatments for some cases of chronic myeloid leukemia. Ascentage brought the product to the Chinese market along with Innovent Biologics (1801.HK), and the drug was included in the national medical insurance scheme from early 2023. Its annual sales are still less than 200 million yuan ($27.50 million).

Ascentage’s drug gained fast-track status in the United States and was approved for Phase Three clinical trials there in February this year. It was also designated an orphan drug by U.S. and EU regulators, defined as a treatment for rare conditions that can qualify for tax breaks or other help to reach the market.

The cash infusion and expertise from Takeda should help Ascentage make headway with its overseas clinical trials, which would in turn improve its chances of a successful U.S. share sale. Any share premium would also pay dividends for Takeda on the equity deal.

Up until now, Ascentage was struggling to shore up investor confidence. It posted operating revenue of just 222 million yuan for 2023, hurt by a sales drop-off in the second half of the year. At year-end the company was sitting on just 1.04 billion yuan in cash, against a net loss of 926 million yuan. Without any new funding, it risked running out of cash after a year. The partnership with Takeda came as a welcome boost, although the company’s share price is still down around 7 percent year to date, even after the powerful rally.

Ascentage has plenty of promising drug pipelines as a specialist in blood cancers.  Its price-to-sales (P/S) ratio reached 32.7 times after the share surge, a hefty premium over Innovent Biologics with a ratio of just nine times. However, it will take a major investment to get the core leukemia drug into overseas markets. And questions remain over the licensing deal with Takeda and the prospects for a U.S. flotation. After a heady couple of weeks, investors will need to keep a cool head and pay close attention to further news.

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