Company’s shares plunge 20% on first trading day, but rebound slightly the next day, following listing that raised $200 million

Key Takeaways:

  • Broncus Holding has raised $200 million from its Hong Kong IPO, giving it enough cash to fund its operations into early 2023
  • Investors are betting company can quickly ramp up sales for its core pulmonary devices, most of which have been approved or are near approval in China, the U.S. and Europe

By Doug Young

Seven months.

That’s how much time medical device maker Broncus Holding Corp. (2216.HK) appears to have gained for itself from its new Hong Kong IPO that raised HK$1.55 billion ($200 million) last Friday. Based on its IPO prospectus filed back in May, the company looks like a classic underachiever just waiting to blossom when the world discovers its devices used to detect and treat lung diseases, including lung cancer.

Whether or not the company will remain in business until that day remains the question of the moment. It certainly seems to have promising technology, which could make it an attractive acquisition target even if it can’t commercialize its products by itself. It also has an important backer that could provide more funding in U.S. giant Intuitive Surgical (ISRG.US), which owned about 6% of the company before the IPO, according to the prospectus.

Truth be told, investors seem quite bullish on Broncus when one considers its tiny revenue, which took a major hit during the pandemic last year. Reflecting that bullishness, the company managed to price its IPO shares at HK$18.70, representing the top end of its previously indicated range of HK$17.20 to HK$18.70.

Even after a disastrous trading debut that saw its shares fall 20% on their first day, the company, which is losing money, trades at an extremely lofty price-to-sales (P/S) ratio of 125, based on its pre-pandemic sales level from 2019. By comparison, Intuitive Surgical trades at a P/S ratio of 28, also based on 2019 sales. Hong Kong-listed Chinese medical device maker Suzhou Basecare Medical (2170.HK) trades at a similar P/S of about 34, which is also well below Broncus’.

We’ll look shortly at some of Broncus’ financials, and also the broader market forecasts for its products, to try to understand why investors are relatively bullish on the company. We should also add that after the first day plunge, the shares bounced back slightly on Monday in Hong Kong, and were up 2.5% early in the morning session.

But before we go into the bigger-picture numbers, we’ll start with one that is perhaps less-visible but matters the most for a young startup like Broncus, namely its cash on hand. Broncus said it had a paltry $50 million in cash at the end of March, which would be enough to keep the company financially viable for 17.6 months, based on a cash burn rate of twice its level of 2020.

It said it planned to use 10% of its IPO proceeds for general corporate purposes, meaning it got another $20 million from the listing to continue funding its operations. That would translate to another seven months of operations, which is where we got the figure given at the top of this review.

Put differently, including the IPO proceeds, the company had enough cash to fund its operations for roughly two years from March this year, meaning it will almost certainly need to return the market with a secondary share offering or find another way to raise cash either late this year or sometime in 2022.

Big Potential

Our guess is that the company probably won’t have too much difficulty raising a bit more money to continue funding its operations, as it does appear to be sitting on a relatively attractive portfolio of intellectual property and also has approvals to sell most of its devices in the U.S., Europe and its home China market.

The market for the company’s core interventional pulmonology navigation devices in China grew from almost nothing to a relatively modest $14.7 million in 2019. That figure is expected to grow almost tenfold to $142.3 million by 2024, according to third-party data cited in Broncus’ prospectus. One of its other key areas for interventional pulmonology diagnostic consumables is expected to see slower but still sizable growth in China, roughly doubling from $23.6 million last year to $43.1 million in 2024.

Broncus points out it is China’s dominant player for its pulmonary devices with 54% of the market in revenue terms and 62% in terms of units sold.

The company also points out most of its devices have been approved or are nearing approval in the U.S. and Europe, even though those markets currently aren’t major revenue contributors. Presumably the well-connected Intuitive Surgical could help it in developing those markets.

All that said, we’ll spend the rest of this space looking at Broncus’ actual financials, which as we’ve said above, look quite modest. The company, which was founded in 2012 in Hangzhou, posted just $3.26 million in revenue last year, representing a 60% tumble from 2019. It blamed the global pandemic for the huge drop, and its prospectus shows that most of the decline came from a big drop in business from its distributor partners. By comparison, its business selling directly to hospitals held up much better during the pandemic.

An updated version of the prospectus shows that Broncus’ sales indeed began to recover this year, nearly tripling in the first four months of 2021 to $1.6 million from just $520,000 for the same period the previous year. Still, on an annualized basis, the figure from the first four months would translate to just $4.8 million for all 2021, which is still well below the roughly $8 million in sales for all 2019. The company does note that the first quarter of the year is typically a slow one, and that the fourth quarter is usually the strongest.

In terms of bottom line, the company posted a net loss of $48.8 million last year, widening from a $32.6 million loss in 2019. For the first four months of this year its loss widened to $13.8 million from $10.3 million a year earlier.

At the end of the day, people are clearly looking at Broncus as a company that could be on the cusp of making big bucks from its products. The pandemic dealt a setback to that plan, setting it back at least a year or possibly two. But with that factor now behind it, all eyes will be watching closely to see if it can quickly rev up revenue and start narrowing its losses in the next couple of years.

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