2696.HK
The Fosun-backed drugmaker’s privatization comes as its stock price has wilted over 60% since its IPO five years ago and it failed to use the listing to raise additional funds.

The Fosun-backed drugmaker’s privatization comes as its stock price has wilted over 60% since its IPO five years ago and it failed to use the listing to raise additional funds

Key Takeaways:

  • Despite sagging shares and a newly announced privatization plan, Henlius’ business has been improving, including a net profit of 546 million yuan last year
  • By fully absorbing Henlius, parent Fosun Pharma stands to directly benefit from the rapid growth of the unit’s high-quality assets

 

By Molly Wen

A public listing is often healthy medicine for high-growth drugmakers in need of capital. But it can also be a burden when investors shun a company’s stock, depressing its valuation and making capital-raising through new share issues unattractive due to low valuations.

Shanghai Henlius Biotech Inc. (2696.HK) falls into that latter class, confirming its intent to privatize on June 24 after its shares were suspended for a month. Among a group of money-losing drug developers that took advantage of a rule change in 2018 paving the way for their listings in Hong Kong, Henlius is one of the first to become profitable thanks to growing sales. Now, it’s also one of the first to abandon its listing.

The company’s journey in the five years since its Hong Kong listing isn’t unusual. Its shares have tumbled over 60% from their IPO price, and it hasn’t been able to use its listing to secure additional equity financing post-IPO. In that context, it makes sense that parent Fosun Pharma (2196.HK; 600196.SH) has decided to bring its offspring back into the fold by privatizing it, according to the company’s June announcement.

Under the deal, investors can receive HK$24.60 ($3.15) for each Henlius share, representing a 37% premium to the HK$18 closing price the day before the May 21 trading suspension. Total cash consideration for the transaction is up to HK$5.4 billion, which is large but still within the more than HK$13 billion in cash held by Fosun Pharma at the end of last year. To avoid draining too much cash, one of Fosun Pharma’s units will use cash plus up to HK$3.7 billion in loans to finance the bid.

Henlius was founded in 2010 by Liu Shigao, Jiang Weidong and Fosun Pharma, which controls about 60% of the company’s shares through three subsidiaries. If the privatization succeeds, all of Henlius’ shares would be controlled by Fosun Pharma, which would then file with the Hong Kong Stock Exchange to delist the company.

The privatization has also touched off a run to the exit door for at least some Henlius executives. The company announced that CFO Li Xinlei resigned on April 30 for personal reasons, and will be replaced by Mao Yingbo.

Decision explained

Henlius was quite forthcoming about its motivation for delisting. It pointed out its stock has slumped and has been thinly traded for much of the time since its 2019 listing. It added it has yet to secure any funding through new share issues since the listing, even though it must pay additional costs to maintain its listing status.

It also cited a confluence of factors, including global macroeconomic challenges, changes in the medical industry and recent trends on the Hong Kong stock market, as undermining its stock price. Accordingly, it believes its current price fails to reflect the fundamental value of the company, to the detriment of its business and employee morale.

Henlius’ heyday as a listed company was short and fleeting. It sold shares for HK$49.60 apiece at the time of its listing in September 2019, raising a tidy HK$3.3 billion. The stock initially fell below the listing price post-IPO, but later shot up to a high of HK$67.05 on a boom in the biomedical sector at the start of the pandemic. But its shares soon began to decline again on pessimism about medical stocks and weak sentiment on the broader Hong Kong stock market, sending Henlius’ shares below HK$10 last year.

While its stock was going nowhere, the company’s actual business was steadily improving. It became the fourth company to lose the “B” marker from its ticker symbol denoting high-risk stocks in 2021. And in 2023, it turned a profit. It currently owns five products approved for sale in China, namely: its Rituximab injection approved in 2019; its Trastuzumab and Adalimumab injections approved in 2020; a Bevacizumab injection approved in 2021; and a Serplulimab injection approved in 2022.

Among those, Trastuzumab was also approved for sale in the EU and the U.S. in July 2020 and April 2024, respectively. The timeline shows the company has been making steady progress in commercializing its products.

Boosting its parent

According to its latest financial statement, Henlius reported operating revenue of 5.4 billion yuan ($720 million) last year, up about 68% from 2022. Equally impressive, it reported a net profit of 546 million yuan, reversing the loss of 695 million yuan the previous year. The company attributed last year’s profit to growing sales as its commercialization drive ramped up, with revenue from those sales reaching about 554 million yuan. Trastuzumab and Serplulimab performed especially well, contributing 2.74 billion yuan and 1.12 billion yuan in revenue last year, respectively.

But investors weren’t extremely impressed. On the first trading day after announcing a positive profit forecast ahead of the full report for 2023, Henlius’ stock rose by just 3.3%. The stock has performed poorly over the longer term, too, leaving it with a price-to-earnings (P/E) ratio of less than 17 times before the trading suspension in May.

Parent Fosun Pharma’s valuation is even bleaker, with a P/E ratio of just 16 times, though its declining revenue and profit as a result of falling sales for pandemic-related products might be partly to blame. In 2023, Fosun Pharma’s revenue fell 5.81% to 41.4 billion yuan, while its net profit sagged by an even larger 36% to 2.39 billion yuan. Henlius was one of the company’s few bright spots in terms of growing revenue, contributing to a 38% increase in Fosun Pharma’s revenue from key anti-tumor and immunomodulatory products.

Thus, Fosun Pharma stands to directly benefit by taking back full control and absorbing the high-quality assets of Henlius, a company whose star is still rising.

Fosun Pharma has said that Henlius is one of its key innovative assets. A privatization of the company will allow Henlius to cast off stock market pressures resulting from its weak stock price, and instead focus on the more important work of innovation, R&D and market expansion. That will ultimately allow Fosun Pharma to consolidate its various innovative biomedical assets and beef up its strategic investment in the group.

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