Xuanzhu Biopharm set for spin-off in Hong Kong IPO

The cash-strapped company has launched a drug to treat duodenal ulcers and is seeking approval for other products, but is up against a host of competing medicines

Key Takeaways:

• Xuanzhu Biopharm is suffering severe cash-flow problems due to limited drug revenues
• Its parent company, Sihuan Pharmaceutical, is also battling financial pressures and has been stuck in the red since 2022

By Molly Wen

Having tried one remedy without success, drug developer Xuanzhu Biopharm is seeking another solution for its financial troubles.

The company has filed to list its shares on the Hong Kong Stock Exchange, just six months after giving up an attempt to join Shanghai’s STAR Market, as it looks for ways to finance ongoing work on new drugs for cancer, digestive ailments and liver disease.

The listing switch-up also highlights the determination of the parent company, Sihuan Pharmaceutical Holdings Group (0460.HK), to hive off the innovative drug unit and focus its own efforts on the market for anti-aging injections and skin serums.

Xuanzhu Biopharm submitted its Hong Kong IPOapplication last Monday, with CICC as the sole sponsor.

On the same day, its parent company issued a statement about the spin-off, saying direct access to the capital markets would give Xuanzhu Biopharm more financial flexibility as it seeks to further develop its  drug business.

Founded in 2008, Xuanzhu Biopharm has conducted research into a range of conditions, resulting in 10 drug pipelines. One product is already on the market and approval for another two drugs is pending, while the rest are still at pre-trial or clinical trial stages. The small-molecule drug anaprazole sodium got the green light as a treatment for duodenal ulcers in 2023 and further approval is being sought for use against a severe type of acid reflux.

Anaprazole is China’s first homegrown proton pump inhibitor (PPI), a type of drug that controls the production of stomach acid, but the market is already crowded, with seven available products including five cheaper generic drugs. According to research cited in the prospectus, China’s annual market for oral PPIs has consistently exceeded 10 billion yuan ($1.38 billion). However, anaprazole only made up a fraction of that market in the first half of the year, generating revenue of just 16.03 million yuan for the company despite being included in the drugs catalog for China’s health insurance scheme.

The other two products making relatively fast progress are both small-molecule cancer drugs, XZP-3287 and XZP-3621. The company has filed for marketing consent and expects to get the regulatory go-ahead for both drugs in 2025, for the treatment of advanced breast cancer and a type of lung cancer. However, the drugs will have to fight it out against many competing products.

The investment needed to get new drugs onto the market has pushed the company’s finances into the red for many years. Xuanzhu Biopharm made net losses of 512 million yuan in 2022 and 301 million yuan the following year. In the first half of 2024 the loss came in at 111 million yuan. R&D spending during these periods was 401 million yuan, 239 million yuan and 74.43 million yuan. The sharp fall in spending could point to a financing crunch. By the end of June this year, the firm’s cash and cash equivalents had fallen 89.5% to 25.34 million yuan from the same period a year earlier. Data in the prospectus showed that the company had enough operating funds to cover at least 125% of likely costs in the next 12 months.

With a stake of 56.47% in the drug developer, Sihuan Pharmaceutical is the main provider of its operating capital. Xuanzhu Biopharm also raised capital through an A and B Series in 2021, gaining a post-financing valuation of 3.9 billion yuan. In September 2022 the company launched an application to list on the STAR Market, but the effort stalled in March 2023 after two sets of inquiries by the Shanghai Stock Exchange. The company finally withdrew the application in May this year.

Parental money troubles

In hiving off the drug company as a separate entity, Sihuan Pharmaceutical said it was aiming to focus on cultivating the high-growth market for medical aesthetics and other new businesses. The parental finances themselves are grounds for concern. Sihuan Pharmaceutical’s annual revenue has been falling, pushing the company into loss territory since 2022. Revenues came in at 2,181 million yuan and 1,861 million yuan in 2022 and 2023, followed by 950 million yuan in the first half of 2024. Meanwhile, net losses were 1,915 million yuan, 54.02 million yuan and 33.42 million yuan over the same timeframe.

Sihuan Pharmaceutical was once one of China’s biggest suppliers of cardiovascular and cerebrovascular prescription drugs. However, margins on generic drugs have been squeezed by China’s collective procurement process, while novel drugs have not been able to take up the slack.  Sihuan Pharmaceutical has therefore turned its attention to the growing market for injectable beauty treatments and skin repair products.

The company gained the Chinese rights to market the botulinum toxin Letybo, an anti-wrinkle treatment, and has also launched hyaluronic acid products and collagen gels for skin plumping and repair.  In the first half of this year, revenues from the aesthetics business rose 66.4% to 323 million yuan from the year-earlier period, taking the proportion of overall turnover to 34%.

Before the IPO application, most of the investors in the B Series financing round sold their stakes to controlling shareholder Sihuan Pharmaceutical for 755 million yuan, yielding an annual return rate of 8% over the 2021 purchase price, according to the prospectus. The sellers included institutional investors such as Sunshine Life Insurance and BOCI Capital, but not Shanghai Yunxin Venture Capital.

The divergent business strategies, as Sihuan Pharmaceutical doubles down on the beauty market, put a question mark over group synergy. By spinning off Xuanzhu Biopharm, the parent can ease the financial pressures and plough more resources into its priority business.

However, post-IPO returns for Xuanzhu Biopharm will depend heavily on the launch of new drugs. Investors will have to wait and see how that pans out.

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