Henlius finds elixir in first profits, scraps A-share IPO  

The drug maker said last week it will halt plans for a second listing on China’s STAR Market, the same day it announced its first-ever interim profit since its 2019 Hong Kong listing

Key Takeaways:

• Helius said it posted its first-ever profit in the first half of this year, as it concurrently announced it would abandon its plan to list shares in Shanghai
• The company’s finances are under pressure, with its current assets last year totaling just 2.19 billion yuan – less than half its 5 billion yuan in total current liabilities.

By Molly Wen

A sagging stock market and anemic pace for new IPOs may have led biotech firm Shanghai Henlius Biotech Inc. (2696.HK) to conclude last week that perhaps it wasn’t the best of times for new fundraising with a planned second listing on China’s STAR Market. With that, it closed the curtain on its plan to become a dually listed company in Hong Kong and on China’s A-share market, according to its official announcement to the Hong Kong Stock Exchange.

In a bid to ease concerns in the face of weak investor sentiment that may have derailed its A-share listing plan and pressured its Hong Kong shares, the company also unveiled a positive profit alert the same day it scrapped the A-share IPO. In it, Henlius said it expects to report a profit of 200 million yuan ($28 million) in the first half of 2023, reversing a loss of 250 million yuan a year earlier, and marking the company’s first such profit since going public.

Investors were clearly pleased with the news, sparking a rally that saw Henlius’ stock soar by 30.3% in early trading the next day before finally closing up 18% at HK$13.30.

Henlius credited the first-ever profit mostly to strong sales of its core products, as the number of patients using its Trastuzumab and Serplulimab injections continued to grow. Trastuzumab was approved for sale in the EU and China in July and August 2020. It is used to treat HER2-positive breast and gastric cancers, and is the first product to be commercialized by Henlius’ in-house team for the domestic market. As that team takes shape, domestic sales for Trastuzumab rose 66.7% year-on-year to 538.6 million yuan in this year’s first quarter.

Internal control risks

Henlius listed in Hong Kong in September 2019, raising HK$3.2 billion ($409 million). It tried to tap into capital markets again just six months later when it first filed a separate plan to list on the Nasdaq-style STAR Market in Shanghai. It was aiming to raise 4 billion yuan in that plan, including 2.4 billion yuan for development of a biosimilar and innovative drug R&D lab. Another 700 million yuan was earmarked for a development of a biopharmaceutical industrialization base, with the remainder for working capital.

But while rivals like BeiGene (6160.HK, 688235.SH, BGNE.US), RemeGen (9995.HK, 688331.SH) and InnoCare (9969.HK, 688428.SH) were well received on the STAR Market, Henlius’ plan stalled. The company extended its plan twice over the next two years, but its latest announcement shows it finally decided to throw in the towel. Henlius didn’t explain why it abandoned the effort, simply noting that the move would “not have a material adverse impact on the group’s daily operations” due to its improving finances.

Last year, some 40 companies similarly terminated their IPO listings on the STAR Market, including seven from the biopharmaceutical sector. Among those, 53% took the step due to issues related to verification of financial matters such as related-party transactions, authentication of costs and expenses, and internal financial controls. Another 28% abandoned plans due to scientific-related issues, such as insufficient demonstration of their technological achievements. Another 20% took the step due to compliance issues such as unclear share ownership.

Despite failing to state the reason for ending its A-share plan, a clue may lie in Henlius’ latest annual report released in April, where it disclosed that its auditor had given an opinion that may have reflected poorly on the company. That opinion noted that the company gave $117 million to a private asset manager in 2019 for an investment product that was ultimately problematic. It said part of the investment has yet to be recovered from the asset manager, and that the investment also incurred losses.

In September 2019, Henlius signed up AMTD Global Markets as an investment manager and deposited $117 million into a related investment account. The agreement expired in September 2021, but Henlius still has yet to recover $66.36 million of the sum. The large investment was not disclosed in the company’s annual reports from 2019 to 2021, and didn’t appear until the 2022 annual report as a disclosable transaction that might result in a loss of about 390 million yuan. That seems to show that Henlius may have some work to do improving its internal controls and disclosure practices.

Building commercialization

Henlius now has five products for sale in China for 18 approved indications, leading to healthy sales growth that saw its revenue nearly double year-on-year to 996 million yuan in the first quarter. In addition to its core Trastuzumab product, Henlius has also gotten a boost from Serplulimab, its first self-developed drug.

It began selling Serplulimab in China in March 2022, and the drug has been approved for indications including squamous non-small cell lung cancer (sqNSCLC) and extensive-stage small-cell lung cancer (ES-SCLC). The drug is the world’s first anti-PD-1 monoclonal antibody approved for first-line treatment of small cell lung cancer, and generated about 249.8 million yuan in domestic sales in the first quarter, including more than 100 million yuan in March alone.

Henlius has also performed well overseas. Trastuzumab has been approved in more than 30 countries, including China, Britain, France, Australia, and Singapore. It recorded overseas revenue of 35 million yuan last year, and another 169 million yuan in licensing and R&D services revenue. In February, the drug’s marketing authorization application was also accepted by the Food and Drug Administration (FDA) in the U.S., where its commercialization rights are owned by Accord US as part of a 2021 licensing deal that will give Henlius sales milestone payments.

While its fast-growing revenue will help its overall finances, Henlius still has considerable debt. At the end of 2022, the company had 680 million yuan in cash and bank deposits, contributing to total current assets of 2.19 billion yuan. But its current liabilities were more than double that at 5 billion yuan. Henlius’ price-to-sales (P/S) ratio stands at just 1.6 times, based on its revenue from the past 12 months. That’s far lower than the 10 times for peer Innovent (1801.HK), indicating investors still aren’t sold on the company despite its new profits. That could show management may need to strengthen the company’s internal controls to win over more investor favor.

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