Drug maker Junshi seeks Swiss cure for cash woes

The biotech aims to raise 3.4 billion yuan through Swiss GDRs in its second major fund-raising push in just over six months

Key Takeaways:

• Junshi Biosciences reported dismal results in the first quarter, with operating income plunging nearly 60% and its net loss expanding by 37%
• Hopes of a big revenue boost from an oral Covid drug have been dashed, and the company may not recoup its investment in the short term

By Molly Wen

As local equity markets flounder, Chinese drug companies are heading westwards in their quest for cash. And the preferred destination looks to be Zurich.

Shanghai Junshi Biosciences Co. Ltd. (1877.HK; 688180.SH) is the latest biotech to hop on board the European financing express, using a cross-border stock link.

The maker of drugs to treat Covid and cancer announced last Monday that it plans to sell up to 68 million Global Depositary Receipts (GDRs) on the SIX Swiss Exchange, aiming for proceeds of around 3.4 billion yuan ($475 million) to replenish its finances and support product development.

The company finds itself strapped for cash after a particularly dire set of earnings. In the first quarter, Junshi’s operating income fell nearly 60% to 255 million yuan and its net loss ballooned 37% to 543 million yuan, bloated by 528 million yuan in R&D costs. Junshi was left with just 4.99 billion yuan of cash in its coffers.

In the past, the company made several successful financing trips to the capital markets. In December 2018 it raised HK$2.94 billion yuan ($377 million) through a listing on the Hong Kong Stock Exchange, and followed up in July 2020 with a 4.49 billion yuan bounty from Shanghai’s Nasdaq-style STAR Market.

Since then, it has also raised money through private share placements, most recently in November last year. Junshi netted 3.78 billion yuan that time by issuing new A-shares. As of end-March the company had 3.45 billion yuan of unused funds from that share placement. Judging from the market reaction, investors are not happy to hear that the company wants to dip into the capital pool again, barely half a year after its last funding effort. The company’s Shanghai and Hong Kong share prices fell sharply at the news, closing down more than 5%.

This time Junshi Bio has decided to go the GDR route, via Switzerland, to reboot its finances, joining a growing list of Chinese companies attracted by easier listing requirements and faster approvals on the European exchange.

The GDRs are certificates issued by a custodian bank that represent Chinese yuan-denominated shares. After a lock-up period of 120 days, the certificates can be converted into the underlying stock and sold on Shanghai and Shenzhen exchanges. The relatively straight-forward procedures for approvals and issuance can usually be completed within three to four months. The cost of issuing Swiss GDRs is also lower than for other overseas IPOs.

So far this year, pharmaceutical companies CanSino Biologics (6185.HK; 688185.SH) and China Meheco Group (600056.SH) have also announced plans to issue GDRs in Switzerland.

Slow sales of Covid drug

In the first quarter, most of the company’s operating revenue came from an anti-cancer drug, Toripalimab, approved for use since 2018. The PD-1 antibody brought in 196 million yuan in the quarter, almost 80% of overall revenue. Sales have been rising as the drug was approved for more conditions, but the effect could be waning. In the first quarter the drug’s sales rose nearly 78% from the same period a year earlier, but the revenue amount was below the 218 million yuan and 214 million yuan in the third and fourth quarters of last year.

Meanwhile, sales of its once hotly anticipated oral drug to treat Covid, VV116, are far below expectations. After gaining marketing approval from regulators in January, the drug generated sales of just 11.5 million yuan in the first quarter.  That’s a far cry from the bumper income predicted by some analysts when the Covid pandemic was raging.  Guosheng Securities, for example, once forecast that the drug could rack up annual sales of 17.6 billion yuan or more.

Junshi invested heavily to develop the Covid oral drug, exciting investors along the way, but by the time the product came to market the opportunity for windfall profits had largely passed, as the pandemic ebbed. 

The company said in a previous financial report that it had spent 391 million yuan on R&D for the drug, with total investment expected to reach 880 million yuan. Based on current sales, the company looks unlikely to recoup its investment in the short term.

Junshi’s other commercialized drugs are an anti-inflammatory injection, Adalimumab, and a product used in a combined antibody therapy for Covid. Adalimumab only gained marketing approval in March last year and was first prescribed two months later. Being still relatively new to the market, it managed only 29.08 million in sales revenue.

Junshi’s Covid-neutralizing antibody, used in combination with a drug from Eli Lilly (LLY.US), gained emergency-use approval from U.S. drug regulators in early 2021, boosting the Chinese company’s revenues that year. But the U.S. regulatory body narrowed the scope of the license last year, saying the product was not very effective against the Omicron variant. Demand for Junshi’s monoclonal antibody, Etesevimab, nosedived and the product is no longer generating revenue.

Accelerated overseas push

Junshi has been losing money for years, and its big bets on new drugs have yet to pay off. Some industry experts have expressed doubts about whether the company can achieve a self-sustaining business dynamic without external financing.

Aside from its handful of products on the market, the company does have nearly 50 drugs in the pipeline in the areas of oncology, autoimmunity, metabolic disease and neurology. Three new drugs are in Phase III clinical trials and two are at the Phase II stage. A further 24 are in Phase I trials and 20 are at the pre-clinical stage. The potential roster of drugs is substantial, but the huge cost of developing them is weighing heavily on company finances.

Small wonder that Junshi has been in active pursuit of overseas revenue.  On Jun. 1, the company announced its manufacturing site had passed a pre-license inspection by U.S. drug regulators, and its partner Coherus BioSciences Inc. (CHRS.US) was preparing to launch the Toripalimab cancer drug in the U.S. market. Coherus expects the drug to be approved in the third quarter of this year, potentially becoming the first Chinese-developed PD-1 immunotherapy drug to launch in the United States.

Junshi also announced a joint venture with Rxilient Biotech to develop and sell Toripalimab in nine countries in Southeast Asia.

The disappointing return on drug investments so far has battered Junshi’s share price, which has fallen more than 75% from a record high reached in February 2021. The company’s latest price-to-sales (P/S) ratio is about 13.8 times, slightly below the 14.8 times for innovative drug leader Beigene (BGNE.US; 6160.HK; 688235.SH).

But Beigene’s earnings are in better shape, with revenues rising 57% in the first quarter, although the firm was still in the red.  Junshi is grappling with weak sales of its high-investment drugs, an uncertain push into overseas markets and a cash-hungry research pipeline. Investors may be left wondering whether the company can serve up a positive plot twist to inspire fresh confidence for the future.

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