Sunho Biologics gets green light for downsized IPO

The loss-making developer of cancer immunotherapies raised just enough financing last year to cross the valuation threshold for a Hong Kong listing

Key Takeaways:

• Sunho Biologics has no revenue or licensing income to draw on, making a loss of 133 million yuan last year as all its products remain at the R&D or clinical stage
• The company is rumored to be targeting just $50 million in proceeds, only a third of the $150 million it was thought to be seeking in its first IPO attempt last year

By Fai Pui

The market conditions may be dire, but Chinese drug developer Sunho Biologics Inc. needs the cash.

The loss-making biotech has secured the green light for an IPO, but the Hong Kong market is in a prolonged slump and has hardly been fertile ground for new listings. In the first quarter of the year, only 12 companies managed to debut in Hong Kong, raising just HK$4.7 billion ($600 million) between them. Those were the lowest quarterly IPO takings in 15 years, placing Hong Kong 10^th in the global rankings behind emerging markets such as India and Saudi Arabia.

Rising U.S. interest rates have pushed up the cost of raising funds, leaving cash-hungry start-ups with limited financing options. Many pharmaceutical companies working on novel drugs have been draining their internal coffers to stay in business long enough to deliver clinical results.

However, Sunho Biologics did manage to secure just enough external financing last August to qualify for a further cash infusion through a stock market listing.

The company, which is developing therapies to treat cancer and immune disorders, enlisted help from the institutional investor Efung Capital, which specializes in biomedicine. The fund bought a 14.89% stake for 210 million yuan ($29 million), pushing the biotech’s valuation to 1.41 billion yuan, equivalent to about HK$1.53 billion.

The financing lifeline enabled the company to cross the valuation threshold set by the Hong Kong Stock Exchange for unprofitable IPO applicants from the biotech industry. The rules require candidates to have achieved a market capitalization of at least HK$1.5 billion, with enough working capital to cover 125% of expenses for at least 12 months from the date of the listing documents. Nevertheless, Sunho Biologics faltered in its first listing attempt and had another go in February this year. Finally on April 15, its IPO application was successful.

Sunho, founded in 2018, needs deep pockets to continue working on cutting-edge treatments such as immunocytokines, proteins that bind to tumor cells and help activate the body’s defenses against cancer. At the time of the first IPO filing last August, market watchers were expecting the company to seek as much as $150 million. The IPO scale will not be revealed until the listing process is formally initiated, but this time around the likely target is estimated at just $50 million, given the challenge of raising money in a depressed market.

Innovative drug stocks were once all the rage with investors. Despite huge R&D costs, companies could hit the earnings jackpot if they managed to bring just one or two viable products to market. But the endeavor is not for the faint-hearted, as investors could easily lose their big bets. On the front page of the prospectus, Sunho does not mince its words about the risk, stating: “There is no assurance that we will ultimately be able to develop and market our core products or any of our pipeline products successfully.”

According to the company, six of its nine pipelines have already reached clinical trial stages. Three of them are core products, including two immunocytokines and an ADCC enhanced antibody, which also aims to boost the body’s immune response. The prospectus describes Sunho’s products as the world’s fastest developing immunocytokines for the clinical treatment of cancer patients.

The substances are fusion proteins designed to recognize tumor-associated antigens and deliver a payload of cytokines, which control cells in the immune system and blood. Immunocytokines can bridge tumor cells and white blood cells, rather like bispecific antibodies. By activating various aspects of the immune system, they have the capacity to mount an enhanced, intensive attack on cancer lesions.

Raising funds for clinical trials

At present, all Sunho’s products are still under development or are in clinical trials. The company’s 21 million yuan in revenue last year was mostly derived from interest on bank deposits, government subsidies and production contracts. But the income was dwarfed by bills for R&D expenses alone, coming in at 53.17 million yuan and 43.04 million yuan in the last two years. The company has six products in either the first or second stages of clinical trials that would require a wad of cash to bring to fruition. Sunho was upfront in the prospectus about its funding needs, saying that all the IPO money would go towards completing trials for its three core products.

In the absence of product revenue, Sunho suffered losses of about 52 million yuan and 133 million yuan in the past two years. By the end of 2022 the biotech’s cash and cash equivalents were down to just 1.82 million yuan, simply not enough to cover day-to-day expenses. The infusion of 210 million yuan from Efung Capital last year kept the company going. But the cash reserves had dwindled to 125 million yuan at the end of last year and dropped further to about 102 million yuan at the end of February, while the company faced 398 million yuan in short-term obligations, of which financial liabilities recorded at fair value stood at 317 million yuan.

The only other unprofitable biotech to list in Hong Kong this year is Qyuns Therapeutics (2509.HK), which is developing therapies for autoimmune or allergic conditions. It went public at a market value of nearly HK$4.4 billion, achieving a stunning debut when its price rose 23.7% on the first day of trade. However, among the seven unprofitable biotech stocks that listed in Hong Kong last year, only one has been able to reward investors with a price gain. Sichuan Kelun-Biotech (6990.HK) has seen its stock price more than double while all the rest have fallen below their listing price, now trading at discounts ranging from 37% to 69%. In this austere environment, it is hard to get investors excited about biotech stocks, whatever their potential.

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