InSilico seeks IPO boost to get AI drugs over the line

The drug developer has raised around $400 million in seven rounds of financing. But after burning through cash, the company needs fresh capital to sustain its work on AI-assisted drugs

Key Takeaways:

• InSilico Medicine’s revenues rose 70% last year to $51.18 million, with $39 million of that coming from the licensing-out of drug projects
• None of the company’s AI-enabled drugs have yet passed all three phases of clinical trials. If the process stalls, the company’s market value will suffer

By Molly Wen

A Chinese biotech is bidding to cross the next major frontier in medical science: using artificial intelligence to deliver marketable drugs.

To do so, InSilico Medicine Cayman TopCo needs to keep filling its deep pockets and has turned to the Hong Kong stock market for an IPO funding boost.

The AI drug developer made a listing application last June, but the process lapsed. The company has now submitted an updated prospectus and will compete with fellow biotech XtalPi, which filed for a Hong Kong IPO late last year, to launch the first AI-driven pharmaceutical stock in the Asia-Pacific region.

Founded in 2014, InSilico has become one of the pioneers of the AI-powered drug industry.  Its revenue grew 70% in 2023 from the previous year, of which $39 million came from licensing its discoveries or technologies to external partners. Last year it struck two licensing-out deals with overseas counterparts worth up to $1.5 billion. Of those, an agreement with U.S. drug developer Exelixis (EXEL.US) secured InSilico a down payment of $80 million, marking the first patent licensing deal for new AI drugs in the Asia Pacific.

The company uses AI to identify novel targets for new drugs and to engineer corresponding treatments at a faster pace than with conventional technology. Its business is divided into three main areas: pipeline drug development, drug discovery services, and software solution services. The main revenue earner is the pipeline segment, in which candidate drugs are developed in-house and then licensed out or taken to market. This operation brought in $39 million in revenue last year.

InSilico works with third parties such as pharmaceutical companies on drug discovery, charging service fees to help identify targets related to specific diseases and develop drugs using its Pharma.AI platform. Under software solution services, the company charges users an upfront subscription fee for access to the platform. In 2023, drug discovery services brought in $8.79 million and software solutions raised $3.36 million. Fifty software clients were signed during the period including pharmaceutical powerhouses Eli Lilly (LLY.US) and Novo Nordisk (NVO.US).

Thanks to the lucrative licensing-out deals, the company’s financial performance improved somewhat last year, with increased revenue and net losses narrowing by $10.19 million to $211 million. But the tech-driven company is still burning through cash at breakneck speed, logging losses of $560 million over the past three years.

When the biomedical financing boom was in full swing, InSilico was a capital magnet, combining the investment allure of AI and innovative drugs. Since its launch in 2014, the company has benefited from seven financing rounds that raised about $400 million in total. It has gained an impressive list of shareholders along the way, including Qiming Venture Partners, Sinovation Ventures, Hillhouse Investment, WuXi AppTec (2359.HK; 603259.SH) and Fosun Pharmaceutical (2196.HK; 600196.SH). The last capital infusion before the IPO bid was led by Saudi Aramco’s diversified venture capital fund Prosperity7 Ventures in August 2022, conferring a post-financing value of $895 million on the drug developer.

By the end of last year, the company held cash and cash equivalents of about $177 million, a tidy sum by the standards of the loss-making firms that have listed under Hong Kong’s biotech rules. But the cash pile may barely cover operating expenses for a year, based on the prevailing spending rate. R&D spending jumped 24.5% to $97.34 million last year, while administrative expenses including labor costs, share compensation expenses and other items reached $17.34 million.

In addition, the company faces hefty liabilities. The weight of current liabilities reached $847 million at the end of January, implying the IPO is needed to secure a smoother financing channel for future R&D efforts. 

Uncertain future for AI pharma

In its IPO filing, InSilico said it had 15 candidate drugs covering fibrosis, oncology, immunology and other therapeutic areas, six of which have gained approval for trials as Investigational New Drugs. The core product among them is the small-molecule candidate ISM001-055, with the fastest-moving pipeline. The compound has the potential to be a breakthrough product, according to Frost & Sullivan, as the world’s first drug in which AI identified the target and designed an appropriate medication.

Over the past two years, many AI-enabled drug candidates have entered clinical trials but none of them has yet passed all three phases of testing. In some cases, small-molecule drugs designed with AI have suffered setbacks during trials, sending the developers’ stock prices into a tailspin. A case in point is BenevolentAI (BAI.AS), a British developer of AI-augmented drugs that listed in 2022. The company attracted a lot of publicity but its core pipeline, BEN-2293, failed to achieve the desired therapeutic effect in Phase II trials. The firm slashed its workforce by half and its share price plunged more than 90%.

InSilico’s main drug candidate, ISM001-055, is undergoing Phase II trials in nearly 40 research centers in China and the United States for use against the lung condition idiopathic pulmonary fibrosis (IPF). The U.S. trial began administering the drug in February and the Phase 2a clinical trial in China is expected to finish in the fourth quarter of 2024. The progress of this core drug will play a critical role in the company’s business prospects.

At present, no AI pharmaceutical companies are listed in Hong Kong or on mainland Chinese exchanges. XtalPi, which is close to the IPO finish line in Hong Kong, was valued at $1.97 billion after its last financing round in 2021. That’s more than double InSilico’s post-financing valuation. But InSilico enjoys some advantages over other AI pharmaceutical companies, with a capacity to generate revenue from its own operations, an income stream from the licensing-out model, and fast-paced R&D pipelines. These qualities make InSilico worthy of investor attention over the long term.

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