New Pathways for Innovation and Transformation of Local Pharmaceutical Companies

Recently, INNOVATION (CSPC Pharmaceutical Group) announced that it will acquire a 100% stock equity in CSPC Baike from WEISHENG Pharmaceutical, CSPC Shanghai, and Enbipu Pharmaceutical for a total consideration of up to RMB 7.6 billion. Among this, 10% will be paid in cash, while the remaining 90% will be paid through the issuance of additional shares. This is the second transfer of innovative drug assets by CSPC Pharmaceutical Group Co., Ltd this year, following Megalith Biopharmaceuticals.

Currently, facing the dual pressure of involution and centralized procurement, the transformation of major local pharmaceutical companies into innovative pharmaceutical companies has become an inevitable trend, with Xinnuowei serving as the innovation carrier for CSPC Pharmaceutical Group Co., Ltd. In addition, several other pharmaceutical companies have recently undergone innovation and transformation through asset integration. Can these operations raise the banner of innovation and upgrading?

Multiple Asset Integrations Mark a New Era for CSPC Pharmaceutical Group Co., Ltd

CSPC Pharmaceutical Group Co., Ltd is an established domestic pharmaceutical company. At its inception, it rapidly became one of the "Four Great Families" of bulk drugs in China with vitamin C and β-lactam antibiotics as its two strategic products. Later, as the API market began to show signs of decline, CSPC Pharmaceutical Group Co., Ltd embarked on an industrial restructuring.

In 1999, CSPC Pharmaceutical Group Co., Ltd acquired the patent for Butylphthalide Soft Capsules, a first-in-class in China, from the Institute of Materia Medica, Chinese Academy of Medical Sciences. After 6 years of R&D, Butylphthalide was officially launched in 2005 (brand name: Enbipu), becoming the first new pharmaceutical chemicals in China for the treatment of ischemic stroke and the third first-in-class in the country. The dividends of Enbipu have continued to this day, making it a super blockbuster with sales of RMB 7 billion.

During this period, innovative products of CSPC Pharmaceutical Group Co., Ltd continued to increase. Besides Enbipu, it also launched multiple innovative drugs such as Mingfule, Duoenyi, Jinlitai, Haiyitan, Duoenda, and Ouyuexin. With the support of these drugs, many products of CSPC Pharmaceutical Group Co., Ltd reached their historical peak in 2020-2021.

However, with the advent of centralized procurement and the expiration of core product patents, CSPC Pharmaceutical Group Co., Ltd urgently needed to formulate effective transformation strategies. INNOVATION, a subsidiary established in 2006, became the carrier of CSPC Pharmaceutical Group's dream of innovative transformation.

INNOVATION's original main business was the production and sales of synthetic caffeine, making it one of the largest chemical synthesis caffeine production bases in the world and a first-tier player in China's health food industry. In 2019, INNOVATION was spun off and listed, becoming the listing platform of CSPC Pharmaceutical Group Co., Ltd on the A-share market.

In 2023, INNOVATION executed a capital increase of RMB 1.871 billion in cash to acquire a 51% stock equity in Megalith Biopharmaceuticals, another subsidiary of CSPC Pharmaceutical Group, thereby achieving control over Megalith Biopharmaceuticals.

Founded in 2019, Megalith Biopharmaceuticals is one of the core assets of CSPC Pharmaceutical Group Co., Ltd in biological innovative drugs. The company has more than 20 research projects under development covering cutting-edge fields such as antibody drugs, ADC drugs, and mRNA vaccines. Among these, two products are in the phase declared for marketing, three are in clinical phases II/III, and five are in clinical phase I.

Currently, the main revenue source of Megalith Biopharmaceuticals is licensing fees. In 2022, the company licensed the overseas rights of its ADC drug SYSA1801 targeting the Claudin18.2 antigen to Elevation Oncology, earning Megalith Biopharmaceuticals a total licensing fee of up to USD 1.195 billion. Currently, SYSA1801 has received Fast Track designation from FDA for the treatment of patients with advanced or metastatic gastric cancer or gastroesophageal junction (GC/GEJ) cancer expressing Claudin 18.2.

Another ADC drug, SYS6002, targeting the Nectin-4 antigen, was licensed to Corbus Pharmaceuticals in 2023 for a total licensing amount of USD 700 million.

The acquisition of Megalith Biopharmaceuticals by INNOVATION marked an important step in the innovation and transformation of CSPC Pharmaceutical Group Co., Ltd. In September 2023, INNOVATION was renamed CSPC Innovative Pharmaceuticals, officially joining the ranks of emerging biotechs in China. Through this acquisition, INNOVATION transformed from a functional food company to an innovative pharmaceutical company, signaling that the burden of CSPC Pharmaceutical Group's innovation strategy has shifted to INNOVATION.

Meanwhile, after its renaming, INNOVATION, which had been relatively unknown since its inception, experienced a surge in its share price, with its market value skyrocketing to RMB 60 billion. Tasting the sweetness of M&A, INNOVATION has made another move this year - acquiring the subsidiary of CSPC Pharmaceutical Group Co., Ltd, CSPC Baike.

CSPC Baike boasts one of the largest biomedical industrial bases under CSPC Pharmaceutical Group Co., Ltd. Its core product, Jinyouli (Pegylated recombinant human granulocyte stimulating factor injection), is the first self-developed long-acting recombinant human granulocyte colony-stimulating factor injection in China, used to prevent and treat infections and fever caused by neutropenia in chemotherapy patients. In recent years, Jinyouli has provided stable cash flow for CSPC Pharmaceutical Group Co., Ltd.

In terms of products under development, according to its official website, CSPC Baike has four other products, including liraglutide injection and long-acting recombinant GLP-1 Fc fusion protein injection, exenatide for the treatment of T2D, anti-EGFR monoclonal antibody injection for metastatic colorectal cancer, and anti-RANKL monoclonal antibody injection for tumor bone metastasis and osteoporosis.

Through the M&A of CSPC Baike, INNOVATION's product pipeline will be expanded to include weight loss, muscle gain, and blood glucose lowering, and a long-acting protein platform has been established. In terms of cash flow, as of June 30, 2024, CSPC Baike's cash and cash equivalents amounted to approximately RMB 1.386 billion, with total assets of approximately RMB 4.591 billion. With Jinyouli continuing to provide cash flow, the completion of the acquisition of CSPC Baike will, to a certain extent, alleviate INNOVATION's concerns about R&D investment.

After continuously injecting innovative drug assets, INNOVATION has become an innovative platform that cannot be overlooked, and CSPC Pharmaceutical Group's innovation and transformation have begun to bear fruit.

Pharmaceutical Companies in China Showcase Diverse Transformation Strategies

Beyond CSPC Pharmaceutical Group, two unusual mergers and acquisitions (M&A) have recently occurred in Chinese pharmaceutical industry. On the evening of October 30, Sino Biopharm announced on HKEX that it had acquired up to 55% of the shares of HOB Biotech Group through a combination of agreement transfers and tender offers.

Founded in 2009 and listed on STAR in 2021, HOB specializes in the R&D, production, and sales of in-vitro diagnostic reagents. Its products are primarily used for detecting related antibodies in blood, encompassing two major product lines for allergy and autoimmune diseases, earning it the title of "the first Chinese company in allergen detection".

Sino Biopharm, a Hong Kong-listed company within the pharmaceutical sector of CP Group, was listed on HKEX in 2000. Its business spans the entire industry chain, encompassing pharmaceutical R&D platforms, intelligent production and sales systems. The company's products include a variety of biologics and pharmaceutical chemicals, covering multiple therapeutic fields such as tumors, liver diseases, respiratory systems and surgery/analgesia. Together with Hengrui Pharmaceuticals and CSPC Pharmaceutical Group Co., Ltd, Sino Biophar is regarded as the "Three Musketeers" of China's pharmaceutical innovation and transformation.

Upon completion of the M&A, HOB will become a listed subsidiary of Sino Biopharm on the A-share market. This transaction is also a rare example of a pharmaceutical company acquiring an in-vitro diagnostic (IVD) device company. Regarding the acquisition, Sino Biopharm stated that HOB's diagnostic business will synergize with the company's pharmaceutical business, and the company will also strive to empower the target company in terms of innovative R&D platforms and marketing, unlocking synergistic effects.

In fact, in 2021, Sino Biopharm had planned to list on STAR but ultimately failed. Industry insiders speculate that Sino Biopharm's acquisition of HOB may have been aimed at acquiring a "shell" company on the A-share market, with the intention of injecting assets later.

Similarly, on October 7, Hong Kong-listed Genor Biopharma announced the acquisition of Yiteng through a merger, with Yiteng's major shareholders becoming the controlling shareholders of the new entity post-merger.

Founded in 2007, Genor Biopharma is primarily engaged in the development and commercialization of tumor and autoimmune drugs. In 2020, Genor Biopharma was listed on HKEX. It is worth mentioning that before 2021, Genor Biopharma was favored by capital and received multiple rounds of financing, with investors such as Hillhouse, Temasek, Goldman Sachs, and Blackstone among its shareholders. Later, due to slow progress in clinical outcomes, it was nearly abandoned by the market, with a market value of less than HKD 1 billion. However, following the announcement of the acquisition, Genor Biopharma's share price surged by over 90% during the trading day.

Founded in 2001, Yiteng is an integrated Chinese biopharmaceutical company engaged in R&D, manufacturing, and sales, focusing on cardiovascular, respiratory, anti-infective, and other fields. It has established a diversified product portfolio, including three commercialized original research products (i.e., Vancocin, Cefaclor, and Yiruiping) and three innovative and leading patented drugs (Vascepa, Mulpleta, and Jingzhuda).

This merger is regarded as the first reverse acquisition case since the establishment of HKEX's Rule 18A. Yiteng fulfills its listing dream through a backdoor listing, while Genor Biopharma obtains valuable cash flow to continue its R&D.

Currently, the development of pharmaceutical companies in China has entered a new stage. Pharmaceutical companies are showcasing diverse transformation strategies. In fact, whether it is acquiring companies to inject assets or "backdoor listings", the essence is to achieve the goal of innovation and transformation through the reorganization and allocation of resources. After the completion of M&A, the next step of digestion and integration remains a long and arduous task.

Primary references:

1. Announcements from various companies

2. CSPC Pharmaceutical Group's Return: Is the Timing Good or Bad?, Shenlanguan, June 17, 2024.

About  the Author    

Xiaobin

Xiaobin holds a Master's degree in Pharmacy and currently work as a public health control staff. Navigating through the intricate and complex data each day and feeling a sense of insignificance of herself. While being happy to witness the golden time of the development of Chinese bio-pharmaceutical industry. Hope to learn and improve together with everyone.