Key Takeaways:
- Innovent Bio has brought several drugs to market in recent years, including two announced last week, but is still losing money with no profits in sight
- The company has overhauled its commercialization model and is doing more licensing partnerships with multinationals to expand its drug pipeline
By Molly Wen
The Hong Kong stock market’s latest freefall hasn’t spared anyone, including once highly sought medical stocks that tempted investors with the huge potential of China’s fast-growing drug market. Even upbeat news on the commercialization of a promising new drug fails to excite these days, as former highflyer Innovent Biologics Inc.(1801.HK) has discovered lately.
Last week the company made two announcements that would have been welcome in any other time. It began the week by saying the Chinese regulator had approved its rearranged during transfection (RET) kinase inhibitor Selpercatinib, which is the first of its category in the world to treat diseases including non-small cell lung cancer, medullary thyroid cancer and thyroid cancer. It announced its anti-angiogenic drug Ramucirumab was also approved for a new indication to treat some liver cancer patients.
But in Hong Kong where its shares are traded, the news made little difference for a company that already has seven drugs approved. Its stock fell for three consecutive days after the pair of announcements, dropping by a cumulative 10%. Even after a 4.2% rebound last Friday to HK$26.25, the stock is still down 68% from its 52-week high of HK$82.
Times have certainly changed, at least when it comes to the importance of profits for the dozens of Hong Kong-listed drug makers that are big on talk but still consistently operate in the red. When the market is hot, even such unprofitable companies – some without any drugs on the market – can easily scoop up generous financing with just the story of promising new candidates and a strong executive crew. But in the current bear market, investors are attaching growing importance to a company’s commercialization capabilities and profit prospects – qualities that have both eluded Innovent Bio despite having multiple products on the market for the last few years.
The company’s revenue grew 15.3% in the first half of this year to 2.24 billion yuan ($311 million). But its loss grew even more – by 60.3% – to 1.09 billion yuan, no doubt disappointing investors.
The company is swimming upstream by having its products included in China’s national health insurance plan. On the one hand such inclusion can greatly increase its actual product sales. But at the same time, it must charge sharply lower prices for those products, even as its R&D and commercialization costs continue to climb. Faced with such a challenging landscape, many may wonder if the company will ever be able to deliver financials that can satisfy the market.
Commercialization team overhaul
In an attempt to improve its cost structure, the company made major changes to its commercialization model in the first half of this year by replacing its single big commercialization team with divisions focused on different products. It now has six dedicated teams for products like Rituximab and Bevacizumab, whose heads report directly to Chairman and CEO Michael Yu.
But in a worrisome development, one of its commercialization team veterans, Liu Min, left the company on Aug. 4. Liu had played a central role on the team from 2018, contributing to the establishment and development of a group that now numbers 3,000. His contributions included delivering 1 billion yuan in sales of Sintilimab in the first year after its launch, and helping the drug become the first programmed cell death protein 1 (PD-1) cancer drug in China’s national medical plan. Accordingly, his departure could slow the company’s commercialization reform.
Further complicating its prospects, Sintilimab sales are sliding as competition in the category ratchets up. According to Eli Lilly (NYSE:LLY), its marketing partner for the drug, total sales in the first half of the year totaled $159 million, a year-on-year decline of 26%, which Innovent Bio attributed to the steep price drop after being included in China’s National Medically-Insured Drug Catalogue.
The sharp price declines dealt a serious blow to the company’s first-half gross margin, which fell by 11.2 percentage points to 78.6% compared to the same period last year. The company added that pandemic flare-ups across China and the government’s strict control measures hurt revenue growth as well.
The newly-approved Selpercatinib mainly targets late-stage non-small cell lung cancer and thyroid cancer, while Ramucirumab now can be used to treat liver cancer as well. With those additions in its quiver, along with its new commercialization model, the company has targeted 20 billion yuan in annual sales within five years, at which time it expects to have another 15 products approved.
Multinational partnerships
The rapid shortening of time needed to have its drugs included in the national medical program, now down to just two years, has put Innovent’s profit margin under tremendous pressure, forcing it to lighten its hefty R&D expenses. To that end, the company has begun transforming from independent drug development to more licensing partnerships to bring foreign-developed drugs to China.
The two drugs that featured in the recent good news were both developed by Eli Lilly, which licensed Innovent as its commercialization partner for the drugs in mainland China. Under terms of their deal, Innovent will make $45 million in initial payments to Eli Lilly following the latest approvals.
Innovent also signed a licensing deal in August to bring two cancer drugs from France’s Sanofi (NASDAQ:SNY) to China. The French company has also obtained Innovent Bio shares worth 300 million euros ($292 million) as part of the deal, giving it 3.87% of the Chinese company.
As it searches for a path to profitability, Innovent’s valuation has sunk below the industry average. Its P/S (price-to-sales) ratio using its first-half revenue as reference is around 6.5 times, compared with the 11.8 times and 6.6 times for two other leading innovative drug companies, BeiGene Ltd. (NASDAQ:BGNE) and Shanghai Junshi Biosciences (1877.HK; 688180.SH).
With a new commercialization structure in place, Innovent must now show it can leverage that structure to generate higher revenue for its growing pipeline of products to boost investor optimism on its profit potential.
