Cash-Strapped Cryofocus Medtech Scrambles to Raise Funds With IPO

Key Takeaways:

• With the company poised to launch a key product in June, it is desperately seeking a major cash injection to support its marketing efforts and expansion of manufacturing capacity
• Its specialized field of minimally-invasive cryotherapy is still relatively new, thus its few commercialized products only generated 22 million yuan in sales last year

By Molly Wen

Cryofocus Medtech (Shanghai) Co. Ltd., a Chinese maker of minimally invasive medical devices, is seeking to list its shares on the Hong Kong Stock Exchange in a desperate bid to raise badly needed cash. Indeed, a successful listing will be crucial if it has any chance of ramping up manufacturing and marketing, and eventually turning a profit.

Despite having raised 193 million yuan ($28.5 million) in a series-B round of financing last January, the company only had 129 million yuan in cash and cash equivalents by the end of April due to mounting annual losses. And despite having six products on the market, with another 104 pending patent applications, it has yet to generate a profit.

This has given added impetus to successfully listing its shares in Hong Kong, an application for which the company submitted last Tuesday. It has hired Citibank and Huatai International as the co-sponsors and marks the second attempt at an IPO after the previous application failed in January.

While it has already banked funds from major healthcare investment institutions such as Hillhouse Capital, Yuanbio Venture Capital and Proxima Ventures, whether it can appeal to the broader investment community with a Hong Kong IPO remains to be seen.

Founded in 2013, Cryofocus develops cryotherapies, an emerging minimally invasive treatment whereby abnormal cells or diseased tissues are destroyed under extremely low temperatures thus preventing further growth and spread of cancerous cells.

This type of intervention is safer and more economical with fewer side-effects and lower risk of complications than traditional treatments like open surgery.

According to data cited in the prospectus, the cryotherapy equipment market in China grew from just 98 million yuan in 2016 to 390 million yuan in 2020 at a compound annual growth rate of 41.3% and is expected to grow to 11.2 billion yuan by 2030.

The company’s key product, a bladder cryoablation system, was approved for sale in the Chinese market in June, becoming one of the first cryotherapy devices used to treat bladder cancer to be commercialized worldwide. Coupled with a transurethral resection of bladder tumor (TURBT), it can effectively lower the recurrence of bladder cancer.

Another core product on the cusp of being approved is an endoscopic clip for anastomosis, which is designed for creating anastomosis in the soft tissues of the digestive tract and stopping bleeding, perforation as well as tissue defects. The company expects it to be approved in the third quarter.

In light of the upcoming commercialization of the new product, the company needs a massive amount of capital for marketing and to ramp up manufacturing capacity.

According to the prospectus, the company plans to use 20% of the IPO funds on the development, commercialization, and manufacturing of the bladder cryoablation system including the upgrade of manufacturing equipment, purchase of new equipment as well as recruitment and training of manufacturing personnel.

Another 10% and 12%, respectively, will be spent on the development, commercialization and manufacturing of the anastomosis clip and a heart cryoablation system.

Cryotherapy: a fledgling field

The cryotherapy device market has a quite high technological threshold as its use requires precisely controlling coolants like liquid nitrogen, which is prone to vaporizing or expanding in volume, with mishandling risking physical injury.

The cryotherapy field might still be new and relatively unknown, but its products target major disease categories including cardiovascular illnesses like atrial fibrillation and high blood pressure, as well as bladder cancer, chronic obstructive pulmonary disease and asthma.

With the aging of the Chinese population, the number of people suffering atrial fibrillation, respiratory conditions as well as cancer will increase thus lifting demand for cryotherapy devices.

Take the common cardiovascular condition atrial fibrillation as an example. As of now the only available cryoablation product on the market is a type of cryoballoon developed by Medtronic MDT.

But the heart cryoablation system being developed by Cryofocus is likely to be the first of its kind to be approved in China and the company expects it to happen as soon as in the second quarter of 2023. The company has another nine products in the clinical trial stage.

No profits

Despite a seeming positive outlook for the future, the company remains mired in the red. Its revenues were only 9.05 million yuan and 22.43 million yuan, respectively, in 2020 and 2021, mostly from sales of its commercialized minimally-invasive devices including its laparoscopic single port multi-channel access platform  and pulmonary nodule localization needles.

The progression of its products through the development pipeline has pushed up its R&D spending from 42.31 million yuan in 2020 to 89.83 million yuan in 2021 and it recorded losses of 159 million yuan and 126 million yuan, respectively.

The company’s administrative expenses are also growing, and the approval of new products will bring with it higher marketing and commercialization costs.

But some leading investment funds have given their vote of confidence in the company, with Hillhouse Capital holding 8.48% of its shares as the biggest institutional investor. The company’s valuation reached as high as 2.09 billion yuan after the series-B last year.

In the absence of more details about the IPO, we can only estimate the potential IPO valuation of the company by referring to the numbers of other unprofitable innovative medical equipment makers including MicroPort CardioFlow Medtech (2160.HK), Acotec Scientific (6669.HK) and Rainmed Medical (2297.HK).

The three vary drastically in terms of price-to-sales (P/S) ratio, with MicroPort on 24.3, Acotec on 6.3 and Rainmed with 60.6, for an average of 30.4. Based on the company’s earnings last year, we can expect an IPO valuation of just 680 million yuan, much lower than after its last round of fund raising.