RemeGen's Cash Coffers Need Filling Up

The developer of innovative drugs has sustained a series of blows to its finances, corporate partnerships, management team and star product, leaving investors jittery

Key Takeaways:

• Despite rising revenue, RemeGen is grappling with losses amounting to 4 billion yuan over the past three years
• The company has failed to complete a planned private placement and is facing a cash flow crunch

China's RemeGen Co. Ltd. (688331.SH, 9995.HK) has made a name for itself in the field of precision drugs to combat cancer and autoimmune diseases. But the biotech can't seem to inoculate itself against bad news.

Hailed as the first Chinese company to launch a homegrown antibody drug conjugate (ADC), RemeGen has recently been battling a barrage of issues from cash flow challenges to the departure of a senior executive and a troubled attempt to raise fresh finance.

Meanwhile, a multinational partner has put a question mark over the prospects for RemeGen's flagship cancer treatment, after writing down the value of its investment in the drug.

Then in late February RemeGen issued an update on its 2024 earnings that only added to the investor concern, as the firm flagged up stubbornly large losses despite rising revenues. The news triggered a slide in RemeGen's share price, which fell 16.5% over three days.

In its statement, the company said annual operating revenues rose 58.4% to 1.72 billion yuan ($240 million) in 2024 from the previous year, driven by sales of its two core products to treat lupus and cancer, telitacicept and disitamab vedotin.

However, RemeGen still logged a net loss of 1.47 billion yuan for the year, only 2.8% smaller than the 2023 shortfall. Overall, RemeGen has been bleeding red ink since enjoying a windfall profit from licensing out its cancer drug, disitamab vedotin, to a U.S. biotech in 2021. Losses have swelled to 4 billion yuan over the intervening three years.

In the update, RemeGen said it had stepped up R&D spending in 2024 to develop candidate drugs at a critical experimental stage. At the same time, income from its two core injectable drugs accelerated, along with gross profit margin, while the rate of sales expenses also dropped.

It is worth noting that the parent's equity share dropped 42.21% to 199 million yuan, while the weighted average return on equity (ROE) fell 54.06%. That means losses are expanding at a faster rate than net asset consumption, which puts RemeGen under mounting financial pressure. Hence the market's negative reaction to the figures.

Woes had been mounting in the weeks leading up to the profit update. On February 7, RemeGen announced the departure of a key executive, He Ruyi, who was swiftly hired by the Yangtze River Pharmaceutical Group.

At RemeGen, He served as executive director and head of strategy, bringing a wealth of experience to his roles after spending 17 years at the U.S. drugs regulator and also working for China's drugs approval agency.  Joining RemeGen in 2020, he led the team tasked with launching the two core products onto the market and getting them included in China's medical insurance scheme, as well as promoting disitamab vedotin, used to treat gastric or breast cancers, overseas.

However, RemeGen imposed big pay cuts on senior executives in 2023 as its cash flow tightened. He Ruyi's annual salary plummeted 70% to just 7.72 million yuan and his job description switched to chief medical officer and chief strategy officer.

Persistent cash flow pressure

Looking to replenish its coffers for further research, RemeGen reached out to the market in March 2024 with a proposed private placement to raise up to 2.55 billion yuan. The fundraising ceiling was revised down to 1.93 billion yuan by the end of July. However, the plan has yet to reach fruition, hampered by a share price slide and the lengthy process for a private offering on the A-share market.

Meanwhile, a drug services supplier with ownership links to RemeGen pulled its planned IPO on Hong Kong's Growth Enterprise Market (GEM) in February.  MabPlex provides development and manufacturing services for biological drugs, with RemeGen as its biggest customer. The IPO U-turn could hamper the collaboration between the associated companies, exacerbate financial strain and even hurt investor confidence in RemeGen.

An international partnership could also be proving problematic. In 2021, RemeGen sold overseas development and marketing rights for its core cancer drug to Seagen, a biotech specializing in ADCs, a promising class of immunotherapy agents. In return, RemeGen got a down payment of $200 million and stood to gain up to $2.4 billion in milestone payments, in a record-breaking deal for an innovative drug developed in China.

However, after buying Seagen in 2023, drugs giant Pfizer made an impairment provision of $200 million for the intangible assets of disitamab vedotin in its 2024 results, which was exactly the same as the upfront payment in 2021. The move sparked investor concern that Pfizer may end up returning the drug rights, dealing a serious blow to RemeGen's overseas expansion. Responding to the market talk, RemeGen said that the drop in book value was linked to changing competitive dynamics in the market.

RemeGen went public on the Hong Kong Stock Exchange in 2020 and Shanghai's STAR Market two years later, raising money to keep developing its two innovative drugs. However, a large part of the proceeds was invested in building production facilities and a team to launch the drugs on the market.

At the same time, working on multiple experimental drugs has consumed a lot of money. RemeGen's spent 1.15 billion yuan on R&D in the first three quarters of 2024, almost as much as its revenue of 1.21 billion yuan in the same period. Its finances are deteriorating after slim pickings for biopharmaceutical sector funding over the last few years.

RemeGen trades at a price-to-sales ratio of about 6 times, compared with 19 times for Kelun-Biotech (6990.HK), another ADC drug producer. If funds start to run dry, RemeGen may have to make further painful staffing decisions and consider selling off some of its drug rights.