Lacking Revenue, Lepu Biopharma Chases IPO to Revive War Chest

Key takeaways:

• Lepu Biopharma has yet to generate product-related revenue, and with only $41 million in cash is desperate for a quick capital injection through an IPO
• Cancer treatment specialist has sold out international portion of its share quota, but domestic portion has met with lukewarm reception

By Fai Pui

Their names may be unfamiliar to most, but PD-1 inhibitors, “smart missile” ADCs and oncolytic viruses (OV) could well be dubbed a triumvirate of cutting-edge “weapons of mass destruction” in the war against cancer.

As the three therapy types lead the fight against the deadly disease, they have provided a major shot in the arm to related stocks in recent years. Lepu Biopharma Co. Ltd. (2157.HK) is hoping to joint that group, as a biotech company deeply involved in the development of all three types.

The Chinese company is preparing to list in Hong Kong, offering shares for subscription with a Tuesday noon deadline. But response so far has been underwhelming. While the international portion of the subscription has been filled, the domestic part was only oversubscribed by a small amount, suggesting some may have doubts about the company.

This is Lepu’s second try at an IPO. The company made its first attempt last April, when PD-1 (programmed cell death protein 1) category biotech stocks were generating plenty of buzz. Despite failing at those hearings, it hardly retreated to lick its wounds. Instead, it powered through those initial frustrations and took a stab again on Oct. 29, and finally passed the hearings earlier this month.

Soon after that, it initiated the public offering process on the Hong Kong Stock Exchange. So, why is the company so eager to get listed when biotech stocks are being dumped in truckloads since the start of this year? The answer lies in the company’s financials.

Lepu touts itself as the only biotech company in China working on all three very promising fronts, with PD-1 products in the new drug application (NDA) stage, multiple “smart missile” antibody-drug conjugate (ADC) products in clinical trials, and OV products under development. But the company has yet to make money from any of its products, and is relying on government subsidies, financial investments and even rental collections to stay afloat.

In the first eight months of last year, its revenue totaled just 4.6 million yuan ($723,600). But its loss for that period was much larger at 662 million yuan, up 82.6% year-on-year, widening from losses of 520 million yuan and 454 million yuan for all of 2020 and 2019, respectively. Altogether, the company lost an eye-popping total of 1.64 billion yuan in just 32 months.

Like many young drug companies, a large chunk of its losses owes to heavy spending on R&D. Such expenses totaled 229 million yuan in 2019, then rose to 354 million yuan in 2020 and reached an even higher 509 million yuan in the first eight months of 2021. At the same time, its administrative expenses more than doubled to 108 million yuan year-on-year in the first eight months of last year.

That left the company with only 262 million yuan in cash and cash equivalents by the end of August, barely enough to keep it afloat for another three months. Which explains why it’s so desperate for a cash infusion now via an IPO.

That said, the company does appear to have strong market prospects. It is a leader in the ADC category with five products in clinical trials, way ahead of industry peers. Antibodies in ADCs can target cancer cells precisely and kill them off by “sneaking in” toxic chemicals, as surgically efficient as a “smart missile”.

According to market data cited in its prospectus, the global ADC market will be worth $20.7 billion by 2030. The Chinese market is expected to grow to 7.4 billion yuan by 2024, and further to 29.2 billion yuan by 2030, representing a compound annual growth rate of 25.8%. Lepu has two ADC products in Phase 2 clinical trials, MRG003 and MRG002. MRG003 is the first Chinese epidermal growth factor receptor (EGFR) drug ever developed and MRG002 is an innovative ADC targeting breast cancer, stomach cancer and upper tract urinary carcinoma.

Stumbling valuation

As one of the most promising cancer treatment protocols in China, helping to strengthen patients’ immune systems and beat cancer, PD-1 inhibitors are one of Lepu’s leading focuses in its R&D. HX008 is the first drug it is attempting to launch under the category. Its application to market the drug for treatment of melanoma and MSI-H/dMMR has been accepted by the Chinese National Medical Products Administration, making it a contender to contribute to the treatment of MSI-H/dMMR.

The company is also working hard in the field of OV. Its CG0070 product has shown strong efficacy and safety among patients with high-malignancy non-muscle invasive bladder cancer who have failed Bacillus Calmette-Guerin (BCG) treatment and have been approved for clinical trials in China.

All that said, some investors may worry the company has yet to get the green light to sell any of its products, and has also conceded its efforts might not pan out. But others have swooped in anyway, betting that Lepu might just make it. The latter group includes Sunshine Life Insurance, Ping An Capital, Vivo Capital and Shanghai Bio-medical Fund. They have participated in three rounds of fundraising for the company, forking over a total of 2.45 billion yuan, which pushed Lepu’s valuation to 10.26 billion yuan in the latest round.

But with an IPO share price of HK$6.87 to HK$7.38, the company will be valued at around 8.98 billion yuan to 9.64 billion yuan when it lists, lower than the valuation it got during the C-series. Lepu’s pursuit of the IPO, even in the face of such a valuation downgrade, hints at how urgently it needs new funds.

The timing isn’t the best either, with biotech stocks performing poorly in Hong Kong lately. Innovent Biologics(1801.HK), another PD-1 product specialist, has lost close to 30% of its value since the beginning of the year alone. Shanghai Junshi Biosciences (1877.HK) has lost nearly 25% and RemeGen (9995.HK), a player in the ADC category, is down around 30%. Investors are pulling out in part over concerns about how impending interest rate hikes in the U.S. might affect the group. And, of course, uncertainties over whether Lepu Biopharma’s products will even be approved aren’t helping either.

“It’s difficult to value the company despite its good market potential since it has no profit or product-generated revenue,” said Kenny Wen, a commentator at Everbright Sun Hung Kai Co. Ltd., who follows biotech stocks.

“The biotech segment of the market in Hong Kong is underperforming lately. Many PD-1 or ADC-linked stocks have stumbled. Given that Lepu has not even started selling its products, why would you invest in this company out of the many choices out there even when you are optimistic about this segment of the market?” Wen added.

He said he sees companies like Lepu as a huge gamble, with investors betting on its R&D capabilities and the prospect of raking in huge amounts of money if its products ultimately make it big. But rising interest rates in the U.S. and rising capital costs that would follow are hurting these companies that require so much money for R&D. So, he’s unconvinced the stock is a wise choice for investment right now, and is advising investors not to pile in.