On May 24th this year, Shenghe Biological-B(02898) was listed on the Hong Kong Stock Exchange. However, this company is particularly different from other 18A enterprises. This is because until the day before submitting the prospectus, Shenghe Biology had only one fundraising since its establishment. Yifeng Capital's Yifeng Ansheng and Yifeng Anhe subscribed for 0.14 billion yuan and 70 million yuan of Shenghe Biology's 5833.33 shares and 2916.67 shares respectively, with a post-investment valuation of 1.41 billion yuan, equivalent to approximately 1.53 billion Hong Kong dollars. The post-investment valuation of 1.4 billion yuan also set a record low for Hong Kong's 18A companies at that time.

However, thanks to the injection of 0.21 billion funds, Shenghe Biology not only met the working capital requirements but also just met the threshold for Hong Kong Exchanges and Clearing Limited for unprofitable biotech companies to apply for listing. In other words, Shenghe Biology's submission to Hong Kong was a 'last-minute' success.

Although it eventually succeeded in listing, its story clearly did not receive market approval. On the second trading day after listing, Shenghe Biology plummeted by 22.04%, followed by further declines of 12.46% and 19.68% in the next two trading days. On July 8th, the stock hit a low of 4.2 Hong Kong dollars, dropping by 68.9% from the issue price of 13.5 Hong Kong dollars in just one and a half months. Since then, the stock price has been fluctuating around 4-8 Hong Kong dollars.

On October 18th, the company plunged by 8.35% to a low of 4.94 Hong Kong dollars, approaching its historical low, a 63.4% drop from the IPO issue price. It is worth mentioning that November 24th is the company's cornerstone unlocking date, with 36 days remaining until the unlock. At this time, the company's only IPO cornerstone, Nanjing Economic Development, is clearly in deep crisis.

Weak fundamentals, profits are nowhere in sight.

From past years' revenue and profit, Shenghe Biology has had nine drugs enter clinical trials since its establishment in 2018, with three core products. As the latest stage is Phase II clinical trials, and they do not have marketed products, the company is currently still in a loss-making state.

Looking at past performance data, in 2022 and 2023, the company's R&D expenses were 53.171 million yuan and 430.41 billion yuan respectively, corresponding to net losses of 0.052 billion yuan and 1.33 billion yuan. According to its prospectus, the R&D expenditures for the company's core products were 10.678 million yuan and 17.383 million yuan, accounting for 20.1% and 40.4% of the total R&D expenses respectively. It is clear that the company focuses on core products to ensure pipeline progress.

However, as multiple products advance in clinical trials, the company's R&D expenses are still expanding in 2024. According to the latest 2024H1 financial report, the company's R&D expenses reached 37.708 million yuan, a year-on-year increase of 53.22%.

While the R&D investment continues to expand, Shenghe Biotechnology is unable to switch the company's cash cycle from financing cash flow to operational net cash flow due to lack of revenue sources. In 2022 and 2023, the net cash used in operating activities was 34.6 million yuan and 40.7 million yuan respectively. The company expects to continue to generate net cash outflows from operating activities in the foreseeable future. In the first half of 2024, the net cash outflow from operating activities was 0.12 billion yuan, nearly 6 times larger year-on-year.

At present, continuous burning of cash in R&D poses a major challenge to Shenghe Biotechnology's cash flow. As of the end of 2023, with a loan of 18 million from Nanjing Borui, the company had only 1.359 million yuan in cash on hand. Through the IPO issuance in the first half of this year, Shenghe Biotechnology raised funds of 0.416 billion yuan. Together with the initial cash of 0.125 billion yuan, the company currently has cash and cash equivalents of 0.494 billion yuan. Based on the net loss of 0.133 billion yuan in 2023, the above funds can still support its operation and R&D for nearly 4 years.

Although the core products are good, they face challenges in commercialization.

As a clinical-stage biopharmaceutical company dedicated to discovering, developing, and commercializing biological products for the treatment of cancer and autoimmune diseases, Shenghe Biotechnology mainly owns three core products, IAH0968, IAP0971, and IAE0972, all internally developed. As of now, the company has a total of nine pipeline products, with three of them in clinical stages apart from the core products.

It's not hard to see that the fastest progressing core variety at the moment is IAH0968 from Victory Bio. Specifically, IAH0968 is a monoclonal antibody (mAb) that enhances antibody-dependent cell-mediated cytotoxicity (ADCC), mainly used to treat 1L HER2+ advanced biliary tract cancer (BTC) and 1L HER2+ advanced colorectal cancer (CRC). The company has initiated Phase II clinical trials for biliary tract cancer (BTC) and colorectal cancer (CRC).

In fact, since the FDA approved Roche's first anti-HER2 antibody trastuzumab (Herceptin) in 1998, a total of 4 anti-HER2 mAbs have been granted marketing authorization for cancer treatment in the USA and China. Trastuzumab emtansine, pertuzumab, margetuximab, and trastuzumab have received FDA approval. Pertuzumab, trastuzumab, and trastuzumab emtansine have been approved by the National Medical Products Administration.

It is worth noting that margetuximab and trastuzumab emtansine have enhanced Fc effector function through mutations in the Fc region. These two antibodies are specifically used for HER2-positive breast cancer patients who did not respond to previous treatments. IAH0968 developed by Victory Bio has shown outstanding performance. For patients in later-line treatment, their treatment options will be more limited, even leading to situations where no drugs are available.

In this context, previous Phase I clinical trials have shown that IAH0968 has good tolerability and anti-tumor activity in late-stage HER2+ solid tumors (including breast cancer, gastric cancer, CRC, and BTC) resistant to trastuzumab, pertuzumab, ado-trastuzumab emtansine, docetaxel, oxaliplatin, capecitabine, irinotecan, albumin-bound paclitaxel, and apatinib or anti-PD-1 monoclonal antibodies. Data shows that at a dose of 10mg/kg, only one dose-limiting toxicity was found, and it did not reach maximum tolerated dose. For patients with metastatic CRC and BTC who have failed multiple front-line therapies, ORR was 40%, and DCR was 80%.

The biggest problem facing Victory Bio now is the slow progress in research and development.

Although the performance of IAH0968 in the indications of BTC and CRC is noteworthy, the market is currently saturated with many biopharmaceutical companies marketing and selling drugs for the same indications, leading to increasingly fierce competition. Globally, 11 antibody-based drugs are approved for treating CRC. In China, 4 antibody-based drugs are approved for treating CRC. Globally, 2 antibody-based drugs are approved for treating BTC, and in China, 2 antibody-based drugs are approved for treating BTC. In this market landscape, the expected launch time for IAH0968, which is still in Phase II clinical trials, is in 2027, significantly slowing down the company's commercialization progress.

Given the current situation where the investment logic for Hong Kong-listed 18A companies has not fundamentally changed, hematopoietic capacity and cash red lines are still key factors for investors to determine the valuation of 18A companies, with Victory Bio clearly falling short in the short term. From the secondary market perspective, the company has also fallen into a liquidity trap. For example, in August and September this year, the company's market trading volume was only 0.22 million shares and 192,200 shares, respectively. With no one paying attention, there is little hope for a short-term rise in Victory Bio's stock price, and unlocking the cornerstone is likewise a distant prospect.