A rare shell trading has appeared in the Hong Kong stock market.

Investor net Wu Wei.

Recently, Jiahe Biotechnology (06998.HK) announced that it will acquire Yiteng Medicine through a merger, where the original Yiteng Medicine shareholders will hold 77.43% of the merged company's shares, and the original Jiahe Biotechnology shareholders will hold 22.57% of the merged company's shares. The actual controlling shareholder of Yiteng Medicine, Ni Xin, will become the controlling shareholder of the new company, who is also the founder, chairman, and CEO of Yiteng Medicine.

In the A-share market, this type of transaction is generally referred to as a "backdoor listing," where smaller listed companies acquire shares of the target company through share issuance. After the transaction is completed, the original controlling shareholder of the listed company holds less equity than the original target company's controlling shareholder, resulting in a change of control of the listed company. However, in the relatively easier listing environment of the Hong Kong stock market, cases of "backdoor listing" are not common.

The target company Yiteng Medicine is a Contract Sales Organization (CSO) enterprise. According to the Wind database, from 2020 until now, Yiteng Medicine has submitted listing materials five times but has not been able to successfully list. The merger between Jiahe Biotechnology and Yiteng Medicine is the first reverse acquisition case since the establishment of the HKEX Chapter 18A rules.

By using Jiahe Biotechnology as a shell, can Yiteng Medicine realize its dream of going public?

The struggling Yiteng Medicine in going public.

The prospectus shows that Yiteng Medicine was founded in 2001 by Ni Xin. Ni Xin, with a background in pharmaceutical sales, defined Yiteng Medicine's business model as CSO (Contract Sales Organization), a third-party outsourced sales professional agency for pharmaceutical sales. Operationally, the company obtains product rights from major overseas pharmaceutical manufacturers, then builds a sales team to act as agents and sell these drugs domestically.

Aiteng Medicine's pharmaceutical products currently on sale include Stabilization and Reliability, Xyklo, and Yirui Ping, among which Stabilization and Reliability and Xyklo were acquired from Eli Lilly, two mature antibiotics that are the preferred treatment for MRSA infections and pediatric infections. Yirui Ping was acquired from GSK and is a new generation of ICS nebulized inhalation preparation suitable for the mild to moderate asthma treatment in children and adolescents.

Of course, with the advancement of medical industry reforms such as the two-invoice system and quantity-based procurement, Aiteng Medicine is also seeking transformation, acquiring mature products on one hand, and also engaging in innovative research and development. In 2015, Aiteng Medicine began laying out an innovative drug pipeline, with products such as Weixipei introduced from Amarin and Wending introduced from Japan's Yunos Pharmaceuticals already on the market.

With industry accumulation, by 2022, Aiteng Medicine achieved revenue of 2.074 billion yuan and net income of 0.306 billion yuan. However, with the deepening of medical system reforms, Aiteng Medicine's revenue growth has been lackluster, with minimal increase in revenue in 2022 compared to 2021.

In addition to the lackluster growth, the main products are original research products whose patents have expired, posing significant obstacles for Aiteng Medicine's listing. Data from the Wind database shows that starting in September 2020, Aiteng Medicine has submitted listing materials five times with plans for a Hong Kong IPO. However, as of now, the company has not been able to successfully issue shares.

According to the prospectus, Aiteng Medicine conducted 6 rounds of financing during its development, with a total financing amount of 0.268 billion US dollars involving investment institutions such as Taikang Investment, Redpoint China, and Handi Asia Pacific. By the end of 2022, Aiteng Medicine's asset-liability ratio reached as high as 62%, with the total face value of short-term and long-term borrowings due for the period reaching 1.717 billion yuan, while the total face value of current assets was only 1.48 billion yuan during the same period. In this scenario, Aiteng Medicine faces a significant need for shareholder exits and corporate financing.

Jiahe Biotechnology, which is not profitable

Jiahe Biotechnology is an innovative-driven biopharmaceutical company mainly engaged in the development of innovative drugs in the fields of breast cancer, lung cancer, gastrointestinal tumors, and hematologic malignancies. Products currently under research and advancing towards commercialization include GB491 (larotrectinib), GB261, GBD201, and many others.

As an innovative drug development company, Jiahe Biotechnology has also been a favorite in the capital markets, receiving acclaim from well-known investment institutions such as GGV, Temasek, Goldman Sachs, and Blackstone. When the company went public on the Hong Kong stock exchange in 2020, the market was also filled with anticipation for Jiahe Biotechnology, with the company's market cap exceeding 14 billion Hong Kong dollars on the first day of listing.

It is worth noting that after years of research and development, Jiahe Biology's products are still in the process of commercialization and have not generated revenue for the company. As of the first half of 2024, Jiahe Biology's revenue was only 14.47 million yuan, and in 2023, the company did not generate any revenue. Due to the high research and development, and management costs, Jiahe Biology, whose products have not yet been commercialized, has incurred substantial losses.

According to the Wind database, since Jiahe Biology disclosed its financial data in 2018, the accumulated losses of Jiahe Biology have exceeded 6.2 billion yuan as of the first half of 2024. With the unclear outlook of the core products before commercialization, the stock price of Jiahe Biology has shown a significant downward trend after going public, dropping to as low as 0.85 Hong Kong dollars per share, even entering the category of penny stocks.

Each has its own difficulties, perhaps this is the important reason for Jiahe Biology to come together with Yiteng Medicine. On October 7th, after Jiahe Biology announced the trading scheme, the company's stock price once rose by over 90%; however, as the market enthusiasm waned, Jiahe Biology's stock price quickly fell back after reaching a peak. By October 10th, the company's stock price had fallen to around 1.8 Hong Kong dollars per share, representing only about a 26% increase compared to the stock price before the company's suspension on September 12th.

"Shell resources" have been repeatedly hyped during special times, but as the A-share registration system reform advances and the IPO channel for enterprises opens up, the transactions of "backdoor listings" have significantly reduced, and the value of "shell resources" has gradually lost its speculative appeal. The China Securities Regulatory Commission has also made it clear that strict supervision of restructuring for listing will be implemented, and the requirement of "backdoor listings being equivalent to IPOs" will be strictly enforced.

Considering the relatively low difficulty for Hong Kong-listed companies to go public and the low value of "shell resources," can Jiahe Biology's reverse acquisition of Yiteng Medicine gain investor acceptance? (Produced by Thinking Business)