On the last trading day of the week, the star stock of innovative drugs, Innovent Bio (01801.HK) on the Hong Kong Stock Exchange, finally saw a rebound after a continuous decline. In the first four trading days of the week, this company, known as the "second brother of innovative drugs," saw its market cap evaporate by over 17 billion Hong Kong dollars (approximately 15.57 billion yuan), despite releasing impressive financial reports during that period.

The reason behind this drastic fluctuation is related to the controversial "low-priced" purchase of subsidiary shares by the company's Chairman. This transaction has raised doubts in the market about the value management of Innovent Bio, and has exacerbated concerns about the company's governance and future international development strategy.

"Low-priced" related transactions cause market shock.

The controversial event that engulfed Innovent Bio originated from an acquisition transaction announced over the past weekend.

On October 25th, Innovent Bio announced that its wholly-owned subsidiary Fortvita signed a share subscription agreement with the company's Chairman and CEO, Yu Dechao's Lostrancos. After the completion of the transaction, Lostrancos will directly hold 20.39% of Fortvita's shares at a price of 20.5 million US dollars (approximately 0.146 billion yuan), while Innovent Bio as the parent company will have its shareholding diluted to 79.61%.

It is understood that Yu Dechao is not only the founder, Chairman, and CEO of Innovent Bio, but also the sole director of Lostrancos, holding 82.93% of the company's shares directly, with the remaining 17.07% held by Innovent Bio's executive director and former CFO, Xi Hao, and another independent third-party investor.

This news quickly sparked market turmoil. Fortvita, as the platform for Innovent Bio's international business expansion, carries the market's expectations for the company's overseas business. However, the valuation of this transaction was only based on the net asset price, sparking market concerns about the "cheap sale of assets."

According to the announcement, Fortvita's valuation is based on the asset-based method. As of the reference date, its total valued assets are approximately 0.234 billion US dollars, total valued liabilities are approximately 0.154 billion US dollars, therefore the overall valuation is about 80.026 million US dollars. Innovent Bio explained in the announcement that since Fortvita's pipeline is mainly focused on early discovery and preclinical stages, and there are no significant overseas clinical trial milestones, the asset-based method is the most suitable valuation method.

However, investors are not convinced. The valuation of Fortvita this time is basically just the total assets minus total liabilities, in other words, there is no premium based on future development expectations.

The key point is that the overseas rights of several research and development products with high potential viewed by Innovent Bio, such as IBI363, IBI343, have all been attributed to Fortvita. Among them, on September 4th, IBI363 just obtained the US FDA's Fast Track qualification, and the company is conducting clinical research in China, the USA, and Australia simultaneously. Considering that overseas business has become one of the important means for domestic innovative drug companies to generate profit, investors believe that the management's acquisition at this time is akin to taking advantage opportunistically.

Moreover, from a performance perspective, Fortvita incurred losses of 0.331 billion yuan and 0.271 billion yuan in the 2022 and 2023 fiscal years respectively, indeed dragging down the performance of the listed company. However, Innovent Bio has been funding Fortvita for more than two years, with the losses incurred reaching 84 million US dollars when converted, even exceeding this valuation.

It should also be pointed out that after this transaction, Innovent Bio still holds 79.61% equity in Fortvita. According to accounting rules, it can still be consolidated into the financial performance of the listed company. In other words, the acquisition itself cannot play a significant role in sharing the pressure on the listed company's performance.

Management urgently responds, investor confidence is difficult to restore.

A reporter from Cailian Press observed that Innovent Bio's stock price remained relatively stable in the days before October 25. Possibly influenced by this news, since October 28, the company's stock price has fallen, declining for four consecutive trading days. Although the company announced on the 30th that the total product revenue for Q3 this year exceeded 2.3 billion yuan, a year-on-year increase of over 40%, it did not immediately reverse the market downturn.

As of the close on October 31, the company's market cap dropped from 72.377 billion Hong Kong dollars at last Friday's close to 55.284 billion Hong Kong dollars, evaporating over 17 billion Hong Kong dollars. On November 1st, at the close, the company's stock price achieved its first increase this week, with the market cap slightly rebounding to 57.329 billion Hong Kong dollars.

During this period, in order to quell market doubts, Innovent Bio held an online business update briefing on October 29th to respond.

Yan Dechao stated at the meeting that he regrets not communicating with investors about related party transactions at an earlier stage. He emphasized that the existing pipeline assets of Fortvita are still in the early stages, whether they can be successfully developed in the future is uncertain, and reiterated the management's determination for Innovent Bio to go global and for Fortvita to remain an independent international platform.

Regarding the increase in shareholding of Fortvita by the management instead of the listed company, Yan Dechao's reason is to invest with the management's own funds to show Innovent Bio's determination for internationalization. At the same time, considering the high risks of going global, they do not want to further dilute the shareholding of the listed company during this process.

Innovent Bio's CFO, Yu Fei, explained that the current valuation of Fortvita is based on an independent evaluation report from a third party. In the biopharmaceutical industry, assets correspond to different risks and valuations at different stages. The current valuation at this stage reflects the actual status of Fortvita's products.

Regarding the composition of Fortvita's pipeline that investors are concerned about, Innovent Bio mentioned that due to confidentiality reasons, they are unable to disclose the specific names of the assets on the platform. However, it can be revealed that most products on this platform are preclinical molecules, including a few early-stage clinical molecules. Fortvita only holds overseas rights, while all the Chinese rights are with Innovent.

Additionally, according to data released by the Hong Kong Stock Exchange on October 4th, Yan Dechao reduced his holdings by a total of 3.25 million shares on September 30th and October 2nd, with a total amount of approximately 0.152 billion Hong Kong dollars. Shortly after the reduction, he spent 0.146 billion RMB to acquire the company's international business, leading to investor concerns of a possible 'empty glove and white wolf' scenario. However, this topic was not addressed during the briefing.

The prospect of going global is attractive, yet the road ahead remains challenging.

Compared to the domestic market, the developed countries have stronger drug payment capabilities and a more diversified payment system, making the overseas market increasingly important as a profit source for pharmaceutical companies.

According to the data, in 2023, the pharmaceutical expenditure scale in developed markets is estimated to be around 1.3 trillion US dollars, accounting for approximately 80% of global pharmaceutical expenditure. The market share of brand-name drugs in developed markets is about 75.8%, and it is expected to maintain an average annual growth rate of 6-9% by 2028.

Faced with such a massive market capacity, Innovent Bio is facing a strong impetus to accelerate its 'go global' strategy. Although Innovent Bio's cash reserves are relatively abundant, with about 10.1 billion RMB as of the end of June, it remains doubtful whether Innovent Bio's existing reserves can support the simultaneous expansion in domestic and international markets, drawing on the experience of high investment in internationalization by companies like Beigene and Legend Biotech.

Moreover, Innovent Bio's overseas journey in the past few years has been less than satisfactory, making it difficult to achieve significant breakthroughs. In early 2022, Innovent Bio's PD-1 drug, Tyvyt, faced opposition in its application for listing with the US FDA and has not initiated a second challenge since the initial setback. As of now, no assets of Innovent Bio overseas have obtained FDA approval for concept verification (POC). The company had two collaborations with Eli Lilly on PD-1, initially licensed to Eli Lilly China, and then re-licensed to Innovent; overseas efforts reported to the FDA based on Chinese data ended in failure.

During the meeting, Yu Dechao stated: 'As of now, we have not had any assets overseas that have obtained POC (Proof of Concept) recognition from the FDA. The company had two collaborations with Eli Lilly on PD-1, initially licensed to Eli Lilly China, and then re-licensed to Innovent; overseas efforts reported to the FDA based on Chinese data ended in failure.'

In addition, Innovent Bio also had some products that were once highly anticipated, 'such as CD47, TIGIT, and other products, we also timely stopped these projects and removed them from our pipeline,' as explained by Yu Dechao.

'Fortvita holds early-stage assets like IBI363 or IBI343, the failure rate far exceeds the success rate due to their early-stage nature,' proposed by Fei.

By using Fortvita to achieve external financing, without consuming domestic business resources and transferring overseas risks, this is undoubtedly a good idea for Innovent Bio's overseas expansion. However, under the dual pressures of 'controversy' in related transactions and 'difficulties' in overseas challenges, it will still take time to verify whether Innovent Bio can successfully explore a path to successful global expansion.