Recently, with multiple boosts such as the Fed rate cut and favorable policies, the secondary market sentiment has risen sharply, and the innovative drug sector has also attracted market attention. The policy of fast-track review for innovative drugs introduced at the end of October, combined with the expected release of the 2024 innovative drug medical insurance negotiation results at the end of November, all contribute to catalyzing the sector.

However, while the innovative drug sector is on a rise, there is one innovative drug company that investors have been eagerly waiting for but its stock price has not risen, which is Aier Eye Hospital Group-B (06622). As a leading eye care innovative drug company integrating research, production, and sales, the company has lost two-thirds of its market cap since the end of 2023, and despite the recent general upward trend in the market, its stock price has not shown any improvement.

Behind the abnormal stock price performance, is it due to the company's insufficient potential in the new drug market and the underperformance of the fundamentals, or is there another hidden mystery?

Pipeline realization + Mid-term loss narrowing

Recently, the most popular core product NVK002 of Aier Eye Hospital Group has made progress again. According to the company's announcement, after two years of treatment, the top-line results of the phase III clinical trial of NVK002 ('China CHAMP') showed significant differences in the main efficacy indicators between the NVK002 eye drops group (0.01% and 0.02% doses) and the placebo group, with the NVK002 eye drops group outperforming the placebo group and showing dose dependence. Both doses of NVK002 have good safety and patient compliance.

It is understood that NVK002 is a low-concentration atropine drug specifically designed for the progression of myopia in children and adolescents. Atropine is known as the 'magic drug' for myopia prevention and control. Currently, atropine eye drops are the only drug verified by evidence-based medicine to effectively slow down the progression of myopia, especially low-concentration atropine can greatly alleviate myopia progression in terms of diopter changes, with a high safety profile, and has become a widely recognized drug in the industry specifically for the prevention and treatment of myopia in children and adolescents.

Currently, several domestic pharmaceutical companies such as Aier Eye Hospital Group, Shenyang Xingqi Pharmaceutical, Okugen, Jiangsu Hengrui Pharmaceuticals and others have layout in atropine drugs. In March this year, Shenyang Xingqi Pharmaceutical's self-developed 0.01% atropine sulfate eye drops were officially approved for marketing, making it the only domestically approved low-concentration atropine eye drops for delaying the progression of children's myopia.

Previously, Southwest Securities' research report predicted that by 2026, the market size of atropine would be between 5.29 billion and 20.39 billion yuan. Guosheng Securities also predicted that shenyang xingqi pharmaceutical's low-concentration atropine sulfuric acid eye drops would reach approximately 1.5 billion in revenue by 2024. Currently, Zuo Ke Eye Hospital has submitted the listing application for NVK002 to the regulatory authorities, which is expected to become the second domestic low-concentration atropine drug, capturing a huge potential market.

With positive news bringing high expectations, in the first half of 2024, Zuo Ke Eye Hospital also saw significant improvements in both revenue and profit. The interim report shows that the company's revenue in the first half of the year was approximately 49.769 million yuan, a year-on-year increase of 3.4 times; net loss of approximately 75.802 million yuan, a 67.58% decrease year-on-year.

During the reporting period, the company's ophthalmic drug sales revenue reached 15.6 million yuan, including the ophthalmic drugs for treating glaucoma such as Betaxolol and Timolol Maleate Ophthalmic Solution (Crystal Bright), and drugs for treating corneal ulcers such as Ruboxte and Bausch & Lomb Eye Mask Series (one for treating mild dry eye and another for treating pseudo myopia), as well as milestone payments obtained based on product licensing agreements for Addaprin Clindamycin Hydrochloride Compound Gel, along with exclusive distribution rights for BRIMOCHOLPF, totaling 34.1 million yuan.

Benefiting from the nearing completion of Phase III clinical trials for NVK004 and TAB014, the company's research and development center is shifting towards launching core products. As of the six months ending June 30, 2024, the company's research and development expenses decreased by 56.3% year-on-year to 89.8 million yuan, with cost-cutting measures driving improved profitability.

In terms of commercial progress, Zuo Ke Eye Hospital is advancing the commercialization process of the Crystal Bright, Ruboxte, and Bausch & Lomb Eye Mask Series product combination. The company is promoting Crystal Bright and Ruboxte to enter hospitals offline, covering over 1200 hospitals and ophthalmic institutions in more than 30 provinces in China.

As an innovative pharmaceutical company, in addition to performance, Zuo Ke Eye Hospital's intrinsic value undoubtedly needs to be evaluated based on its R&D pipeline layout. Public data shows that Zuo Ke Eye Hospital's ophthalmic drug pipeline layout is extensive, covering the major common eye disease areas of the anterior and posterior eyes, including dry eye syndrome, presbyopia, myopia, corneal epithelial defects, diabetic macular edema, and wet age-related macular degeneration.

Recently, Zuo Ke Eye Hospital's another core candidate drug TAB014 completed the last patient's final visit in China for Phase III clinical trials, and the company is expected to obtain top-line data this year. Subsequently, it will proceed with the relevant processes for applying for the new drug's market launch. TAB014 is a monoclonal antibody injection for the treatment of wet age-related macular degeneration (wAMD), a breakthrough innovative drug in the treatment of posterior eye diseases by the company, and also the first anti-vascular endothelial growth factor based antibody in China for treating wAMD in the clinical stage.

The company's other reserve products include innovative versions of cyclosporin A (CsA) eye gel for dry eye treatment, potential BIC presbyopia drugs BRIMOCHOL PF and CARBACHOL PF, as well as several ophthalmic generic drug products such as Betamethasone, all of which are in the new drug application stage or are about to be submitted for market application.

Looking at Aier Eye Hospital Group's ophthalmic drug pipeline layout, most of them have similar first-mover or best-in-class potential. It can be foreseen that with the intensive launch of new drugs in the next two years, Aier Eye Hospital Group is expected to enter a new stage of explosive growth in performance.

Innovative drugs are rebounding but causing significant losses to shareholders.

While the fundamentals have improved significantly, in the first half of 2024, the biomedical sector's sales end collectively rebounded. Data statistics show that in the first half of 2024, sales of 30 innovative drugs totaled 22.4 billion, an increase of 73% from 13 billion in the same period last year.

The market environment is becoming more active, with many innovative drug enterprises achieving double growth in revenue and profits. For example, benefiting from the core product Pimicotinib (ABSK021) reaching a licensing agreement with Merck, AB Science (02256) achieved revenues of 0.497 billion yuan in the first half, a substantial increase of 0.478 billion compared to the same period last year, with profits reaching 0.207 billion yuan, significantly turning losses into gains year-on-year and achieving positive cash flow. On November 8th, AB Science rose more than 11% in a single day, and has risen over 24% since November, reaching a new high for more than two years.

In addition to product sales, policies are also starting to exert force. Previously, relevant departments issued the 'Full-Chain Support Implementation Plan for Innovative Drug Development', covering aspects such as research and development, evaluation, and application in policy support, strengthening the full chain of innovative drug policies. The new drug evaluation and approval mechanism will be optimized, significantly shortening the approval time for clinical access, greatly improving the efficiency of innovative drug research and reducing research and development costs.

As innovative drug approval reforms, industry and payment terminal environments continue to improve, China's innovative drug industry is entering a period of vigorous development. In the medical field, especially in the gold track of the ophthalmology sector, the broad market prospects are evident as medical needs in ophthalmology span a person's entire lifecycle from childhood myopia to age-related retinal diseases.

However, in contrast to the industry rebound and positive performance, Aier Eye Hospital Group's stock price has been declining all the way. It can be seen that since February of this year, the company's average monthly stock price has remained below 2 Hong Kong dollars.

In the August announcement of mid-year performance, the company's stock price fell by 0.71%. In September, despite the approval of the glaucoma drug Jingbeiqing for listing and the completion of the final patient's last visit for Phase III clinical trials of TAB014 in China, neither of these positive news could significantly boost the stock price, until the overall market rebound at the end of September, driving the company's stock price up by 10%.

In October, the company announced positive results from the clinical trial of NVK002 for myopia treatment, with the stock price falling by 9.09% for the entire month. As of November 8th, it closed at 1.41 Hong Kong dollars, with a trading volume of only 0.595 million.

Public information shows that before the spin-off listing, Meak Eye Hospital was split from Lee's Pharm's ophthalmology drug pipeline. Before the initial public offering, the company had undergone two rounds of financing.

In June 2019, Meak Eye Hospital completed a $50 million Series A financing round. The investment institutions included Coyote, Panacea, Smart Rocket Limited, and a few other minority equity investors. In 2020, it completed a $0.145 billion Series B financing round with a luxurious lineup of institutions introduced, including Hillhouse COFL, TPG Asia, Positive Valley Capital, Aier Eye Hospital International (Hong Kong) Limited, Orbis Capital Group, Bio Success Investments Limited, Lee’s Healthcare Fund, and a few other minority equity investors.

According to the company's disclosure, the cost per preferred share for the pre-IPO Series A financing was $0.37, and for Series B financing, it was $1.14 (converted at an exchange rate of 7.18, approximately 2.66 yuan and 8.18 yuan, respectively). If the pre-IPO investors hold until now, based on the current stock price of 1.41 Hong Kong dollars (about 1.3 yuan), Series A investors have a loss of 51%, and Series B investors have a loss of 84%.

Looking at changes in shareholding, the largest shareholder Lee's Pharm's holding of 0.14 billion shares remains unchanged. The second-largest shareholder is Fidelity International, holding 32.974 million shares, with 26.927 million shares bought in 2021 Q4 and 5.444 million shares bought in 2023 Q4, resulting in losses of 78.9% and 62.4%, respectively, based on the average stock prices during the periods of 6.7 Hong Kong dollars and 3.75 Hong Kong dollars.

Hillhouse Capital holds 30.6272 million shares unchanged, while TPG Asia sold 3.3755 million shares in 2024 Q2, with the latest ownership ratio at 4.99%, still holding 27.2517 million shares. GIC (Ventures) has reduced its holdings several times this year, with the ownership ratio decreasing from 6.92% last year to 4.83%.

Existing shareholders have suffered heavy losses, leaving one curious about how the company's top management will explain this situation.

From an investor relations perspective, since the listing of Meak Eye Hospital, investment institutions have not shown much interest in it. The latest research report comes from Guoyin International Securities, released in March 2023, lowering the target stock price to 12.5 Hong Kong dollars, with an expected market cap of $0.87 billion. However, over a year later, the company's market cap is currently only 0.77 billion Hong Kong dollars. One wonders what Guoyin International's thoughts are on the company's current market cap performance.

The stock price performance deviating from the fundamentals has also sparked discussions in the market. Many investors on Futu have expressed that although the company has potential single products, the stock price has not been rising, making people 'regret not turning iron into steel'.

'Snowball' investors are also making calls, 'According to the interim report, the company has a cash on hand of RMB 1.27 billion, but the latest market cap is only 0.77 billion Hong Kong dollars, and the stock price is severely mismatched with the true value.'

Despite the continuous decline in stock prices and cash on hand exceeding the market cap, in response to investors' calls, the management of Aier Eye Hospital Group and the investor relations department did not resort to conventional methods such as buying back shares to rescue the market cap.

In fact, in December last year, the China Securities Regulatory Commission issued two consecutive new regulations advocating for listed companies to increase the intensity of returning investments to investors. In October of this year, the central bank officially implemented the policy of stock repurchase and increase holding rediscount loans, aiming to incentivize financial institutions to provide loans to eligible listed companies and major shareholders to support their share buybacks and increases holding, good buybacks can help stabilize stock prices, reduce market fluctuations, safeguard the rights and interests of small and medium-sized investors, and also enhance the overall attractiveness of the market. However, Aier Eye Hospital Group seems to have forgotten this point.

In conclusion, whether Aier Eye Hospital Group's performance and bullish news can smoothly translate into a valuation increase, evidently the actions of the management are more significant than purely the market.