From the Star Board to the Exchange.

Cai Jun from Investor Network.

Recently, SIHUAN PHARM (00460.HK, hereinafter referred to as the 'Company') has been busy with its listing split.

SIHUAN PHARM announced that it plans to spin off XuanZhu Biotech for a listing in Hong Kong. In 2022, 2023, and the first half of this year, XuanZhu Biotech reported net losses of 0.512 billion yuan, 0.301 billion yuan, and 0.111 billion yuan respectively.

Previously, XuanZhu Biotech had planned to list on the Star Board but subsequently terminated the plan. In fact, the company has been independently Operated since 2018 and has enhanced its overall valuation through acquisitions, integration, and equity introduction. However, the failure to list on the Star Board disrupted its capital plans, leading the Company to repurchase some Shareholder Holdings of XuanZhu Biotech and commence the IPO process in Hong Kong.

The thorns of breaking through three barriers.

XuanZhu Biotech's path to capitalization is fraught with challenges.

In 2022, SIHUAN PHARM's application to spin off XuanZhu Biotech for a listing on the Star Board was accepted by the Shanghai Stock Exchange. At that time, XuanZhu Biotech had no commercialized Pharmaceuticals and reported a net loss of 0.512 billion yuan that year, thus meeting the fifth set of listing standards.

In 2023, the winter for Innovative Drugs unexpectedly arrived, and the regulators tightened IPO applications from loss-making companies. During the listing committee meeting, XuanZhu Bio was required to further disclose the technological advantages of its research products, subsequent commercialization plans, and specific measures, with a review temporarily suspended. In May of this year, the IPO review for XuanZhu Bio was terminated.

A setback disrupted SIHUAN PHARM's capital plans. In 2008, the company acquired the predecessor of XuanZhu Bio, which was independently operated a decade later, with its research pipeline covering digestive system diseases, tumors, and non-alcoholic fatty liver disease. Six months after the termination of the Star, the Hong Kong stock market became one of the few ways for XuanZhu Bio to achieve capitalization.

Before submitting the application, SIHUAN PHARM repurchased a portion of the B round investors' shares in XuanZhu Bio through its platform. In the 2021 financing, Sunshine Life, Hebei Zhongji Finance, Bank of China Capital, and others invested a total of 0.611 billion yuan in XuanZhu Bio, with Sunshine Life acquiring 3.62% equity for 0.25 billion yuan. In this round of repurchase, the company bought back all of Sunshine Life's holdings for 0.308 billion yuan. Based on this calculation, Sunshine Life earned a 23.2% profit in three years, with XuanZhu Bio's valuation exceeding 8.5 billion yuan.

In this case, various calculations are mixed.

First, the transaction price between SIHUAN PHARM and the exiting shareholders was established based on an 8% annual ROI. Up to now, A round investors represented by the platform of State Investment Corporation are still among XuanZhu Bio's shareholders, and at that time, the latter raised a total of 0.963 billion yuan, with a post-investment valuation of 3.3 billion yuan.

Second, whether XuanZhu Bio's valuation is reasonable. Compared to its IPO on the Star, the biggest change for the company is that it launched its first Pharmaceutical. In 2023, its developed Anarazole sodium was approved for sale and included in the national medical insurance catalog. In the first half of this year, the drug's sales reached 16.03 million yuan.

Moreover, the growth of Innovative Drug companies requires overcoming three hurdles. The first hurdle is achieving results in research and development, the second is successful capital operation, and the third is unblocking commercialization paths. XuanZhu Bio has passed the first hurdle and is working on the second, while the prospect of the third hurdle remains uncertain.

In the IPO inquiry letter, the Exchange had repeatedly asked XuanZhu Bio about the competitive advantages of its product pipeline and market space. Anarazole sodium belongs to the PPI (Proton Pump Inhibitor) category of drugs, which has fierce competition and shrinking market size. In 2023, the sample hospital scale for similar products was 2.61 billion yuan, a decrease of 65.2% compared to 2019, caused by factors such as implementation of centralized procurement and several varieties being included in key monitoring catalogs.

Feeding it to XuanZhu Bio.

Peeling back the history of growth at XuanZhu Bio, it is actually SIHUAN PHARM continuously 'feeding' by integrating resources. At that time, the Star Market was opening up for IPOs, and the windfall for Innovative Drugs was thriving, driving up the valuations of many companies.

Before its independent operation in 2018, XuanZhu Bio's Innovative Drug business was primarily conducted through XuanZhu Bio ShanDong, focusing on the small molecule track. From 2019 to 2021, XuanZhu Bio acquired XuanZhu Bio Peking and reorganized KangMing BaiAo, expanding into clinical research and the large molecule track.

In December 2019, a subsidiary of SIHUAN PHARM transferred its holdings of XuanZhu Bio Peking's equity to XuanZhu Bio for 0.33 billion yuan. In 2021, XuanZhu Bio Peking's revenue and Net income were 42.2103 million yuan and 9.0152 million yuan, respectively.

In 2021, XuanZhu Bio and KangMing BaiAo implemented a reorganization, with XuanZhu Bio's subsidiary XuanZhu Bio KangMing acquiring KangMing BaiAo's large molecule business assets, liabilities, and personnel for 0.131 billion yuan. KangMing BaiAo's major shareholder, Zhu XiaoDong, became an executive at XuanZhu Bio.

In fact, XuanZhu Bio and KangMing BaiAo had interactions earlier. In 2020, XuanZhu Bio provided a loan of 10 million yuan to KangMing BaiAo for the latter's product pipeline research and development. Subsequently, XuanZhu Bio also provided Zhu XiaoDong with a loan of 3.0204 million yuan for the repurchase of the equity he held in KangMing BaiAo.

Looking back at the internal integration timeline, it coincided with the A and B round financing of XuanZhu Bio. After this operation, benefiting from an increase in the research and development pipeline, XuanZhu Bio's valuation has been uplifted. However, XuanZhu Bio has yet to achieve profitability, seemingly lacking commercialized products, but the acquisition of affiliated assets has also led to significant Outflow of funds.

In January 2022, XuanZhu Bio KangMing signed an asset and technology transfer agreement with Beijing XuanYi to acquire relevant assets related to the pilot workshop and the technology rights for CD80 fusion protein for nearly 0.3 billion yuan in total. The transferor, Beijing XuanYi, was an enterprise once controlled by Che Fengsheng, the actual controller of SIHUAN PHARM.

Capital and a veteran of cross-sector ventures.

In the early 2000s, Che Fengsheng partnered with Guo Weicheng, Zhang Jionglong, and Meng Xianhui in Hainan to establish the predecessor of SIHUAN PHARM. Previously, Che Fengsheng worked as a university teacher, a neurologist in a hospital, and in sales at a pharmaceutical company. Years of cross-sector effort sharpened his keen business instincts.

In 2007, SIHUAN PHARM was listed on the Singapore Stock Exchange, later privatized and delisted, and then went public on the Hong Kong Stock Exchange in 2010, with business covering medical aesthetics, Innovative Drugs, and generic drugs. As of now, Che Fengsheng is the chairman of the company and has signed an agreement with the other three actual controllers, collectively holding 55.02% of the company's shares.

It can be seen that the company's business sectors are vast, much like Che Fengsheng's cross-sector experience. In the first half of this year, the company's total revenue was approximately 0.95 billion yuan, a year-on-year decrease of about 10%, with a loss attributable to shareholders of approximately 33.4 million yuan, significantly narrowing from the previous year's loss of 49.6 million yuan, a year-on-year reduction of 32.7%.

The only thing sustaining the performance came from the company's medical aesthetics business, which reported revenue of approximately 0.323 billion yuan during the reporting period, up 66.4% year-on-year. The largest sector, generic drugs, had revenue of approximately 0.597 billion yuan during the same period, down 29.4% year-on-year.

Among them, the botulinum toxin product Lethibao, represented by the company from South Korea, is a major force. Since its domestic sales began in 2021, its market share has exceeded 10%, with sales in the first half of this year growing 50% year-on-year. In September, the company announced the renewal of the exclusive sales agreement for this product until the end of 2030; in the announcement about the split of XuanZhu Biotechnology, the company stated it would invest more funds and resources in the field of medical aesthetics and other emerging businesses.

It should be noted that the ability to cross sectors and integrate resources is related to the actual controllers or executives of the company controlling over 100 enterprises. As a veteran of capital operations, whether it can secure another IPO is worth tracking.