IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Hua Medicine Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27410" target="_blank" data-smartkarma-citation="entities:27410:1">Hua Medicine Ltd (2552 HK)</a> which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong since <a href="https://www.smartkarma.com/entities/27265" target="_blank" data-smartkarma-citation="entities:27265:1">Ascletis Pharma Inc (1672 HK)</a> and <a href="https://www.smartkarma.com/entities/27352" target="_blank" data-smartkarma-citation="entities:27352:1">BeiGene Ltd (6160 HK)</a>. In line with our recommendation to avoid the Ascletis IPO, the shares are down 34% post-IPO. In contrast, we are bullish on BeiGene and its shares are marginally down 2% post-IPO. The mid-point of Hua Medicine's IPO price range of HK$8.28-9.28 per share implies a market value of $1.2 billion (HK$9.2 billion).</p><p>Hua Medicine has a Type 2 drug, <em>Dorzagliatin</em>, which is currently in Phase 3 trials and plans to submit a new drug application (NDA) in China by 2019. Hua Medicine claim to fame is that <em>Dorzagliatin</em> is the first ever GKA (glucokinase activator) globally to reach Phase 3 clinical trials. GKAs are designed to control the progressive degenerative nature of diabetes. Hua Medicine's innovative diabetes drug undoubtedly has huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:</p><ol>
<li>We value Hua Medicine on a risk-adjusted net present value (rNPV) basis. Hua Medicine’s founder, Dr Li Chen, was quoted in South China Morning Post that Hua Medicine is “<em>targeting sales of about US$3 billion by 2025</em>”, which would give <em>Dorzagliatin</em> a 15% share of China’s anti-diabetics market. Consequently, Hua Medicine’s valuation will be highly dependent on <em>Dorzagliatin</em>. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Hua Medicine of $1.0 billion (HK$7.8 billion). This valuation is 11% below the low-end of the IPO valuation range.</li>
<li>
<em>Dorzagliatin</em> faces strong competition from established Type 2 diabetes therapies and from several companies pursuing new Type 2 diabetes therapies (including GKAs). Insulin had the largest share of the anti-diabetics market in China with a market share of 46% in 2017. Citing the US anti-diabetics market, Hua Medicine argues that new innovative drugs with good efficacy have made rapid gains in market share. However, we believe that the IPO price range already factors in this bullish scenario for <em>Dorzagliatin</em> in China.</li>
<li>The rNPV valuation is contingent on assumptions about the individual drug's peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if <em>Dorzagliatin's</em> terminal EBIT margin is 40%, the peak market share for <em>Dorzagliatin</em> should be at least 15% to justify the IPO price range. Currently, in the China anti-diabetics market, α-glucosidase’s market share of 17% is the second largest after insulin. In other words, <em>Dorzagliatin</em> needs to establish itself as the leading anti-diabetics drug after insulin in China to justify the IPO price range.</li>
</ol><div class="content-caption">rNPV valuation sensitivity to terminal EBIT margin and peak market share</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/062/492/original/Sensitivity.png?1535923539" class="editor-image img-responsive" data-smartkarma-image-id="62492"></figure><div class="content-caption">Source: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation range, Red highlighted box denotes our valuation of Hua Medicine</div><div class="content-highlight"><p>Our overall view is that while we do not doubt that Hua Medicine's drugs will be successful, the IPO valuation range already factors in bullish market traction for <em>Dorzagliatin</em>. Consequently, there is little money left on the table for IPO investors. While the relatively small IPO raise compared to Ascletis and BeiGene should help in quickly covering the books, we are inclined to sit on the sidelines.</p></div>

Hua Medicine Ltd (2552 HK) which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong since Ascletis Pharma Inc (1672 HK) and BeiGene Ltd (6160 HK). In line with our recommendation to avoid the Ascletis IPO, the shares are down 34% post-IPO. In contrast, we are bullish on BeiGene and its shares are marginally down 2% post-IPO. The mid-point of Hua Medicine's IPO price range of HK$8.28-9.28 per share implies a market value of $1.2 billion (HK$9.2 billion).Hua Medicine has a Type 2 drug, Dorzagliatin, which is currently in Phase 3 trials and plans to submit a new drug application (NDA) in China by 2019. Hua Medicine claim to fame is that Dorzagliatin is the first ever GKA (glucokinase activator) globally to reach Phase 3 clinical trials. GKAs are designed to control the progressive degenerative nature of diabetes. Hua Medicine's innovative diabetes drug undoubtedly has huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:
We value Hua Medicine on a risk-adjusted net present value (rNPV) basis. Hua Medicine’s founder, Dr Li Chen, was quoted in South China Morning Post that Hua Medicine is “targeting sales of about US$3 billion by 2025”, which would give Dorzagliatin a 15% share of China’s anti-diabetics market. Consequently, Hua Medicine’s valuation will be highly dependent on Dorzagliatin. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Hua Medicine of $1.0 billion (HK$7.8 billion). This valuation is 11% below the low-end of the IPO valuation range.

Dorzagliatin faces strong competition from established Type 2 diabetes therapies and from several companies pursuing new Type 2 diabetes therapies (including GKAs). Insulin had the largest share of the anti-diabetics market in China with a market share of 46% in 2017. Citing the US anti-diabetics market, Hua Medicine argues that new innovative drugs with good efficacy have made rapid gains in market share. However, we believe that the IPO price range already factors in this bullish scenario for Dorzagliatin in China.
The rNPV valuation is contingent on assumptions about the individual drug's peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if Dorzagliatin's terminal EBIT margin is 40%, the peak market share for Dorzagliatin should be at least 15% to justify the IPO price range. Currently, in the China anti-diabetics market, α-glucosidase’s market share of 17% is the second largest after insulin. In other words, Dorzagliatin needs to establish itself as the leading anti-diabetics drug after insulin in China to justify the IPO price range.
rNPV valuation sensitivity to terminal EBIT margin and peak market shareSource: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation range, Red highlighted box denotes our valuation of Hua MedicineOur overall view is that while we do not doubt that Hua Medicine's drugs will be successful, the IPO valuation range already factors in bullish market traction for Dorzagliatin. Consequently, there is little money left on the table for IPO investors. While the relatively small IPO raise compared to Ascletis and BeiGene should help in quickly covering the books, we are inclined to sit on the sidelines.

Hua Medicine IPO Preview: Suffering from the Ascletis Over-Valuation Syndrome

Ascletis Pharma Inc / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27265" target="_blank" data-smartkarma-citation="entities:27265:1">Ascletis Pharma Inc (AP HK)</a> which specialises in developing drugs to treat HCV (hepatitis C virus), HIV and liver cancer, is the first pre-profit biotech firm to IPO in Hong Kong since the exchange relaxed rules to allow listings from unprofitable early-stage drug developers. The IPO price range of HK$12-16 per share implies a market value of $1.7 billion (HK$13.4 billion) to $2.3 billion (HK$17.9 billion). Cornerstone investor, Singapore sovereign wealth fund GIC, will buy around 19% of the offer shares at the IPO mid-point. Ascletis had been under pressure to list from several insiders who wanted to cash in on their ownership stakes, according to Caixin.</p><p>Ascletis has two HCV drugs, <em>Danoprevir</em> and <em>Ravidasvir</em>, which are at or near commercial-stage respectively. Ascletis claim to fame is that it is the first domestic company in China to commercially launch an HCV cure, which is <em>Danoprevir</em> (branded as <em>Ganovo</em>). Ascletis' innovative HCV drugs undoubtedly have huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:</p><ul>
<li>In line with prevalent practice used to value biotech firms, we value Ascletis on a risk-adjusted net present value (rNPV) basis. The Ascletis founder, Wu Jinzi, stated that its two drugs (<em>Danoprevir, Ravidasvir</em>) gave “<em>Ascletis a sufficient value pipeline to qualify for an IPO</em>”. Consequently, in the short-term, Ascletis’ valuation will be highly dependent on these two drugs. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Ascletis of $1,671m (HK$12.9 billion). This valuation is 4% below the low-end of the IPO valuation range.</li>
<li>The rNPV valuation is contingent on assumptions about the individual drugs particularly peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if Ascletis' terminal EBIT margin is 40%, the peak market share for <em>Danoprevir</em> and <em>Ravidasvir</em> should be at least 50% to justify the IPO price range. Notably, seven biotech firms (foreign and domestic) are in or have completed phase III trials in China for HCV drugs. With fierce competition for HCV drugs, achieving a 50%+ market share will require perfect execution.</li>
</ul><div class="content-caption">rNPV valuation sensitivity to terminal EBIT margin and peak market share</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/058/545/original/Sensitivity%20valuation.png?1532188054" class="editor-image img-responsive" data-smartkarma-image-id="58545"></figure><div class="content-caption">Source: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation range</div><ul><li>For the above valuation, we have not considered the rNPV of Ascletis’ five pipeline drugs which have not reached Phase III trials and are years away from commercialisation (if successful). Nevertheless, if we assume more conservative estimates for <em>Danoprevir</em> and <em>Ravidasvir</em>, the proposed IPO price range already factors in the successful commercialisation of the pipeline drugs. For example, if Ascletis' terminal EBIT margin is 40% and the peak market share for <em>Danoprevir</em> and <em>Ravidasvir</em> is 30%, the pipeline drugs should be worth at least $700 million. Put differently, one of the pipeline drugs should be successfully commercialised to achieve our bull-case <em>Ravidasvir</em> rNPV of $700 million to justify the IPO price range.</li></ul><div class="content-caption">rNPV valuation sensitivity of pipeline drugs to terminal EBIT margin and peak market share</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/058/546/original/Sensitivity%20of%20pipeline.png?1532188086" class="editor-image img-responsive" data-smartkarma-image-id="58546"></figure><div class="content-caption">Source: Global Equity Research; Note: Grey highlighted area denotes the valuation of pipeline drugs which is at or higher than Ravidasvir rNPV of $700 million</div><div class="content-highlight"><p>Our overall view is that while we do not doubt that Ascletis' drugs will be successful, the IPO valuation range already factors in bullish (or unrealistic) market traction for its drugs. Consequently, there is little money left on the table for IPO investors and would avoid participating in the IPO.</p></div>

Ascletis Pharma Inc (AP HK) which specialises in developing drugs to treat HCV (hepatitis C virus), HIV and liver cancer, is the first pre-profit biotech firm to IPO in Hong Kong since the exchange relaxed rules to allow listings from unprofitable early-stage drug developers. The IPO price range of HK$12-16 per share implies a market value of $1.7 billion (HK$13.4 billion) to $2.3 billion (HK$17.9 billion). Cornerstone investor, Singapore sovereign wealth fund GIC, will buy around 19% of the offer shares at the IPO mid-point. Ascletis had been under pressure to list from several insiders who wanted to cash in on their ownership stakes, according to Caixin.Ascletis has two HCV drugs, Danoprevir and Ravidasvir, which are at or near commercial-stage respectively. Ascletis claim to fame is that it is the first domestic company in China to commercially launch an HCV cure, which is Danoprevir (branded as Ganovo). Ascletis' innovative HCV drugs undoubtedly have huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:
In line with prevalent practice used to value biotech firms, we value Ascletis on a risk-adjusted net present value (rNPV) basis. The Ascletis founder, Wu Jinzi, stated that its two drugs (Danoprevir, Ravidasvir) gave “Ascletis a sufficient value pipeline to qualify for an IPO”. Consequently, in the short-term, Ascletis’ valuation will be highly dependent on these two drugs. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Ascletis of $1,671m (HK$12.9 billion). This valuation is 4% below the low-end of the IPO valuation range.
The rNPV valuation is contingent on assumptions about the individual drugs particularly peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if Ascletis' terminal EBIT margin is 40%, the peak market share for Danoprevir and Ravidasvir should be at least 50% to justify the IPO price range. Notably, seven biotech firms (foreign and domestic) are in or have completed phase III trials in China for HCV drugs. With fierce competition for HCV drugs, achieving a 50%+ market share will require perfect execution.
rNPV valuation sensitivity to terminal EBIT margin and peak market shareSource: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation rangeFor the above valuation, we have not considered the rNPV of Ascletis’ five pipeline drugs which have not reached Phase III trials and are years away from commercialisation (if successful). Nevertheless, if we assume more conservative estimates for Danoprevir and Ravidasvir, the proposed IPO price range already factors in the successful commercialisation of the pipeline drugs. For example, if Ascletis' terminal EBIT margin is 40% and the peak market share for Danoprevir and Ravidasvir is 30%, the pipeline drugs should be worth at least $700 million. Put differently, one of the pipeline drugs should be successfully commercialised to achieve our bull-case Ravidasvir rNPV of $700 million to justify the IPO price range.rNPV valuation sensitivity of pipeline drugs to terminal EBIT margin and peak market shareSource: Global Equity Research; Note: Grey highlighted area denotes the valuation of pipeline drugs which is at or higher than Ravidasvir rNPV of $700 millionOur overall view is that while we do not doubt that Ascletis' drugs will be successful, the IPO valuation range already factors in bullish (or unrealistic) market traction for its drugs. Consequently, there is little money left on the table for IPO investors and would avoid participating in the IPO.

Ascletis Pharma IPO Preview: Drug-Fuelled Euphoria Needed to Justify Valuation

United States

Roche Holding AG develops and manufactures pharmaceutical and diagnostic products. The Company produces prescription drugs in the areas of cardiovascular, infectious, autoimmune, respiratory diseases, dermatology, metabolic disorders, oncology, transplantation, and the central nervous system. Roche Holding serves customers worldwide.

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Roche Holding (ROG SW)

Hua Medicine IPO Preview: Suffering from the Ascletis Over-Valuation Syndrome

Hua Medicine Ltd (2552 HK) which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong...

Arun George

Ascletis Pharma IPO Preview: Drug-Fuelled Euphoria Needed to Justify Valuation

Ascletis Pharma Inc (AP HK) which specialises in developing drugs to treat HCV (hepatitis C virus), HIV and liver cancer, is the first pre-profit...

Arun George

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