The first reverse takeover case of Hong Kong Stock Connect 18A, dealers enter the game of "building new buildings"

On October 7th, Hong Kong-listed 18A innovative pharmaceutical company GENOR-B (06998.HK) issued an announcement that sparked heated discussions in the medical circle: GENOR-B will acquire Yiteng Medicine through a merger, and the new company formed after the merger will be renamed Yiteng GENOR-B.

In fact, this constitutes a reverse takeover. The transaction is conducted in the form of a share swap, with the original shareholders of Yiteng Medicine holding 77.43% of the new company and the original shareholders of GENOR-B holding 22.57%. Ni Xin, the actual controller of Yiteng Medicine, will become the controlling shareholder of the merged company, holding 37.60% of the shares.

Ni Xin, the founder, chairman, and CEO of Yiteng Medicine, told Economic Observer that this merger will also need to go through the listing process of the Hong Kong Stock Exchange again. It is expected to be completed in the first quarter of next year, which will be the key time for the formal completion of the acquisition.

GENOR-B and Yiteng Medicine each have their own labels: the former was listed on the Hong Kong Stock Exchange in 2020, backed by star investment institution Hillhouse Capital, with a subscription multiple of over 1200 times during the placement. The market value on the listing day exceeded HKD 14 billion, but faced operational challenges after listing, with a market value around HKD 500 million before the merger announcement; the latter is a CSO (Contract Sales Organization) that has cooperated with many foreign pharmaceutical companies, having submitted prospectuses to the Hong Kong Stock Exchange four times but failed to list.

According to a partner of GENOR-B, GENOR-B's pipeline does not have many differentiated features, the stock price is relatively low, the financing channels are not very smooth, and the possibility of conversion and listing is not very high. Cash is currently very much needed. For Yiteng Medicine, without being listed, investors cannot exit. "With the integration of shareholders on both sides, those who want to stay long-term will stay, and those who want to exit in the short to medium term will exit. It is a relatively good arrangement." "This is the first case of a reverse merger in the 18A sector. If it can have an impact on the industry's development, we are still very happy. But our starting point is based on the company's own planning, seeking opportunities for business development," Ni Xin said.

Transaction

According to the announcement, GENOR-B believes that the reason for the merger is that the commercialization of the most promising product CDK4/6 inhibitor is imminent, and GENOR-B has reached an important stage of development, requiring strong commercial capabilities to seize all possible market opportunities. After evaluating multiple potential target companies, GENOR-B believes that Yiteng Medicine meets the above criteria.

In the description in the announcement, Yiteng Medicine has a leading diversified portfolio of innovative patented drugs with huge market potential and original research products with competitive market advantages; it has a sound commercial platform supporting robust financial performance; it has an industry-leading sales and marketing network to support the future commercialization of synergistic pipelines; and it has an advanced manufacturing platform and a global supply chain management system.

GENOR-B will settle the transaction through the issuance of shares, without any cash outlay.

In the view of a person close to the merger event, this merger is a "game" played by the investors of both companies, "activating the resources of both companies, at least solving their respective difficulties for now." Ni Xin told Economic Observer that this reverse merger was mainly driven by Yiteng Medicine, but the merger transaction requires the support and approval of both shareholders and investors, so investors also play a very important role in the process. After considering various factors, Yiteng Medicine finally decided to use a reverse acquisition method for financing arrangements for business expansion.

The Story of the "Shell"

At a time when the innovative drug industry is in full swing, Genor Biopharma once had a "good hand".

Founded in 2007, Genor Biopharma is an innovative-driven biopharmaceutical company. Its current product pipeline covers the top three global tumors (breast cancer, lung cancer, gastrointestinal tumors) as well as hematologic malignancies.

In terms of product types, Genor Biopharma mainly focuses on promising biosimilars, with some fast-follow drugs and first-in-class drugs. The pipeline layout is somewhat similar to Junshi Biosciences (688180.SH/01877.HK).

Initially, Genor Biopharma also adopted an aggressive strategy, which was evident in the development process of its "Tomorrow's Yellow Flower" product PD-1. In December 2016, Genor Biopharma's PD-1 monoclonal antibody (GB226) obtained the clinical trial approval from the National Medical Products Administration, only about 3 months later than BeiGene's PD-1 tislelizumab, still belonging to the domestic first echelon.

However, Genor Biopharma's choice of indications proved to be unwise. Initially, the chosen indication was relapsed and refractory peripheral T-cell lymphoma. Later, the Genor monoclonal antibody was also known as the first PD-1 product globally to apply for an indication for peripheral T-cell lymphoma.

The above indication for the Genor monoclonal antibody was accepted by the National Medical Products Administration in mid-2020 and was included in priority review. However, in June 2023, the new drug application for the use of Genor monoclonal antibody in the treatment of relapsed and refractory peripheral T-cell lymphoma was not approved by the National Medical Products Administration. This was also the first PD-1 product rejected by the National Medical Products Administration for market approval.

Although Genor Biopharma explained that no PD-1 product globally has been approved for the treatment of peripheral T-cell lymphoma, the Drug Evaluation Center of the National Medical Products Administration is more cautious in the evaluation of products with related indications. The rejection of an innovative drug by the regulatory authority is not common, and the impact on Genor Biopharma, whether in terms of internal confidence, external evaluation, or investor and market recognition, objectively exists.

The research and development difficulties did not end there. Genor Biopharma's research and development progress on core targets such as HER-2 monoclonal antibody GB221 and ADC drug GB251 is also not optimistic. Currently, the closest to market and most hopeful drug is the CDK4/6 inhibitor lerociclib (GB491). In March of this year, the National Medical Products Administration formally accepted the new drug application for lerociclib for first-line treatment of breast cancer However, in the face of fierce competition in the field of lorlatinib, Genor Biopharma is facing tough competition. Pfizer's lorlatinib, Novartis' ribociclib, Lilly's abemaciclib are leading the race, and Jiangsu Hengrui Medicine's darolutamide has already entered the national medical insurance catalog. In terms of research drugs, CSPC Pharma and Sihuan Pharmaceutical have related products entering clinical trials. In addition, the domestic patent for lorlatinib has expired, and there will be generic drugs joining the competition in the future.

In addition to lorlatinib, another promising product from Genor Biopharma is a CD20/CD3 bispecific antibody (GB261). In August this year, Genor Biopharma used the popular NewCo model to grant global rights to GB261 to a foreign company outside Greater China. In addition to the usual financial returns such as upfront payments, milestone payments, and sales royalties, the licensee also receives partial equity in the newly established overseas company.

Compared to the nearly 500,000 subscription applicants, a subscription multiple of 1247 times, a first-hand winning rate of only 3%, and a 21.67% increase in stock price on the IPO day, the current Genor Biopharma is left with only a "shell".

The "Truth" of the Merger

According to the aforementioned partners of Genor Biopharma, a struggling innovative drug company joining hands with a CSO company known for its commercialization capabilities is a positive development from any perspective. "With cash flow, pipeline, overseas collaborations, new management personnel coming in, and Yiteng Medicine also having factories," the partner said. In the long run, there are still many challenges to face after the merger, such as the relatively fewer original Genor Biopharma board seats in terms of new shareholder ownership, and how to find the most beneficial way to operate for both parties is the biggest challenge.

Yiteng Medicine was established in 2001 and began cooperating with GlaxoSmithKline in 2008 to promote and sell Xeljanz injections and tablets in China; in 2015, it was granted exclusive rights by Amarin to develop and commercialize Vascepa in Greater China; in 2016, it was granted exclusive rights by Lilly to promote and sell the anti-infective drugs Zerbaxa and Xerava in China; in 2020, it completed the acquisition of FPN from GlaxoSmithKline in China and the Netherlands, FPN is an asthma nebulizer.

Yiteng Medicine's products are mainly focused on the core treatment areas of anti-infection, cardiovascular, and respiratory systems. Among them, Zerbaxa, Xerava, and FPN are the main sources of revenue for Yiteng, contributing to over 90% of its revenue.

Yiteng Medicine has always had a dream of going public. In September 2020, it submitted its first listing application to the Hong Kong Stock Exchange, and in 2021, it submitted three more times. In the active capital market environment at that time, Yiteng Medicine was unable to go public as desired.

Public information shows that Yiteng Medicine's revenue for 2021, 2022, and 2023 are 2.073 billion yuan, 2.074 billion yuan, and 2.3 billion yuan respectively, with profits of 157 million yuan, 306 million yuan, and 308 million yuan respectively Before innovative drugs became the most glamorous narrative in the industry, the story of CSO was also favored by capital, with star institution Sequoia Capital among the shareholders of Yiteng Medicine. However, after the pharmaceutical reform in 2015 and the implementation of drug centralized procurement in 2018, the development prospects of CSO were no longer optimistic in the industry, as the high sales rate and centralized procurement squeezed out the profit margins in the middle sales link.

In this situation, undervalued GENOR-B became the target of Yiteng Medicine.

Since the launch of the Hong Kong Stock Exchange's Chapter 18A rules, 64 biotechnology companies have been listed on the H-share market, with a total financing amount exceeding HKD 100 billion. "Watching him build tall buildings, watching him feast guests, watching his building collapse," now, there are not a few Chapter 18A companies with a market value of less than HKD 3 billion. GENOR-B, which announced its merger, is one of the companies with a relatively low market value, with very poor daily liquidity and obvious lack of vitality.

On September 24th, the China Securities Regulatory Commission issued the "Opinions on Deepening Market Reform of Mergers and Acquisitions of Listed Companies", proposing to support listed companies in transforming and upgrading to emerging industries, conducting cross-industry mergers and acquisitions, acquiring key technological assets, and integrating assets upstream and downstream of the industrial chain to guide resources towards new productive forces.

The innovative drug industry is undoubtedly the industry that best meets the standard of "new productive forces". "Building tall buildings, feasting guests, building collapses" is the development cycle of innovative drugs as an emerging industry. From this perspective, the merger of GENOR-B and Yiteng Medicine provides an insight to the industry - seeking future through unity is also a way out