Why is the market not buying CSPC Innovation's acquisition of weight loss drug assets? Analyzing the "H-style A" double play of CSPC PHARMA

The concept of weight loss drugs is about to make another wave.

On January 25th, CSPC Innovation (300765.SZ) disclosed its restructuring plan, which involves the acquisition of 100% equity of CSPC PHARMA (referred to as "Vitamins Pharmaceuticals"), CSPC PHARMA (referred to as "Enbipu Pharmaceuticals"), and CSPC PHARMA (referred to as "Shiyao Baike") through the issuance of shares and cash payment.

Among them, CSPC Innovation and Shiyao Baike are both controlled by CSPC PHARMA (1093.HK), and this transaction is also an internal asset restructuring of CSPC PHARMA.

It is worth mentioning that in the research pipeline, the GLP-1 class drug TG103 injection of Shiyao Baike is undergoing Phase 3 clinical trials for obesity/overweight indications, and the semaglutide injection for type 2 diabetes indications is also undergoing Phase 3 clinical trials, with expected market approval starting from 2026.

However, the market's reaction to this transaction has been mediocre.

On January 25th, CSPC Innovation's stock price fell by 6.35%.

The main reason behind this may be related to the low price at which CSPC Innovation issued shares to Vitamins Pharmaceuticals, Shiyao Shanghai, and Shiyao Baike.

According to the plan, the price at which CSPC Innovation issued shares to Shiyao Baike shareholders is RMB 20.91 per share. If calculated based on the average trading price of the previous 20 trading days before the pricing reference date, which is RMB 36.48 per share, this issuance price is equivalent to a 40% discount.

This means that CSPC PHARMA, as the major shareholder, not only can acquire CSPC Innovation's A-share shares at a "cheap" price, but also the shares of CSPC Innovation's minority shareholders will be diluted to a greater extent.

Perhaps this is the cause of dissatisfaction in the secondary market.

In response to this, Zhitong App (ID: TradeWind01) also called CSPC Innovation to inquire about the consideration for the issuance of shares, but as of the time of writing, no response has been received.

However, this is not the first time that CSPC PHARMA has injected its innovative drug assets into CSPC Innovation. In August 2023, CSPC Innovation increased its capital to acquire control of CSPC PHARMA's innovative drug company, Giant Stone Biopharmaceutical Co., Ltd. (referred to as "Giant Stone Biopharmaceutical").

With two "H-to-A" transactions, whether CSPC Innovation's innovative drug business segment can achieve a leap forward remains to be seen.

Betting on "Twice a Week" Weight Loss New Drug

This transaction is an internal asset restructuring of CSPC PHARMA.

CSPC PHARMA controls 74.42% of CSPC Innovation's equity through its wholly-owned subsidiary CSPC PHARMA Enbipu Pharmaceuticals, and at the same time, CSPC PHARMA also controls 100% of Shiyao Baike through Vitamins Pharmaceuticals, Enbipu Pharmaceuticals, and Shiyao Shanghai. In this transaction, CSPC Innovation plans to acquire 100% equity of Shiyao Baike held by Vesheng Pharmaceuticals, Shanghai Pharmaceuticals, and Enbipu Pharmaceuticals through the issuance of shares and cash payment. Currently, the final transaction price has not been determined due to the incomplete asset evaluation of Shiyao Baike.

From a fundamental perspective, Shiyao Baike is indeed a high-quality asset.

According to the announcement, Shiyao Baike is mainly engaged in the research, development, and sales of long-acting protein drugs and other innovative drugs. Its core drug is Changxiao Shengbai Zhi Preparation, which is mainly used for the treatment of bone marrow suppression caused by chemotherapy, radiotherapy, and other anti-tumor treatments targeting rapidly dividing cells. It can increase the number of white blood cells to ensure the effectiveness of anti-tumor treatment.

In 2022 and 2023, the unaudited revenue of Shiyao Baike was RMB 2.34 billion and RMB 2.663 billion, respectively, with net profits of RMB 707 million and RMB 859 million during the same period.

Such performance has already exceeded CSPC Innovation, whose revenue and net profit attributable to shareholders in 2022 were RMB 2.626 billion and RMB 726 million, respectively.

Shiyao Baike's pipeline of research and development is also attractive.

As a core pipeline, the overweight indication of GLP-1 drug TG103 injection has entered Phase 3 clinical trials, and it is also pushing for clinical trials of TG103 injection for the treatment of non-alcoholic fatty liver disease and Alzheimer's disease.

CSPC PHARMA's official WeChat account shows that TG103 has the potential for ultra-long-lasting effect with an injection frequency of once every two weeks, which does have certain advantages compared to the current once-weekly injection frequency of semaglutide.

At the same time, Shiyao Baike's semaglutide injection for the treatment of type 2 diabetes is also advancing in Phase 3 clinical trials.

This means that after completing the acquisition of Shiyao Baike, CSPC Innovation will also enter the ranks of listed companies in the booming GLP-1 weight-loss drug market.

According to incomplete statistics, there are currently several A-share companies, including Huadong Medicine (000963.SZ), Lizhu Group (000513.SZ), Changshan Pharmaceutical (300255.SZ), and Hengrui Medicine (600276.SH), that are promoting clinical trials of GLP-1 pipeline.

Why is the market not buying it?

Since 2023, GLP-1 drugs have become a hot topic in the capital market.

For example, after Changshan Pharmaceutical disclosed the summary of its Phase 3 clinical trials of GLP-1 drugs on September 19, 2023, as of the close on January 25, 2024, its stock price had already increased by more than 30%.

Although CSPC Innovation will expand its business into the hot "miracle weight-loss drug" field after acquiring Shiyao Baike, the secondary market does not seem to be buying it.

On January 25, the closing price of CSPC Innovation's stock was RMB 32.61 per share, with a decrease of 6.35%. The core controversy may lie in the price at which CSPC Innovation issued new shares to purchase assets.

According to the "Reorganization Management Measures," the issue price of shares issued by a listed company to purchase assets shall not be lower than 80% of the market reference price. The market reference price is one of the average trading prices of the company's stock in the 20 trading days, 60 trading days, or 120 trading days prior to the announcement date of the board of directors' resolution for this transaction.

Based on this calculation, the prices at 80% of the average trading prices in the 20 trading days, 60 trading days, and 120 trading days prior to the pricing reference date for CSPC Innovation are RMB 29.19 per share, RMB 27.77 per share, and RMB 20.91 per share, respectively.

Among these three prices, CSPC Innovation has chosen a issuance price of RMB 20.91 per share, which is significantly lower than the average trading prices in the previous 20 trading days and 60 trading days by 28.37% and 24.70%, respectively. If calculated based on the average trading price of RMB 36.48 per share in the 20 trading days prior to the pricing reference date for CSPC Innovation, this issuance price is equivalent to a 40% discount.

This also means that in this acquisition, the major shareholder purchased the shares of CSPC Innovation at a lower price per share.

Such actions may not be friendly to the minority shareholders of CSPC Innovation.

"The issuance price of the reorganization should be lower than the investors' expectations, and the issuance will also dilute the rights of existing shareholders, so the market's reaction to this transaction is relatively negative," pointed out an investor in Beijing.

Xinfeng (ID: TradeWind01) has sought clarification from CSPC Innovation on the reason for this issuance price, but has not received a response as of the time of publication.

"H to A" Twice

Before the injection of CSPC Baike, CSPC PHARMA had already injected innovative drug assets into CSPC Innovation, and its stock price had been rising ever since.

CSPC Innovation has been focusing on related health products in the field of "big health," including functional ingredients such as caffeine and acarbose, as well as health products such as Guoweikang vitamin C tablets and B-complex vitamin tablets.

Among them, functional ingredients are the main source of revenue for CSPC Innovation, generating revenue of RMB 1.105 billion in the first half of 2023, accounting for 84.35% of the total. However, the gross profit margin is limited, standing at 41.28% during the same period. Meanwhile, the revenue from the health product business with a gross profit margin of 77.10% grew modestly, achieving revenue of RMB 180 million in 2023, an increase of only 0.15% YoY.

This business structure has indeed limited the imagination of the secondary market. The average price-to-earnings ratio of CSPC Innovation from January to August 2023 was around 20 times.

However, with CSPC PHARMA taking control of CSPC Innovation and injecting capital into innovative drug companies, the valuation has started to change. In August 2023, CSPC Innovation initiated a capital increase in Giantstone Biotech, controlled by CSPC PHARMA, by injecting cash of CNY 1.871 billion to acquire a 51% stake in the latter.

In 2022, Giantstone Biotech's revenue and net profit were CNY 217 million and -CNY 438 million, respectively.

As an innovative pharmaceutical company, Giantstone Biotech has already entered the stage of applying for market approval for its "Recombinant Anti-PD-1 Fully Human Monoclonal Antibody Injection" for the treatment of cervical cancer and its "Omalizumab" for the treatment of chronic spontaneous urticaria. Its pipeline covers areas such as breast cancer, psoriasis, and solid tumors.

This means that although Giantstone Biotech has not yet achieved profitability, its pipeline of products in the application for market approval or under development does fill the gap in CSPC Innovation's innovative drug research and development field.

From early September 2023 to the end of December 2023, CSPC Innovation's price-to-earnings ratio skyrocketed from 21 times to 50 times.

The surge in valuation is driven by market expectations for the development of CSPC Innovation's innovative drug business.

Although CSPC PHARMA twice transferred its innovative drug assets from the Hong Kong stock platform to the A-share platform of CSPC Innovation, which can be seen as a "left hand to right hand" move, this action has brought more valuation advantages to CSPC PHARMA.

Due to the low liquidity and valuation of the Hong Kong stock market, despite having multiple innovative drug pipelines, CSPC PHARMA's valuation is limited. As of the close on January 25, 2024, its price-to-earnings ratio (TTM) was only 10.89 times.

In contrast, Hengrui Medicine (600276.SH), which has a performance scale comparable to CSPC PHARMA, had a price-to-earnings ratio (TTM) of 62.50 times during the same period.

In this context, the step-by-step transfer of innovative drug assets from CSPC PHARMA to CSPC Innovation may also help reprice its innovative drug assets and obtain better valuation.

Whether CSPC Innovation can truly complete the transformation of innovative drugs is eagerly awaited by the market.