IPO Preview | NaoDong Aurora to Hong Kong for "blood transfusion": Nearly 900 million losses in 2 years, fearing dependence on major clients

Medical and health companies going public with "injuries" have become a common practice in the Hong Kong stock market. Recently, another "injured" medical and health company has knocked on the door of the Hong Kong stock market.

On March 28th, Brain Dynamic Aurora Medical Technology Co., Ltd. (referred to as "Brain Dynamic Aurora") submitted an application for listing to the Hong Kong Stock Exchange, planning to IPO on the main board of Hong Kong, with CICC and Guotai Junan International as its joint sponsors. It is reported that Brain Dynamic Aurora had previously submitted a listing application to the main board of the Hong Kong Stock Exchange on August 8, 2023, which is now invalid.

According to the Intelligence Finance app, Brain Dynamic Aurora was established in 2012 as the first domestic company to combine neuroscience with advanced artificial intelligence technology to develop medical-grade digital therapy products for cognitive disorders. The company's product pipeline covers a wide range of cognitive disorders induced by vascular diseases, neurodegenerative diseases, mental illnesses, and developmental defects in children.

As a pioneer in China's cognitive disorder digital therapy industry, Brain Dynamic Aurora has also been favored by capital since its inception: in 2015, the company received angel investments from Shanghai Feima Travel and Zhongwei Growth, with a post-investment valuation of 36.6285 million yuan. Subsequently, Brain Dynamic Aurora has received investments of over one hundred million yuan multiple times. By 2023, the company completed a C+ round of financing, totaling 7 rounds of financing including the angel round, with a post-investment valuation reaching 2.691 billion yuan.

However, despite raising funds through 7 rounds of financing, the company has yet to achieve profitability, and this time Brain Dynamic Aurora has had to reach out to the secondary market for more funds.

So, behind the lack of profitability, what is the investment value of Brain Dynamic Aurora?

In the commercialization stage, losses nearly 900 million in 2 years

Just as Brain Dynamic Aurora admitted in its prospectus that "the company is in the commercialization stage," both the product pipeline and fundamentals reflect this characteristic.

In terms of the product pipeline, as of March 20, 2024, Brain Dynamic Aurora's core product - the Brain Function Information Management Platform software system (referred to as the "system") has achieved commercialization for eight indications of four major types of cognitive disorders, and is currently developing an additional 21 indications for cognitive disorders. During the period, this system has been included in the provincial medical insurance reimbursement catalogs of 30 provinces in China.

At the same time, the company's other three products have obtained regulatory approval in China, including the Basic Cognitive Ability Test software (BCAT), Cognitive Ability Screening Assessment software (SAS), and Reading Disability Screening Assessment software (DSS). Another product has obtained regulatory approval in the European Union, the Cognitive Function Disorder Treatment software, along with five candidate products in different preclinical and clinical development stages.

In summary, Brain Dynamic Aurora currently only has its core product "system" commercialized for some indications, while the rest of the products are either in the regulatory approval stage or in clinical development stages.

(The above is the product pipeline of the core product)

The company is in the commercialization stage, which obviously means that Brain Dynamic Aurora is currently in the stage of "rapid revenue growth, but still difficult to make a profit".

According to the prospectus, in 2022 and 2023, Brain Dynamic Aurora achieved revenues of 11.291 million yuan and 67.20 million yuan, growing rapidly. Among them, the rapidly increasing revenue from in-hospital system integration software solutions is the company's main source of revenue, with revenues of 4.075 million yuan and 41.224 million yuan respectively, accounting for 36.1% and 61.3% of total revenue.

Unlike the rapidly growing revenue, Brain Dynamic Aurora is still in a perennial loss-making stage: from 2022 to 2023, the company's net losses were 500 million yuan and 360 million yuan, with a total loss of nearly 900 million yuan over 2 years. In addition, the adjusted net losses in 2022 and 2023 were 120 million yuan and 150 million yuan respectively, showing a trend of increasing losses.

The difficulty in making a profit for Brain Dynamic Aurora during its rapid growth period can be attributed to the "drag" of various expense increases.

According to the prospectus, in recent years, in order to continuously promote research and development and commercialization, the company has also spent a lot of financial and material resources, leading to a significant increase in various expenses. Among them, Brain Dynamic Aurora's sales and distribution expenses increased from 11.928 million yuan in 2022 to 38.399 million yuan in 2023, administrative expenses increased from 27.762 million yuan to 54.398 million yuan, and research and development expenses increased from 67.627 million yuan to 90.733 million yuan.

Affected by the perennial loss-making status, the cash flow on Brain Dynamic Aurora's books is obviously not abundant - according to the prospectus data, as of the end of 2023, the company had cash and cash equivalents of 46.315 million yuan. In the future, if the company wants to continue promoting product commercialization, it will likely still need a large amount of funds, which also reveals the company's intention to "infuse blood" through its Hong Kong IPO.

Increasing Industry Demand, But Suffering from "Dependence" on Large Customers

With the aging population, the overall number of patients with the four main types of cognitive disorders in China is increasing.

Let's start with some data - according to Frost & Sullivan data, cognitive disorders have become an important public health issue for the elderly population. With the aging population, it is estimated that by 2025, the total number of patients with the four main types of cognitive disorders in China will reach 358.3 million, and by 2030, it will reach 390.1 million. This is a huge patient group that is expected to generate a large amount of clinical demand.

Driven by the growing demand, the market for digital therapies for cognitive disorders is gradually becoming a promising track.

According to Frost & Sullivan data, in 2022, the global market size of digital therapies for cognitive disorders reached 2.1 billion U.S. dollars, and is expected to increase to 4.2 billion U.S. dollars by 2025 and 7.0 billion U.S. dollars by 2030, with compound annual growth rates of 25.5% and 10.7% respectively Among them, China has greater growth potential: in 2022, the market size of cognitive impairment digital therapy in China reached RMB 149.4 million, and is expected to increase to RMB 1,952.2 million by 2025 and RMB 9,568.2 million by 2030, with compound annual growth rates of 135.5% and 37.4% respectively.

(Image Source: Nao Dong Ji Guang IPO Prospectus)

In terms of competitive landscape, as one of the pioneers in the domestic cognitive impairment digital therapy industry, Nao Dong Ji Guang has obviously accumulated some first-mover advantages.

As of December 31, 2023, in China, approximately 25 participants including the Company have a total of about 30 cognitive impairment digital therapy products approved by the National Medical Products Administration or local medical products administrations, and at least 15 participants have at least 15 cognitive impairment digital therapy products undergoing clinical trials and obtaining relevant medical device registration certificates. Based on 2022 revenue, Nao Dong Ji Guang holds 25.0% and 91.6% market shares in the Chinese cognitive impairment digital therapy market and the Chinese medical-grade cognitive impairment digital therapy market for the year as shown.

However, it is worth noting that despite Nao Dong Ji Guang's certain first-mover advantages, it still suffers from a "dependency syndrome" on major clients due to unfavorable customer development.

According to the prospectus data, in 2022 and 2023, the total revenue from the top five clients of the Company was RMB 8.3 million and RMB 50.8 million respectively, accounting for 73.1% and 75.6% of the total revenue for the same period. The revenue from the largest client was RMB 4.4 million and RMB 26.8 million respectively, accounting for 39.1% and 39.9% of the total revenue for the same period. It is evident that the revenue proportions from the largest single client and the top five clients have been continuously increasing in 2022 and 2023.

In response to this, Nao Dong Ji Guang stated in the risk factors that the Company cannot guarantee that it will be able to reverse this trend in the coming years or for a period of time. In the foreseeable future, a significant portion of the Company's revenue is likely to continue to depend on a limited number of clients. Losing one or more major clients, or reducing purchases from any major client, may reduce the Company's revenue.

Conclusion

In summary, the cognitive impairment digital therapy market, with strong demand and rapid growth, is undoubtedly an attractive investment track.

However, for Nao Dong Ji Guang, although it is in a potential track with relatively fast growth, its long-term performance of losses may still discount its investment value