Investment cooling Chinese innovation medicine, but why not reduce the valuation?

2022-05-13 0 By

The bursting of the innovation drug bubble will be late, but not absent.”Four-year-old biotech, the oncology sector, is said to be counting down to its closing.”One day at the end of March, this sentence in the circle of friends stabbed many people’s eyes.It is an unspoken fact that the institutions that invest in innovative drugs are retreating, a year after innovative drugs became the hot ticket for investment.According to a new drug founder recalls, probably from the Hong Kong stock market 18A broke IPO, those who once flocked to the investment institutions, the frequency of the door became less.He left a multinational pharmaceutical company several years ago to set up an innovative pharmaceutical company.In 2021, he spent the year in the usher.But after the Year of the Tiger, he got a little panicked, between the huge sums of money needed for each step of the pipeline that had already been started and the reluctance of investment institutions to make decisions.A longtime early-stage investor in innovative drugs proved that to Arternet.This year, a large number of his earlier layout of innovative drug projects into the C round, D round financing.He and the founders are clearly feeling that institutions are becoming more cautious and less frequent.At the same time, investors and entrepreneurs alike are beginning to mark valuations down somewhat, “I would guess at least a quarter to a third.””The investor said.But according to arterial network later understand, the primary market in accordance with this range of real reduced valuation of innovative drug projects are not many, more projects choose to wait.China’s innovative drug industry seems to be at its most dangerous. But is it really?Who let innovation medicine investment cool?As the bosses of innovative drug companies feel the approaching winter, there are professional investors who look at innovative drugs.Because behind them, there’s the voting committee.At the beginning, they also ran as usual in various innovative drug projects, after the project was promising, the resistance to the landing unexpectedly increased.”Sometimes the role of an investment manager is just like that of a middleman. It is up to the investment committee to decide whether a project can be invested or not.””It’s more passive,” one investor told further explained that for those projects with high valuations, the likelihood of being accepted by the investment committee is now very small.As the highest decision-making body of a venture capital institution, the investment Committee is usually responsible for deciding the institution’s capital plan, investment strategy, investment principles, investment objectives, asset allocation and overall portfolio plan.A vertical media once interpreted venture capital like this: VC can form a business model, the top layer is poor cognition, the middle is poor information, and then is the manifestation of fundraising, Sourcing, investment after all kinds of details.If investment managers take the lead in optimizing the details of venture capital institutions, then the poor cognition of the optimization top is the job of investment committee.Compared with technical path innovation, target popularity and other specific analysis dimensions, the investment committee will more consider the competitiveness of the project to be invested in the subsequent transaction.In other words, in the secondary market is not favored by the technology is difficult to pass the investment committee.The hot market for innovative drugs over the past two years has proved this.In April 2018, HKEx amended the main board listing rules, adding a new chapter 18A “Biotechnology Companies” (” 18A “), allowing biotechnology companies with no revenue or profit to submit listing applications.More than a year later, the science and innovation Board was opened, and the fifth set of listing regulations, which happened to coincide with 18A, both drove the listing and financing tide of innovative drug projects.For example, hKEX noted in its first hKEX and Biotech newsletter in 2021 that while the capital market has experienced significant fluctuations due to the COVID-19 pandemic, hKEX’s healthcare sector has shown strong resilience and attracted much attention from the market.For all of 2020, the Hang Seng Hong Kong-listed Biotech Index (49.5 per cent) outperformed the Hang Seng Index (-3.7 per cent).The enthusiasm of the secondary market makes innovative drug projects a certainty in the eyes of the Investment Committee, and a wave of innovative drug enterprises obtain financing and then go public.But novelty is not enough to sustain a sustained boom.By the second half of 2021, people will shake their heads when they mention innovative drug companies listed in 18A and the fifth set of the Science and Innovation Board.The shares of these fledgling public companies are illiquid.On December 27, 2021, for example, there were 29 biotech companies with the suffix “B” with a turnover of less than HK $10 million, including 11 with a turnover of less than HK $1 million.Late-stage innovative drug companies are forced to go public at a discount.In February 2022, The IPO price was 7.13 Hong Kong dollars per share, or 5.78 yuan, lower than the 6.7 yuan per share price in the Series C financing less than a year earlier.Behind this, Rapson had to go public at a discount to relieve the immediate need for capital.Although this is the first price below the series C financing cost in the four years since 18A launched, many ipos in the past six months have already made pre-IPO investors lose money, and more innovative drug companies’ shares have fallen sharply, falling back to the value of series B or even Series A financing.”The primary market financing is actually highly correlated with the secondary market, and the transmission of influence is very fast now, and the market is very cold now.”Another investor told, “People are not so sure about everything. It’s like the beginning of 2020. They are worried about whether there will be an economic crisis or how international policies will change.On the contrary, projects that are still far from the secondary market, such as synthetic biology, exosomes, gene therapy, regenerative medicine, etc., are more likely to be approved by the investment committee.The underlying logic of innovation drug investment is easy to get stuck in the final investment committee decision, smart investment managers see innovation drug projects naturally less.”Investors calm down very quickly. Maybe when the cold water cools down, everyone will calm down. But when the news comes up, everyone will go crazy.When he calmed down, the investor admitted that it would be difficult to raise money if the company did not have clear commercialization expectations.As a matter of fact, more investors are rethinking the methodology suitable for China’s innovative drug investment when the investment fever of innovative drug is fading.Most of them told Artery that the first half of innovative drug investment is now over and the second half is beginning.”This is the normal law of industry and investment development. Only after going through a complete cycle can China’s innovative pharmaceutical companies and investors be professional and mature enough.”Northern lights venture partner Song Gao guang said.In fact, in early interviews, many investors have mentioned to that in the short term, domestic innovative drugs will enter a period of pain, and some enterprises without differentiation and strong clinical strength may be on the verge of bankruptcy.In fact, the current situation has confirmed the original judgment, but the process has been delayed and intensified due to the outbreak of COVID-19 and the rapid development of bio-medicine in various regions.In the second half, innovation drug investment decisions will be based on a more comprehensive and three-dimensional understanding of the project value.For example, in the past, innovative drug programs were valued at more than $1 billion once a product entered clinical trials, and at least doubled when it advanced to Phase II clinical trials.Under the halo of speed being king, the observation of clinical data itself is less important.As the end of the r&d phase nears, considerations such as the pace of product approval and the risk of commercialization are given greater weight.Truly valuable innovative drugs, at least in the head-to-head experiments with existing drugs, show a significant improvement in efficacy and safety, and clear clinical advantages and underlying technical barriers.Some investors told that many institutions will only continue to hold innovative drug projects in their portfolio, and will not invest money in unfamiliar projects. They need to fully master all the details of an innovative drug project technology, team and market.And in the first half, innovation medicine investment is a bit like blind men and elephant, often touch a point will cross.For example, from 2016 to 2017, when PD-1 investment was very popular, investment institutions almost searched for similar projects and could make investment judgments based on the single factor that the founding team had relevant industrial experience.The first half of the innovative medicine investment logic, is fast to follow the type of innovation.It scours the world for innovative drugs with outstanding clinical value to tackle serious diseases, such as cancer, and quickly brings blockbuster drugs to the country with minor improvements that bypass restrictions before patents expire.This process gave birth to the VIC new drug development model of capital +CRO+ scientists.At that time, the top talents of multinational pharmaceutical enterprises went into the sea to start their own businesses. Investment institutions intervened at a very early stage to promote the development of new drugs and attract more capital, further pushing the enterprises forward and increasing their valuation.VIC model has achieved the most important innovative drug companies in the first half of China, such as Baiji Shenzhou and Zaiding Pharmaceutical, and has also changed the fate of many terminally ill patients.In the past, most special-effect new drugs in the late stage of severe illness were developed by foreign pharmaceutical companies and marketed in foreign markets, and they would wait at least 7 to 8 years before being introduced into China.During the waiting time, only a small number of eligible patients receive new drugs through grey channels, but there is a lot of confusion.VIC innovative pharmaceutical companies reduce the waiting time of these life-saving drugs to 1-2 years, and they enter medicine soon after the market, effective and accessible, such as PD-1, which is moving forward with heavy load.However, in the later period, the VIC model was gradually distorted.Sometimes there is no real breakthrough, but valuations have gone up a lot.More important, compared with the industry’s elite waiting to start innovative drug companies, and the institutions waiting to invest in them, the number of new drugs that can be copied is so small that r&d is piling up.When a product is still a long way from commercialization, competitors have flocked to the company to compete for limited clinical resources and sales channels, and these operational capabilities are exactly the shortcomings of VIC model entrepreneurs. Therefore, the way of new drug development must be changed.Therefore, the current cold market in innovation medicine investment is actually a process of connecting the preceding and the following.Perhaps more important than predicting the future is figuring out how to survive.If we don’t cut valuations, we’re gonna die?Hold on, it is not easy for innovative drug companies.In fact, until now, people don’t think much about the survival of innovative drug companies.In the past decade, creating or investing in innovative drug companies has been almost always successful or better.”This situation is problematic. China’s innovative drug industry has to go through life and death before deciding which to choose.”Song Gaoguang said.Chinese innovative pharmaceutical companies that have not established risk awareness must deal with two major crises when risks come.The first is a cash flow crisis.Before the launch of their products, most innovative pharmaceutical companies have very limited cash flow sources, which can only be achieved by providing professional technical support and licensing pipelines.But in a crisis, neither path is good enough.The former is limited by the technical platform and personnel capacity, it is difficult to make scale, while the latter is only a few innovative pharmaceutical companies with strong research and development ability can do it.For example, in the prospectus of innovative pharmaceutical companies, we can usually read the description of other business income related to technology export, but the capital can range from hundreds of thousands to millions, which is just a drop in the bucket in front of the investment of hundreds of millions in r&d pipeline.However, the external authorization of large amount of money really belongs to China’s new drug start-ups is very few.Prior to this, the domestic innovative drug industry was excited by the $2.6 billion licensing order for Seattle Gene, a new ADC drug from Rongchang, but such licensing deals are not common even for the domestic ADC leader like Rongchang.In addition, Qinhao Pharmaceutical granted the product development and commercialization rights of SHP2 inhibitor GH21 outside China to Huasia Biological International with 282 million DOLLARS, and Verizhibo granted the global r&d and production license of anti-LAG-3 antibody LBL-007 and the exclusive commercialization rights outside China, all of which are rare among new drug start-ups.External financing is of self-evident importance to innovative pharmaceutical companies. It seems that reducing the valuation to exchange for cash flow has become their only way out.But despite tight funding, valuations have not come down significantly.”The liquidity of the primary market is relatively poor, so the discount is not normal at present, but the impact of the valuation of the vast majority of projects rises sharply, almost realistic, the increase is basically controlled within 1 times.”One investor told, it is necessary for innovative pharmaceutical companies to manage shareholders’ expectations well, because whether to reduce the valuation does not depend on the innovative pharmaceutical companies themselves to a large extent.Although in the early high valuation, placed too much expectation and interests of investment institutions, but after all, to live is the absolute truth.This is not difficult. In 2021, the investment and financing of innovative drugs were hot, and the valuation of phase I clinical trial projects increased from 300 to 400 million yuan to 1.2 billion yuan. However, some investors told that if the core product entered phase II clinical trial, the enterprise could still achieve a further financing valuation of about 1.5 billion yuan.In other words, investors will not face losses even if expectations are lowered.In fact, many investors have noticed the cash flow crisis of innovative pharmaceutical companies and started to lower their expectations voluntarily.”Of course many investors understand the difficulties of companies, and they also focus on cash flow to keep the project going.”It is understood that the early projects of pre-A or round A have begun to reduce their valuation. For example, the original valuation of the pre-A round innovative drug project of 400 ~ 500 million yuan has been reduced to 250 million yuan in financing.But valuations for Series B and subsequent growth projects have barely come down.One investor said that in his letter to the founders of the companies he invested in at the beginning of the year, he specifically reminded everyone to pay attention to cash flow. “We will try our best to help the companies through the difficult times, but it is not easy.”In addition to the generally low mood among investors, the volume of capital itself is shrinking, he told 2018, the National Medical Insurance Administration was established, leading the first batch of state-organized centralized drug procurement pilot work was in full swing, the price of generic drugs dropped significantly, capital and local attention focused on innovative drugs, a large amount of cash influx, together pushing up the valuation of innovative drug projects.But this kind of situation has changed this year, all over the park investment appeared stronger effect orientation.Another crisis that needs to be addressed is the problem of inadequate operational management capacity.Although this is not important in the face of life-or-death cash flow, it must be taken seriously.As mentioned above, most innovative drug companies are led by r&d or product professionals, rather than battle-hardened entrepreneurs, who are not equipped to make the right decisions when the company goes off track.And the wrong trade-offs tend to exacerbate the cash flow crisis.More importantly, those innovative pharmaceutical companies that have survived this crisis need to optimize management paradigm in terms of how to maintain victory in the fierce market competition in the future and how to keep correct details such as team running-in, financing planning, product running-in, competitive strategy and operating efficiency.For innovative pharmaceutical companies that can really do big in the future, the current cash flow crisis may be the power of management ability.So, for some innovative drug companies, this is indeed the most dangerous time.However, Chinese innovative drugs are following the order of growth and opening a new chapter.