Rare HK Shell Listing: Billion-Dollar Jiahe Bio Becomes "Shell

Recently, Jiahe Bio-Pharma (06998.HK) announced that it would acquire Eton Pharmaceuticals through a merger, with the original shareholders of Eton Pharmaceuticals holding 77.43% of the merged company's shares and the original shareholders of Jiahe Bio-Pharma holding 22.57%. The actual controller of Eton Pharmaceuticals, Ni Xin, will become the controlling shareholder of the new company; he is also the founder, chairman, and CEO of Eton Pharmaceuticals.

In the A-share market, such transactions are generally referred to as "reverse takeovers," where a smaller listed company acquires the shares of the target company by issuing shares. After the transaction is completed, the equity held by the original controlling shareholder of the listed company is less than that held by the controlling shareholder of the target company, resulting in a change of control of the listed company. However, in the Hong Kong stock market, where the difficulty of going public is relatively low, "reverse takeovers" are not very common.

The target company, Eton Pharmaceuticals, is a Contract Sales Organization (CSO) enterprise. According to the Wind database, Eton Pharmaceuticals has submitted listing materials five times since 2020 but has ultimately failed to go public smoothly. The merger between Jiahe Bio-Pharma and Eton Pharmaceuticals is the first reverse acquisition case since the Hong Kong Stock Exchange established the 18A rule.

Can Eton Pharmaceuticals realize its listing dream by leveraging Jiahe Bio-Pharma?

Eton Pharmaceuticals, facing listing difficulties, was established in 2001 by Ni Xin. With a background in pharmaceutical sales, Ni Xin defined Eton Pharmaceuticals' business model as a CSO, which is third-party outsourced sales, specializing in drug distribution. In practice, the company obtains product rights from major overseas pharmaceutical manufacturers and then forms a sales team to distribute these drugs domestically.

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Currently, the main drugs sold by Eton Pharmaceuticals are Vancomycin, Cefuroxime, and Erythropoietin, among which Vancomycin and Cefuroxime were acquired from Eli Lilly and are two mature antibiotic products, preferred for the treatment of MRSA infections and pediatric infections. Erythropoietin was acquired from GSK and is a new generation of inhaled corticosteroid (ICS) formulation, suitable for the treatment of mild to moderate asthma in children and adolescents.

Of course, with the advancement of medical industry reforms such as the two-invoice system and volume-based procurement, Eton Pharmaceuticals is also seeking transformation, acquiring mature products on one hand and engaging in innovative research and development on the other. In 2015, Eton Pharmaceuticals began to lay out its innovative drug pipeline, introducing Vesanoid from Amarin and Stevula from Shionogi Pharmaceutical, both of which have been launched.

Relying on industry accumulation, by 2022, Eton Pharmaceuticals achieved a revenue of 2.074 billion yuan and a net profit of 306 million yuan. However, with the deepening of the medical system reform, the revenue growth of Eton Pharmaceuticals is relatively weak, with little increase in the company's revenue in 2022 compared to 2021.In addition to sluggish growth, the main products are either original research products whose patents have expired, or they may also be significant barriers to the listing of Eting Pharmaceuticals. Data from the Wind database shows that since September 2020, Eting Pharmaceuticals has submitted listing materials five times in succession, intending to go public on the Hong Kong stock market. However, as of the current date, the company has not been able to issue shares smoothly.

The prospectus indicates that during its development, Eting Pharmaceuticals has undergone six rounds of financing, with a total of $268 million raised, involving investment institutions such as Taikang Investment, Sequoia China, and HanDan Asia Pacific. As of the end of 2022, Eting Pharmaceuticals' debt-to-asset ratio was as high as 62%, with the book total of short-term and long-term borrowings due in the current period reaching 1.717 billion yuan, while the company's current assets book total was only 1.48 billion yuan. Under these circumstances, the exit of Eting Pharmaceuticals' shareholders and the company's financing needs are both relatively large.

Jihe Bio, which has not yet made a profit, is an innovation-driven biopharmaceutical company. The company is mainly engaged in the development of innovative drugs in the field of tumors such as breast cancer, lung cancer, gastrointestinal tumors, and hematological tumors. Currently, there are several products under research and commercialization, including GB491 (Lerociclib), GB261, and GBD201.

As an innovative drug research and development company, Jihe Bio was once a darling of the capital market and has successively won the favor of well-known investment institutions such as Hillhouse, Temasek, Goldman Sachs, and Blackstone. In 2020, when the company went public in Hong Kong, the market was also full of expectations for Jihe Bio, and its market value exceeded 14 billion Hong Kong dollars on the first day of listing.

It is worth noting that after years of research and development, Jihe Bio's products are still in the process of commercialization and have not yet provided revenue for the company. As of the first half of 2024, Jihe Bio's revenue was only 14.47 million yuan, and in 2023, the company failed to generate revenue. Affected by the high research and development and management costs, Jihe Bio, which has not yet commercialized its products, has already suffered significant losses.

Data from the Wind database shows that since Jihe Bio announced its financial data in 2018, the cumulative loss exceeded 6.2 billion yuan as of the first half of 2024. Under the unclear situation of the core product's commercialization before the listing, the stock price of Jihe Bio also showed a clear downward trend after the listing, with the lowest stock price falling to 0.85 Hong Kong dollars per share, once entering the category of penny stocks.

Each has its own difficulties, which may be the important reason for Jihe Bio and Eting Pharmaceuticals to come together. On October 7, after Jihe Bio announced the transaction plan, the company's stock price once rose by more than 90%; however, as the market enthusiasm faded, Jihe Bio's stock price quickly fell after the surge, and by October 10, the company's stock price had fallen to around 1.8 Hong Kong dollars per share, only about a 26% increase compared to the stock price before the company's suspension on September 12.

"Shell resources" have been repeatedly speculated upon during special periods, but with the advancement of the A-share registration system reform, the IPO channel for companies has been opened, and "shell listings" have significantly decreased, and "shell resources" have gradually lost their speculative value. The China Securities Regulatory Commission has also clearly stated: to strictly regulate restructured listings and strictly implement the "shell is equivalent to IPO" requirements.

In the case where it is not difficult for Hong Kong stock companies to go public and the value of "shell resources" is not high, can Jihe Bio's reverse acquisition of Eting Pharmaceuticals gain the recognition of investors?