On October 7th, an announcement from the Hong Kong stock market's 18A innovative pharmaceutical company,嘉和生物 (06998.HK), sparked heated discussions within the pharmaceutical community: 嘉和生物 is set to acquire 亿腾医药 through a merger, with the new company to be renamed 亿腾嘉和 post-merger. This effectively constitutes a reverse takeover. The transaction is conducted through a share-swap, with the original shareholders of 亿腾医药 holding 77.43% of the new merged company, while those of 嘉和生物 holding 22.57%. 倪昕, the actual controller of 亿腾医药, is expected to become the controlling shareholder of the merged company, owning 37.60% of the merged entity's shares.

倪昕, the founder, chairman, and CEO of 亿腾医药, told the Economic Observer that the merger still requires going through the listing process of the Hong Kong Stock Exchange, and the deal is expected to close in the first quarter of next year, marking the official completion of the acquisition. Therefore, the first quarter of next year is the most critical timeframe.

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嘉和生物 and 亿腾医药 each have their distinct labels: the former was listed on the Hong Kong Stock Exchange in 2020, backed by the star investment institution Hillhouse, with a subscription multiple of over 1200 times during the placement, and a market value of over 14 billion Hong Kong dollars on the day of listing. However, it has faced continuous operational challenges, with a market value of around 500 million Hong Kong dollars before the merger announcement. The latter is a Contract Sales Organization (CSO) that has collaborated with many foreign pharmaceutical companies, having submitted its prospectus to the Hong Kong Stock Exchange four times but failing to go public.

In the view of a partner of 嘉和生物, the company's pipeline lacks significant differentiation, its stock price is relatively low, and its financing channels are not very smooth. The possibility of share conversion or board transfer is not very high, and it is in urgent need of cash at present. For 亿腾医药, the inability to go public means that investors cannot exit, "By integrating the shareholder levels on both sides, those who should come in come in, and those who should go out go out. Those who want to think long-term can do so, and those who want to think short to medium term can exit. It's a pretty good arrangement." "This is the first case of a reverse merger under 18A, and if it can stimulate the development of the industry, we are still very pleased. However, our starting point is still based on the company's own planning, seeking opportunities for business development," said 倪昕.

According to the announcement, 嘉和生物 believes that the merger is justified because the commercialization of the most promising product, the CDK4/6 inhibitor, is imminent, and 嘉和生物 has reached a critical stage in its development, requiring strong commercial capabilities to seize all possible market opportunities. After evaluating several potential target companies, 嘉和生物 concluded that 亿腾医药 meets the aforementioned criteria.

In the description of the announcement, 亿腾医药 possesses a leading portfolio of innovative patented drugs with significant market potential and competitive original research products; it has a comprehensive commercial platform supporting robust financial performance; it boasts an industry-leading sales and marketing network to support the future commercialization of the synergistic pipeline; and it features an advanced manufacturing platform and a global supply chain management system.

嘉和生物 will settle through the issuance of shares, with no cash expenditure.

In the view of a person close to the merger event, this merger is a "setup" by the investors of both companies, "activating the resources of both companies, at least solving their respective difficulties for now."Ni Xin told the Economic Observer that this reverse merger was mainly actually driven by Eton Pharmaceuticals, but the merger transaction required the support and approval of shareholders and investors from both sides, so investors also played a very important role in the process. The merger transaction was considered comprehensively, and finally Eton Pharmaceuticals decided to use the reverse acquisition method for business expansion financing arrangements.

As a "shell" story

When the innovative drug industry was booming, Jiahe Bio also had a "good hand".

Jiahe Bio was established in 2007 and is an innovation-driven biopharmaceutical company. Its current product pipeline covers the top three global tumors (breast cancer, lung cancer, gastrointestinal tumors) and hematological tumors.

In terms of product types, Jiahe Bio mainly focuses on potential biosimilars, as well as some fast-follow drugs and first-in-class drugs. The layout of the pipeline is a bit similar to that of Junshi Biosciences (688180.SH/01877.HK) at that time.

At the beginning, Jiahe Bio also adopted a high-profile strategy, which was more evident in the development process of its "yesterday's yellow flower" product PD-1. In December 2016, Jiahe Bio's PD-1, Jien Dan Kang (GB226), obtained the clinical trial approval from the National Medical Products Administration, only about 3 months later than BeiGene's PD-1, Tislelizumab, and still belongs to the first echelon in China.

However, Jiahe Bio's choice of indications was proven to be unwise. At the beginning, it chose relapsed and refractory peripheral T-cell lymphoma. Later, Jien Dan Kang was also known as the first PD-1 product globally to apply for the indication of peripheral T-cell lymphoma.

The above indication of Jien Dan Kang was accepted by the National Medical Products Administration in mid-2020 and was included in the priority review. However, in June 2023, the new drug application for Jien Dan Kang to treat relapsed and refractory peripheral T-cell lymphoma was not approved by the National Medical Products Administration. This is also the first PD-1 product to be refused for marketing approval by the National Medical Products Administration.

Although Jiahe Bio explained that no PD-1 products have been approved globally for the treatment of peripheral T-cell lymphoma, and the National Medical Products Administration's Drug Evaluation Center is more cautious in the review of related indication products, it is rare for innovative drugs to be refused marketing approval by the drug regulatory department at the "last minute". The impact on Jiahe Bio objectively exists in terms of internal confidence, external evaluation, and investor and market recognition.

The research and development (R&D) difficulties have not ended. Jiahe Bio's R&D situation on core targets such as HER-2 monoclonal antibody GB221 and ADC drug GB251 is also not optimistic. At present, the closest to market and most hopeful is the CDK4/6 inhibitor, Le Rociclib (GB491). In March this year, the National Medical Products Administration has officially accepted the new drug application for Le Rociclib's first-line treatment of breast cancer indication.However, in the case of the product Lai Luoxili, Jiahe Bio is facing a highly competitive landscape. In the same race, Pfizer's Ibrance, Novartis's Ribociclib, and Eli Lilly's Abemaciclib are ahead, while Hengrui Medicine's Dalpiclib has already entered the national medical insurance directory. Among the drugs under research, both Zhengda Tianqing and Si Huan Pharmaceuticals have related products that have entered clinical trials. In addition, the patent for Ibrance in China has expired, and in the future, generic drugs will also join the competition.

Apart from Lai Luoxili, another product of interest from Jiahe Bio is a CD20/CD3 bispecific antibody (GB261). In August of this year, Jiahe Bio licensed the global rights of GB261, excluding the Greater China region, to a foreign company using the popular NewCo model of the time. In addition to the conventional financial returns such as upfront payments, milestone payments, and sales royalties, the licensor also received a portion of the equity in the newly established overseas company.

Compared to the numbers of nearly 500,000 applicants for the placement, a subscription multiple of 1247 times, a one-hand lottery rate of only 3%, and a stock price increase of 21.67% on the day of the IPO, Jiahe Bio now only has a "shell."

The "Truth" Behind the Merger

The aforementioned partner of Jiahe Bio stated that a struggling innovative drug company joining hands with a CSO company known for its commercialization capabilities is a positive development from any perspective. The former has some products, and the latter has a stable cash flow. "With cash flow and pipeline in place, and international cooperation, new management personnel, and factories from Yiteng Medicine," the partner said, "In the long run, there are still many challenges to face after the merger, such as how to operate in the most beneficial way for both parties given the reduced number of original Jiahe Bio members in the board of directors due to the new shareholder composition."

Yiteng Medicine was established in 2001 and began cooperating with GlaxoSmithKline in 2008 to promote and sell Xilixin injections and tablets in China; in 2015, it was granted exclusive rights by Amarin to develop and commercialize Vascepa in the Greater China region; in 2016, it was granted exclusive rights by Eli Lilly to promote and sell the anti-infective drugs Wen Ke Xin and Xi Ke Lao in China; in 2020, it completed the acquisition of FPN's product rights in China and the Netherlands from GlaxoSmithKline, FPN being a nebulizer for treating asthma.

The products represented by Yiteng Medicine are concentrated in the three core therapeutic areas of anti-infection, cardiovascular, and respiratory systems. Among them, Wen Ke Xin, Xi Ke Lao, and FPN are the main sources of revenue for Yiteng, contributing to more than 90% of the company's revenue.

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

Public information shows that Yiteng Medicine's revenue for the years 2021, 2022, and 2023 was 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 CSOs was also favored by capital, and Sequoia Capital, a star institution, is among the shareholders of Yiteng Medicine. However, after the drug policy reform in 2015 and the implementation of drug collection in 2018, the development prospects of CSOs are no longer看好 by the industry because of high sales costs, and what the collection squeezes is the water in the middle sales环节.In this scenario, the undervalued Jiahe Bio became the target for Yiteng Pharmaceuticals.

Since the launch of the Hong Kong Stock Exchange's Rule 18A, 64 biotech companies have been listed on the H-share market, raising a total of over 100 billion Hong Kong dollars. "Watching him build a high-rise building, watching him entertain guests, watching his building collapse," now, there are quite a few 18A companies with a market value of less than 3 billion Hong Kong dollars in the entire Hong Kong stock market, and Jiahe Bio was one of the companies with a lower market value before the merger announcement, with very poor daily liquidity and obviously insufficient vitality.

On September 24, the China Securities Regulatory Commission issued the "Opinions on Deepening the Reform of the Mergers and Acquisitions and Restructuring Market of Listed Companies," proposing to support listed companies to transform and upgrade to emerging industries, conduct cross-industry mergers and acquisitions, acquire key technology assets, and integrate upstream and downstream assets in the industry chain to guide resources to gather towards new productive forces.

The innovative drug industry is undoubtedly the industry that best fits the "new quality productive force" standard, and "building high-rise buildings, entertaining guests, and the collapse of the building" is the development cycle of innovative drugs as an emerging industry. From this perspective, the merger of Jiahe Bio and Yiteng Pharmaceuticals provides an insight for the industry - seeking the future by hugging for warmth is also a way out.