The fifth company, Xuanzhu Biotech, failed to take off, while Sihuan Pharmaceutical continues to "forge ahead under pressure"

The ending may have been predetermined.

Recently, Four Rings Medicine (0460.HK) announced the withdrawal of the IPO application materials for its innovative drug subsidiary Xuanzhu Biotechnology Co., Ltd. (referred to as "Xuanzhu Biotech").

In comparison to the embarrassing situation of submitting a "0 revenue" application to the STAR Market in 2022 under the fifth set of listing standards, some of Xuanzhu Biotech's drugs have already achieved commercialization.

In June 2023, Xuanzhu Biotech's Class 1 innovative drug Anailazol Sodium enteric-coated tablets have been approved for listing and were included in the national medical insurance catalog in the same year of listing.

Despite the positive inflow of funds, Four Rings Medicine still voluntarily terminated the plan to spin off Xuanzhu Biotech for listing citing "factors such as the market environment of the capital market."

TradeWind (ID: TradeWind01) sought confirmation from Four Rings Medicine on whether Xuanzhu Biotech has any other listing plans, but as of the time of publication, no response has been received.

The defeat of Xuanzhu Biotech may bring certain pressure to Four Rings Medicine.

Four Rings Medicine, which has always focused on the medical aesthetics business, mainly generates revenue from the agency of medical aesthetic products such as Hugel Company's botulinum toxin "Letybo" and the development of generic drug business.

As a result, Four Rings Medicine has been hoping to achieve transformation and open up performance space through the development of innovative drugs and medical aesthetics.

However, the research and development of innovative drug business is "costly."

Four Rings Medicine originally planned to alleviate the burden through the spin-off, but now, with the failure of Xuanzhu Biotech's solo flight, the road to "reducing the burden" is full of challenges.

Another "Fifth Set" Defeat

In September 2022, Xuanzhu Biotech's listing application was accepted by the Shanghai Stock Exchange. At that time, due to the absence of innovative drugs on the market and no source of income during the reporting period, it applied for listing under the fifth set of standards.

The "fifth set of listing standards" only requires market value and research and development progress: "The expected market value is not less than RMB 4 billion, the main business or product needs to be approved by the relevant national authorities, with a large market space, and has achieved phased results. Pharmaceutical industry enterprises need to have at least one core product approved for phase II clinical trials, and other enterprises that meet the positioning of the STAR Market need to have obvious technological advantages and meet corresponding conditions."

After six months of inquiries, Xuanzhu Biotech faced the review of the listing committee, but it was deferred.

Since then, Xuanzhu Biotech's IPO has been stagnant until the voluntary withdrawal of the application materials this time.

"Based on Xuanzhu Biotech's own business development and strategic planning considerations, and after careful study of factors such as the current market environment of the capital market, the board of directors and Xuanzhu Biotech have decided to withdraw the application for Xuanzhu Biotech's planned listing on the Shanghai Stock Exchange, and the Shanghai Stock Exchange has accepted Xuanzhu Biotech's voluntary withdrawal application," Four Rings Medicine stated.

Xuanzhu Biotech is not alone.

From an external environmental perspective, companies that applied for IPO under the fifth set of standards have indeed encountered difficulties in listing.

According to data compiled by TradeWind (ID: TradeWind01), from January 1, 2023 to May 27, 2024, a total of 7 companies applying under the fifth set of standards, including Xuanzhu Biotech, have terminated their STAR Market IPOs Some companies have even obtained registration approval, but have not been listed until the approval expires - Xi'an Xintong Pharmaceutical Research Co., Ltd. obtained registration from the China Securities Regulatory Commission on April 25, 2023, with a validity period of 12 months, but has not issued shares until now.

However, some companies are still choosing to wait.

According to incomplete statistics from Feng (ID: TradeWind01), there are currently at least 8 companies, including Shenzhen Beixin Life Science and Technology Co., Ltd., Sichuan Jinjiang Electronic Medical Equipment Technology Co., Ltd., and Wuhan Heyuan Biotechnology Co., Ltd., that are in the inquiry/registration submission stage for the fifth set of listing standards.

However, looking at the situation of Xuanzhu Biology itself, there is indeed a high level of uncertainty regarding the commercial prospects of its core pipeline product, Anilazol Sodium Enteric-coated Tablets.

As a proton pump inhibitor (referred to as "PPI"), Anilazol Sodium Enteric-coated Tablets was approved by the China Food and Drug Administration in June 2023 for the treatment of duodenal ulcers and was included in the national medical insurance catalog in the year of its listing, generating revenue.

Xuanzhu Biology's parent company, Sihuan Pharmaceutical, believes that the number of digestive ulcer patients in China reached over 70 million in 2021, with a corresponding PPI market size of nearly 30 billion yuan, indicating that Anilazol Sodium Enteric-coated Tablets, with excellent clinical performance, has huge future commercial value.

This may only be half of the story.

Despite the vast market size, the industry competition is fierce.

PPI drugs similar to Anilazol Sodium Enteric-coated Tablets have been successively included in centralized procurement.

According to incomplete statistics, there are currently at least 7 PPI drugs on the market in China for the treatment of digestive ulcers, including Rabeprazole, Esomeprazole, Omeprazole, Lansoprazole, Pantoprazole, Ilaprazole, and Anilazol Sodium.

Except for Ilaprazole and Anilazol Sodium, the other 5 PPI drugs have been included in centralized procurement.

Lizhu Group (00513.SZ), which holds Ilaprazole, also pointed out that the industry competition is intense, and medical institutions tend to use centrally procured drugs.

"For PPI products, hospitals have a relatively high priority for the use of centrally procured varieties, so the impact on Ilaprazole tablets is significant. The company will follow up with measures such as strengthening hospital coverage to make up for the quantity with price." Lizhu Group stated.

Therefore, whether the commercial prospects of Anilazol Sodium Enteric-coated Tablets can be realized remains unknown.

Holding 2 Innovative Drug Companies

Amidst the uncertain future, Xuanzhu Biology has also encountered changes in the environment for spin-off listing reviews, which may be one of the reasons for its proactive withdrawal of application materials.

The "New Nine Regulations" issued by the State Council on April 12 this year emphasized strict supervision of spin-off listings, which may have dampened the enthusiasm of listed companies to spin off subsidiaries for listing in Shanghai and Shenzhen.

The failure of Xuanzhu Biology to go public independently has increased the pressure on Sihuan Pharmaceutical.

The core pressure is on funding.

Previously, Sihuan Pharmaceutical planned to spin off Xuanzhu Biology for listing on the Sci-Tech Innovation Board, allowing the latter's innovative drug business to obtain blood supply through the capital market "The spin-off will help Xuanzhu Biotech further become an independent innovative drug R&D platform company, and can directly enter the debt and equity capital markets, thereby increasing Xuanzhu Biotech's financial flexibility and enhancing its ability to raise external funds." Sihuan Pharmaceutical pointed out: "The group can also focus the company's existing funds and resources on nurturing and developing high-growth medical aesthetics business and other new businesses."

According to the original plan, Xuanzhu Biotech's Sci-Tech Innovation Board IPO is expected to raise RMB 2.47 billion, for purposes including "innovative drug R&D," "headquarters and industrialization of innovative drugs," and supplementary working capital.

Currently, Xuanzhu Biotech, which has only preliminarily commercialized its products, has limited overall performance scale.

In 2023, the revenue of Sihuan Pharmaceutical's innovative drug segment was about RMB 12 million. During the same period, its research and development expenses still reached RMB 578 million.

Moreover, Xuanzhu Biotech is currently advancing the clinical trials of multiple anti-tumor drugs such as HER2 bispecific ADC drug XZP-KM501, DNA-PK inhibitor XZP-6877, and CD80 fusion protein drug XZP-KM602.

As a result, the development of Xuanzhu Biotech requires a large amount of cash, or it may still need more support from its parent company Sihuan Pharmaceutical.

Xin Feng (ID: TradeWind01) sought confirmation from Sihuan Pharmaceutical whether Xuanzhu Biotech still has plans to go public in other markets, but as of the time of publication, no response has been received.

Furthermore, as the difficulty of listed companies spinning off subsidiaries to list on the A-share market increases, Sihuan Pharmaceutical's attempt to cultivate the development of innovative drug business through the capital market may be falling through.

In addition to Xuanzhu Biotech, another subsidiary of Sihuan Pharmaceutical responsible for innovative drug business is Jilin Huisheng Biopharmaceutical Co., Ltd. (referred to as "Huisheng Biopharma"), which is also advancing the research and development of multi-pipeline drugs.

Huisheng Biopharma is mainly responsible for the development of drugs in the field of diabetes, with several insulin products already approved for marketing, and clinical research on GLP-1 analog semaglutide injection, semaglutide tablets, and other drugs for weight loss and blood sugar reduction in progress.

Continuously increasing investment in innovative drug R&D in different tracks is bringing more pressure to Sihuan Pharmaceutical.

In 2023, Sihuan Pharmaceutical's net loss was RMB 54 million, mainly due to the consumption of research and development expenses.

"The loss for this year is mainly due to the profit of the group's medical aesthetics and generic drug business segments, as well as the substantial annual research and development investment of the group's innovative drug business segments (mainly Xuanzhu Biotech and Huisheng Biopharma)." Sihuan Pharmaceutical stated.

The development of the innovative drug business takes time, and in the short term, Sihuan Pharmaceutical may still rely on its main business of generic drugs and medical aesthetics.

Currently, Sihuan Pharmaceutical's generic drug business is impacted by the price reduction from centralized procurement, with revenue of RMB 1.399 billion in 2023, a year-on-year decrease of 29%.

However, Sihuan Pharmaceutical's medical aesthetics business, which includes various products such as Hugel's botulinum toxin "Letibao," has shown significant growth, with revenue of RMB 450 million in 2023, a year-on-year increase of 200.3% "Mainly due to the comprehensive relaxation of domestic epidemic control measures and the gradual recovery of consumer demand, the Group's medical beauty platform, Meiyan Space, has achieved a significant increase in medical beauty sales revenue through the clearance of channel inventory, strategic cooperation with multiple medical beauty institutions, and the upgrade to version 3.0 of the marketing strategy," said Sihuan Pharmaceutical.

However, Sihuan Pharmaceutical's core product, Letibao, is facing a new competitor. The A-type botulinum toxin under Aimeike (300896.SZ) and the recombined A-type botulinum toxin from Chongqing Yuyan Pharmaceutical Co., Ltd. have both entered the listing application stage.

This means that the original competitive landscape in China, which only had Letibao, Hengli, Botulinum Toxin Type A, and Jishi, will be disrupted.

Sihuan Pharmaceutical still faces significant challenges