While some biopharmaceutical companies are desperately seeking to go public in Hong Kong, there are listed companies that choose to go private, and this happens to be the case with a company that has already turned around its losses through the commercial sale of its products.

On the evening of June 24th, Fosun Pharma (600196.SH, 02196.HK) announced its intention to privatize its subsidiary Henlius Biotech (02696.HK) through an absorption merger.

The cash consideration for this privatization is HKD 24.60 per share, a premium of over 30% compared to the closing price of HKD 18.84 per share, the day before the trading suspension of Henlius Biotech. The total cash consideration for the absorption merger will not exceed approximately HKD 5.407 billion or its equivalent in RMB.

How should we view the privatization of Henlius Biotech?

Why privatization is being pursued

Henlius Biotech is the biopharmaceutical platform of Fosun Pharma, established in 2010 as a joint venture between Fosun Pharma and an international team of scientists. It primarily focuses on the development of monoclonal antibody drugs, with products covering areas such as oncology and autoimmune diseases. In 2019, it achieved an IPO listing through Chapter 18A of the Hong Kong Stock Exchange's Main Board Listing Rules.

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In April 2018, the Hong Kong Stock Exchange added Chapter 18A to its "Main Board Listing Rules," allowing biotech companies without revenue or profits to submit listing applications.

In 2023, Henlius Biotech achieved a revenue of approximately RMB 5.395 billion, with a net profit of RMB 546 million, marking the company's first full-year profit. Behind the profit, the main driver was the continuous expansion of sales volume after the commercialization of the company's core products. In 2023, the total product sales revenue was approximately RMB 4.554 billion, a year-on-year increase of 70.2%.

Henlius Biotech became the first biopharmaceutical company under Chapter 18A of the Hong Kong Stock Exchange to turn around its losses through the commercial sale of innovative drugs. At that time, this was a milestone event for biopharmaceutical companies under Chapter 18A.

A month ago, the market had already heard rumors of Henlius Biotech's privatization. Now, the rumors have been confirmed.Regarding the reasons for the privatization of Fosun Hanlin, Fosun Pharma stated that since Fosun Hanlin's listing on the Hong Kong Stock Exchange, the H-share stock price level has not met expectations and the trading volume is relatively small, influenced by factors such as the global macroeconomic situation, the medical industry, and the overall trend of the Hong Kong stock market. Fosun Hanlin has not raised funds through equity financing since its listing, and the advantages of being a publicly-listed company have not been fully realized. "Upon completion of this transaction, it will be beneficial to strengthen the synergy between our group (excluding the target group) and the target group, and through the business resources provided by our group, it can support the sustainable growth of the target group and the realization of our group's overall strategic goals."

Fosun Pharma indicated that it will pay the cash consideration involved in this absorption merger through merger loans (expected not to exceed an equivalent of HKD 3.7 billion) and its own funds.

Fosun Pharma also stated that after the completion of this absorption merger, Fosun New Medicine (as the surviving entity after the merger) will inherit and assume all the assets, liabilities, equity, business, personnel, contracts, and all rights and obligations of Fosun Hanlin, and the legal entity of Fosun Hanlin will be deregistered. Not considering the impact of Fosun New Medicine implementing specific shareholder stock exchange transactions and potential share option offers, it is expected that immediately after the completion of this transaction, the group will hold 100% of the equity in Fosun New Medicine.

During the planning period for the privatization of Fosun Hanlin, Fosun Pharma was looking for "funding ammunition."

On June 19, Fosun Pharma announced that its subsidiary, Fosun Pharma Singapore, sold 6.01% of GlandPharma shares at a discount of approximately 3.69% through a block trade, and through this sale, it could realize funds of about USD 211 million (pre-tax).

An insider from Fosun Pharma told the First Financial Daily reporter that the company is actively adjusting its strategic focus and will further concentrate on the pharmaceutical business in the future, accelerating the pace of innovative transformation.

Will more companies follow suit?

In the five years since the launch of the Hong Kong Stock Exchange's 18A rules, more than 60 biotech companies have achieved listing on the Hong Kong stock market through this rule. However, the stock performance of most of these listed companies is not optimistic.

According to statistics from the First Financial Daily reporter, as of June 24, more than 10 companies have seen their adjusted stock prices fall by more than 90% compared to the issue price.

As the main character in this privatization, Fosun Hanlin's stock price has also accumulated a decline of more than 60%.The stock performance of biotech companies is lackluster, which is related to the industry going through a capital winter.

Recently, a biopharmaceutical investor told the First Financial Daily reporter that with the sharp decline in Hong Kong's pharmaceutical stocks in the second half of 2021 as a sign, it was actually the beginning of the capital winter in the pharmaceutical industry at that time. However, people originally thought that it would rebound after a year or so of decline, but in fact, it has continued to this day, and when it will hit bottom is still unknown.

The capital winter in Hong Kong's biotech market, on the one hand, makes it difficult for investors to exit, and on the other hand, it is also difficult to support related companies to continue refinancing and research and development.

Currently, some companies are looking for new financing channels. For example, Ascentage Pharma (06855.HK), which is also listed on the Hong Kong Stock Exchange under the 18A rule, recently announced that the company is preparing for an IPO in the United States.

It is worth noting that under the weak Hong Kong biotech market, there are occasional instances of companies' stock prices plummeting.

The latest case occurred on June 24, when Junshi Biosciences (02511.HK), listed on the Hong Kong Stock Exchange under the 18A rule, fell at the opening, with the maximum drop during the day exceeding 61%, and finally closed down by 57.66%. There was no negative news on the company's side.

A person from a biopharmaceutical company told the First Financial Daily reporter that one of the reasons why the stock prices of Hong Kong biotech companies fluctuate so much is also related to the market not setting price limits and allowing short selling.

In the view of this person from the pharmaceutical company, whether more biopharmaceutical companies will choose to go private and delist in the future still depends on whether there are strong major shareholders behind them to support.