Look at the future prospects, not the losses, says the chief executive of a newly listed Chinese biotech company that’s developing anti-cancer drugs with Indianapolis-based pharmaceutical giant Eli Lilly and Co.
Innovent Biologics Inc.’s Michael Yu said investors need to look beyond the turmoil that has sent Chinese health-care stocks down as much as 35 percent since the summer. It’s been a rocky ride for the industry that’s been hit by a scandal and broader market plunge, making it even tougher for companies that have just listed with little revenue and a history of losses.
Investors should take a five- to 10-year view and focus on the outlook for cash flow, said Yu in an interview after Innovent’s Wednesday debut in Hong Kong. The sector is volatile because assumptions and psychology affect investors more so than in other industries, especially when the global market fluctuates, he said.
"A typical biotech company is not like traditional businesses," said Yu. “Its valuation is based on cash flows in the next few years. It’s based on the future.”
Jiangsu, China-based Innovent is the fourth biotech firm to list its stock since the city’s exchange revised its rules in April to allow unprofitable companies from the sector to go public, paving the way for more Chinese health-care firms to raise money. While at least 10 biotech companies have applied for listing since the exchange lowered its barrier for initial public offerings, performance has been less than impressive. With years needed for a new drug to develop, the sector typically needs longer time to become profitable.
Innovent, backed by Singapore’s sovereign wealth fund Temasek Holdings Pte., has incurred operating losses in each year since its 2011 inception and has not generated any revenue from product sales. It expects to get China’s final regulatory approval for its first cancer drug Sintilimab as early as next quarter, Yu said.
Revenue could start rolling in the following quarter, he said. The company also expects to submit three other new drugs for Chinese regulatory approval from this year. The company reported a 716 million yuan ($103 million) loss last year.
Lilly broadened a partnership with Innovent in late 2015. The companies agreed to collaborate to develop up to three cancer treatments both inside and outside China. Innovent could receive payments totaling more than $1 billion if the products reach certain milestones.
Hit by a vaccine scandal, the threat of lower drug prices and short-seller attacks, the once red-hot health-care sector has spiraled downward. The CSI 300 Health Care gauge of mainland stocks and Loncar China BioPharma Index have seen drops of more than 30 percent from their mid-year highs. Elevated valuations in the sector triggered investor concerns, while the U.S.-China trade war and slowdown in the domestic economy dented sentiment in the broader market.
HIV and liver-cancer drugs maker Ascletis Pharma Inc. has tumbled 58 percent while Hua Medicine has dropped 10 percent since their debuts this year. Both were listed under Hong Kong’s new rules. Innovent has jumped 21 percent since its debut Wednesday in Hong Kong, as the sector outperformed the market.
Bulls have faith in the emerging sector’s long-term growth, pointing to the increasing demand for medical biotech as the population ages. Yet it can take years to fully develop a new drug, and success can be elusive. It’s an industry that often experiences boom-bust cycles, and is seen as a risky investment because of high failure rates thanks to strict regulation in clinical testing, according to UBS Group AG.
For sophisticated investors, it’s about the multiple they make back on their investment, Yu said. “If you just focus on today’s earnings instead of investing in new drugs, your returns will be minimized and that’s the last thing investors would want to see.”
Still, Yu said China’s biotech companies need much more time and investment to narrow the gap with their well-established international peers. So far, many original innovations still come from outside China, he said. “The gap is narrowing, it just takes time for us to catch up.”