In recent times, SiHuan Pharmaceutical (00460.HK), commonly referred to as "the company," has been busy orchestrating a split to facilitate a new listingThis strategic move focuses on the suggestion to demerge Xuanzhu Bio for an IPO in Hong KongHowever, the road to this new listing has not been smoothThe financial performance of Xuanzhu Bio raises eyebrows, with net losses recorded at 512 million yuan, 301 million yuan, and 111 million yuan for the fiscal years 2022, 2023, and the first half of this year, respectively.

Initially, Xuanzhu Bio had aimed for a listing on the Sci-Tech Innovation Board, a move that was later haltedThis move for independence from its parent, SiHuan Pharmaceutical, followed a series of acquisitions, integrations, and the introduction of strategic investments aimed at boosting its overall valuationThe derailment of its plans to list on the Sci-Tech board has necessitated the repurchase of shares held by some stakeholders, hence prompting the shift of focus towards an IPO in Hong Kong.

The journey towards capitalization for Xuanzhu Bio has not been an easy one

In 2022, the company’s application to list on the Sci-Tech Board was accepted by the Shanghai Stock ExchangeAt that time, Xuanzhu Bio had no commercialized products and faced significant losses, leading them to meet the exchange's fifth set of listing standardsHowever, in 2023, a chilly climate emerged for innovative drugs, and regulatory bodies clamped down on IPO applications for loss-making companiesIn a committee meeting, Xuanzhu Bio's review process was postponed, with demands for more disclosures regarding their developmental products and commercialization strategiesBy May of this year, the IPO approval process was terminated.

This setback significantly disrupted SiHuan Pharmaceutical's capital plansThe company acquired Xuanzhu Bio back in 2008, later spinning it off as an independent entity ten years later, with a focus on research pipelines addressing gastrointestinal diseases, tumors, and non-alcoholic fatty liver disease

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After the Sci-Tech Board move fell through, looking towards a Hong Kong listing became one of the few pathways left for Xuanzhu Bio to pursue capital influx.

Before officially filing for the Hong Kong IPO, SiHuan Pharmaceutical repurchased some shares from earlier investors in the B round financing phase through its subsidiary platformsNotably, during a round of funding in 2021, major investments were made by companies like Sunshine Life, Hebei Zhongji Capital, and Bank of China Capital, cumulatively amounting to nearly 611 million yuan, with Sunshine Life investing 250 million yuan for 3.62% equityIn a subsequent repurchase, the company acquired all of Sunshine Life's shares back for approximately 308 million yuan, yielding them a yearly profit margin of 23.2% within just three years, pushing Xuanzhu Bio's valuation beyond 8.5 billion yuan.

Behind the numbers lies a complex web of valuations and calculations

Firstly, the transaction prices between SiHuan Pharmaceutical and exiting shareholders were agreed upon based on an 8% annual return ratePresently, early-stage investors represented by Guotou Investment continue to hold shares in Xuanzhu Bio, which initially garnered funding of 963 million yuan, leading to a post-investment valuation of 3.3 billion yuanSecondly, whether Xuanzhu's valuation stands justified remains a question, particularly with their first commercial drug sale recently approvedIn 2023, the approval of their product, Annelazole Sodium, marked a significant milestone, being included in the national health insurance list, and generating revenues of approximately 16.03 million yuan in the first half of the year.

For innovative pharmaceutical companies, growing past the hurdles of research output, successful capital maneuvers, and establishing a commercial pathway is critical

While Xuanzhu Bio has successfully navigated the first hurdle, their progress on the second remains uncertain, casting doubts on their prospects moving forward.

The Shanghai Stock Exchange's inquiry letters during the IPO process frequently prodded Xuanzhu Bio regarding its product lines and competitive advantages in the marketAnnelazole Sodium, categorized among Proton Pump Inhibitors (PPIs), encounters fierce competition within a diminishing market landscapeIn 2023, the market size of comparable products shrank to 2.61 billion yuan, reflecting a drop of 65.2% since 2019, caused by factors such as centralized procurement and numerous products being placed under stringent monitoring.

A deeper look into Xuanzhu Bio’s growth trajectory reveals a continuous influx of investment stemming from a series of resources integrated systematically by SiHuan PharmaceuticalAt a time when the Sci-Tech board opened its doors for IPOs and the enthusiasm for innovative drugs was at an apex, many companies witnessed escalated valuations.

Prior to its independence in 2018, Xuanzhu Bio's core innovative drug ventures were spearheaded primarily through Shandong Xuanzhu Bio, focusing mainly on small molecule drugs

Between the years 2019 and 2021, this dynamic company expanded its reach by acquiring Beijing Xuanzhu Bio and restructuring Kangming Bio, venturing deeper into clinical research and larger molecule domainsIn December 2019, a transfer occurred where SiHuan Pharmaceutical sold 3.3 billion yuan worth of Beijing Xuanzhu Bio shares to Xuanzhu Bio itself, with the latter generating revenues amounting to 42.21 million yuan and net profits of around 9.05 million yuan by 2021.

In 2021, the restructuring between Xuanzhu Bio and Kangming Bio saw the former’s subsidiary acquiring Kangming’s assets and liabilities for approximately 1.31 billion yuanKangming's main shareholder, Zhu Xiaodong, transitioned into an executive role within Xuanzhu BioTheir histories intertwine further back when Xuanzhu offered Kangming Bio a loan of 10 million yuan in 2020 to fund product research.

Reflecting on this integration phase coincides with Xuanzhu Bio's A and B round financing, an operational maneuver that helped escalate its valuation via enhancements in its research pipeline

Despite these gains, Xuanzhu Bio still has not turned a profit, primarily due to the lack of commercialized products, while significant funds have been utilized to acquire assets and interests from related parties.

In January 2022, a contract was signed between Xuanzhu Bio and Beijing Xuanyi for a near 300 million yuan deal, acquiring technology rights linked to CD80 fusion proteins and associated assets from a pilot processing workshopNotably, the transfer party, Beijing Xuanyi, was previously under the control of SiHuan Pharmaceutical's actual controller, Che Fengsheng.

Che Fengsheng, a seasoned operator in both finance and cross-industry ventures, initially set the wheels of SiHuan Pharmaceutical in motion with partners in Hainan around the turn of the millenniumWith a diverse professional background including roles as a university professor, neurologist, and sales strategist for a pharmaceutical company, Che honed a keen business acumen over many years

SiHuan Pharmaceutical first made its mark by listing on the Singapore Stock Exchange in 2007, only to privatize, subsequently relisting on the Hong Kong stock exchange in 2010, covering a spectrum ranging from medical aesthetics to innovative and generic drugs.

Currently, Che Fengsheng serves as the Chairman, holding significant equity stakes with three other controlling shareholders—55.02% combinedObserving SiHuan's broad industry scope relative to its founder's cross-industry experiences is fascinatingRecently, the corporation reported a drop of about 10% in total revenue for the first half of the year, amounting to 950 million yuan, with attributable losses of approximately 33.4 million, an improvement from the 49.6 million loss during the previous year—indicating a narrowing of losses by 32.7%.

The only segment propping up performance appears to be the medical aesthetics division, which recorded revenues of around 323 million, up by 66.4% year-on-year

The leading sector, generic drugs, however, saw a decline in revenue to 597 million yuan—a decrease of 29.4% during the same period.

A major contributor in this sector is the botulinum toxin product, Letibotulinum, which boasts a market share exceeding 10% since its introduction in 2021, showcasing a 50% increase in sales for the first half of this yearRecently, the company announced an extension of its exclusive distribution agreement for the product until the end of 2030, expressing an intention to shift resources and capital towards bolstering its medical aesthetics business and exploring other emerging markets post-splits like that of Xuanzhu Bio.

It is relevant to underscore that the ability to transcend into diverse fields and streamline resources ties closely to over 100 enterprises linked to the firm’s actual controllers or executivesAs a seasoned player in capital maneuvers, whether they can secure yet another IPO remains a tantalizing prospect worth monitoring in the near future.