The stock price dropped 90% within a year, and the majority shareholders were forced to close their positions last month. At this juncture, the stock price suddenly surged more than 20%, which is probably not a good thing for Shengnuo Pharmaceutical-B (02257).

On April 17, Shengnuo Pharmaceutical's stock price opened higher in early trading, reaching a maximum increase of 37.87%. According to the news, Shengnuo Pharmaceutical announced on the same day that the company has obtained a written response from the US FDA's Class C meeting on the requirements of its core product STP705. The company has initiated the required preclinical studies in accordance with FDA guidance recommendations.

According to the Zhitong Finance App, the purpose of the Class C conference mentioned above was to obtain suggestions and opinions from the FDA on the proposed non-clinical and clinical development plans to prepare for phase II/III and phase III clinical studies of the follow-up treatment of ISSCC by Shengnuo Pharmaceutical. Since STP705, the core product of Shengnuo Pharmaceutical, was still in phase II clinical phase, the commercial value of its product and the commercialization feasibility of the company's own delivery technology have not been verified.

This time, the R&D process has gone one step further, which is considered a major R&D milestone. However, this may be a benefit for other innovative pharmaceutical companies, but this does not seem to be the case for Shengnuo Pharmaceuticals. For this 18A company, cash flow, which is on the verge of exhaustion, is already a sword of Damocles hanging over its head.

The majority shareholders were forced to close their positions, and cash may not be enough to support them for half a year

In March of this year, Shengnuo Pharmaceutical, the “first stock of small nucleic acid drugs” in Hong Kong, attracted market attention due to continuous announcements during the quiet period of financial reporting.

The Zhitong Finance App learned that on March 7, Shengnuo Pharmaceutical issued an announcement stating that due to unmet security deposit requirements, 1.56 million shares held by Lu Yang, executive director and chairman of the board of directors of Shengnuo Pharmaceutical, were forcibly sold, accounting for about 1.78% of the total number of shares issued by the company.

On March 18, Shengnuo Pharmaceuticals announced once again that Executive Director Dai Xiaochang once again had his 99,500 shares sold on March 15 due to unsatisfied security deposit requirements. In addition, Dai Xiaochang holds 7.828 million shares, of which 6.640,500 shares are being held in securities accounts with secured financing by financial institutions as collateral for his personal financing arrangements. This portion of shares accounts for 7.58% of Shengnuo Pharmaceutical's shares. If financial institutions fail to provide a repayment plan that satisfies them, this portion of the shares will also be forcibly sold.

By checking the Zhitong Finance App, I learned that after March 15, Dai Xiaochang continued to be forced to close positions for 5 consecutive days from March 18 to March 22, respectively. As of March 22, Dai Xiaochang's shares fell to 2.356,600 shares, or 2.49%. In other words, after March 15, Dai Xiaochang's shares were reduced by a total of 5.4718 million shares. Combined with the above information, 80% of this pledged 6.64 million shares may have already been forcibly sold.

In this context, on April 17, Shengnuo Pharmaceutical's stock price suddenly surged by nearly 40%. Combined, the same-day turnover rate reached 12.43%. It is difficult not to doubt whether this “boosted shipments.”

On the other hand, as can be seen from the 2023 results disclosed by Shengnuo Pharmaceuticals, since the company still does not have a single commercialized product, sales revenue from 2019 to 2023 was zero.

Although pipeline research and development continues to advance, the company is consciously reducing expenses. According to the data, the company's R&D expenses fell from 67.641 thousand US dollars in 2022 to 54.382 million US dollars in the same period in 2023, and administrative expenses were also reduced.

It is worth mentioning that according to the R&D progress disclosed by the company, the progress of the core product STP705 in the ISSCC and BCC indications is in line with the progress disclosed in the 2022 annual report, and is still only phase II clinical. Although receiving a response from the FDA this time, it is still quite far from the NDA stage, and it is too early to commercialize it.

The reason driving the company to take the initiative to cut fees or the pressure on the company's cash flow. Judging from the cash flow situation, the company's cash and cash equivalents were drastically reduced from US$105 million in 2022 to US$238.84 million in 2023. In other words, based on the company's net loss of 84.99 million US dollars in 2023, the cash on the account is currently only enough for Shengnuo Pharmaceutical to burn until the first quarter of 2024.

However, insufficient R&D funding does not seem to affect Shengnuo Pharmaceuticals' corporate benefits. Financial reports show that in 2023, the company's directors' remuneration and employee costs did not decrease but increased, rising from 21.6 million US dollars in 2022 to 23.3 million US dollars. Among them, directors' remuneration rose from 1.91 million US dollars to 3.37 million US dollars, an increase of 76.44% over the previous year.

Can the sales pipeline survive?

Since Shengnuo Pharmaceutical does not currently commercialize its products, the main source of its working capital is equity and debt financing, so shareholders close their positions one after another, which may affect the company's subsequent financing.

Although it stated in the announcement that “the management team is still full of confidence in the Group's long-term development prospects,” the ideals are very rich and the reality is very difficult. Combined with the company's 2023 financial report mentioned above, it may be difficult for Shengnuo Pharmaceutical to continue to develop new drugs until June of this year without follow-up financing, so if they want to survive, the sales pipeline or technology may be an option.

According to the Zhitong Finance App, one of the core barriers and technical difficulties of small nucleic acid drugs as exogenous drugs is the development of delivery systems. With strong R&D strength, Shengnuo Pharmaceutical has now developed 4 patent delivery platforms. Currently, it is one of the 3 companies in the world that have multiple technology platforms and products have entered the clinical stage, and is in a leading position in the industry.

On the product side, Shengnuo Pharmaceuticals announced in June last year that STP705, a candidate product for treating squamous cell carcinoma in situ (isSCC), has entered the advanced clinical development stage. Shengnuo Pharmaceuticals is also advancing confirmatory clinical research on STP705 for the treatment of isSCC. Previously, STP705 had conducted clinical trials on the treatment of ISSCC and BCC in more than 100 subjects. Clinical study safety data for these two cancer indications suggest that STP705 is safe and has no grade 3 or higher adverse events. Preliminary efficacy data showed that cancer cells in most treatment groups had achieved histological clearance.

From a technical point of view, if Shengnuo Pharmaceuticals chooses to grant commercial rights to STP705, its potential value is still worthy of recognition, but from a commercial perspective, it is still unknown whether other pharmaceutical companies are interested in commercializing small nucleic acid drugs.

Refer to the current commercialization path of the world's first siRNA drug and patisiran, the first RNAi drug. Alnylam's 2023 quarterly report shows that the number of patients using patisiran was officially surpassed by Vutrisiran in the 3rd quarter of last year, and its sales volume was surpassed by Vutrisiran as early as the beginning of last year. This also means that Vutrisiran, as a drug that was only marketed in June 2022, replaced the previous generation of products within half a year and became Alnylam's latest revenue pillar. This raises doubts about the technical iteration and commercial longevity of siRNA drugs, and this may influence the market's judgment on the value of STP705, which is also a small nucleic acid drug.

Although Shengnuo Pharmaceutical said earlier, it has begun a commercial layout, including setting up a commercial team and promoting large-scale production. However, in a context where cash flow is running out, research and development of core products is still in the middle, and commercialization is even impossible.

For Shengnuo Pharmaceuticals, if they want to continue research and development of small nucleic acid drugs and find financing to get through the pre-commercialization stage in a stable manner, it is probably an urgent matter right now.