On April 3 of this year, Danish pharmaceutical company GenMab announced that it will acquire a local Chinese ADC drug developer Biotech Pufang Biotech in the form of an all-cash transaction of 1.8 billion US dollars, thereby obtaining ADC technology assets developed independently by it.

As soon as the news came out, it attracted market attention. Because this may indicate that MNC “sweeps” China's ADC assets from pipeline acquisitions to asset entity acquisitions, and also reflects the “tight demand” for domestic ADC technology product assets, the probability that some leading high-quality companies or pipelines will monetize during the R&D phase is increasing.

This market change is clearly more favorable to leading domestic ADC R&D companies such as Columbotai Bio-B (06990) and Rongchang Biotech (09995). Combined with the benefits, it seems predictable that their valuation will rise. However, for Rongchang Biotech, there is still a certain gap between reality and ideals.

According to the Zhitong Finance App, the cumulative decline in Rongchang Biotech's stock price from the beginning of the year to date reached 19.23%, while the stock price of Colunbotai rose by 50.34% during the same period. Furthermore, Columbotai, which was later listed by Rongchang Biotech, now has a total market value of HK$37.066 billion, while Rongchang Biotech's total market value is currently only HK$166.02, less than half of the former. Market competition and financial performance are probably important reasons why the valuation gap between the two is getting wider.

Investors prefer “false competition”

According to the Zhitong Finance App, the biggest difference between ADC drug development and antibody drug development and targeted drug development is that ADC drug development mainly focuses on arranging and combining the three parts of antibodies, connectors, and small molecule toxins to find optimal solutions in the field of indications. Therefore, even if the targets of related products are the same, differences in connectors and toxins can still differentiate, so the racetrack situation with targets such as ADC and PD-1 is not the same.

Currently, 15 ADC drugs have been approved for marketing worldwide, 13 of which are marketed in the US, 1 in China, and 1 in Japan, corresponding to 11 targets: CD33, CD30, HER2, CD22, CD79b, Nectin-4, BCMA, EGFR, CD19, Tissue Factor, and FRα.

Also, according to the Southwest Securities Research Report, there are more than 170 ADC drugs under investigation in China, of which nearly 60 have entered the clinical stage. Comparing domestic ADC companies horizontally, it is easy to find that domestic ADC targets are scattered, and the HER2 target with the highest concentration of R&D accounts for 38%. A research report previously published by Guojin Securities also showed that more than 60 domestic ADC drugs are being developed that target HER2, ranking first.

However, in the ADC circuit that emphasizes differentiation, gathering mature targets is not a good thing. As market competition becomes heated, it is unknown whether R&D companies can get a share of the limited indicative market, which also affects the market's judgment on the company's subsequent value.

Take Rongchang Biotech as an example. Its core product, verdicitumab (RC48), mainly targets the breast cancer market in the HER2 field.

Looking at the overall molecular structure, RC48 has characteristics such as high stability, strong specificity, and side killing effects. Based on Rongchang Biotech's proprietary Thiel-bridge (Thiel-bridge) coupling technology, experiments have proven that 3.3 mg of RC48 has a stronger bystander effect than 10 mg T-DM1, maximizing the lethal effect of the drug while ensuring overall stability.

Its competitor DS-8201 uses fixed-point coupling technology. Compared with the microtubule inhibitor MMAE, it has a narrower anti-cancer spectrum and is less active against colorectal and gastrointestinal tumors. The DNA topoisomerase I inhibitor DXD used by DS-8201 is superior. It acts on the entire cell cycle, and also has a therapeutic effect on solid tumors.

Since most domestic ADCs are developed against T-DM1, according to existing clinical data, there is currently no HER2 ADC developed by a domestic company that is comparable to DS-8201. Although there is a difference in structural design between verdicitumab and DS-8201, its efficacy data is still inferior to DS-8201 in non-head-to-head comparison.

In the current global HER2 breast cancer market, the dominance of DS-8201 cannot be underestimated. The market predicts that as DS-8201 continues to be released and continues to rise rapidly, it is expected to sell more than the remaining HER2 breast cancer treatments in 2026 and may exceed 6 billion US dollars in 2028. Currently, the drug has been marketed domestically. Under the squeeze of DS-8201, it may be more difficult for verdicitumab to expand the frontline treatment market later.

According to the data, there are 171 HER2 related pipelines currently marketed or being developed domestically, accounting for about 42% of the global HER2 pipeline, and the domestic HER2 ADC clinical pipeline already accounts for more than 70% of the world. In other words, in addition to dealing with market challenges from DS-8201, verdicitumab also has to face more and more participants on the HER2 ADC circuit, and competition on the racetrack is becoming increasingly heated.

Similar to the situation with verdicitumab, Rongchang Biotech's other product, taitacip, is also facing increasingly fierce competition. This is probably one of the reasons why its valuation is being suppressed.

Cash is an important anchor for growth certainty

Cash may be an important factor in Colombotte's higher valuation. Both it and Rongchang Biotech have already entered commercialization, and commercial performance and financial performance are also important anchors in the valuation of the two companies.

According to the Zhitong Finance App, in 2023, Colunbotai's total revenue reached 1.54 billion yuan, a sharp increase of 91.6% over the previous year. Its main source of revenue was revenue from seven pre-clinical ADC asset license agreements developed in collaboration with MSD. Driven by a sharp increase in revenue, Columbotai's current gross profit reached 760 million yuan, an increase of 44% year on year; R&D expenditure was 1.03 billion yuan, up 21.9% year on year.

It is easy to see from the financial report that MSD almost single-handedly supported Kolumbotai's revenue last year. As a result, in 2023, Colunbotai's operating cash flow changed from negative to positive. The adjusted annual loss was 450 million yuan, a year-on-year decrease of 24.4%; the company's current cash and financial assets were about 2.53 billion yuan.

In other words, Columbotai's current cash flow is sufficient, and subsequent continuous R&D activities are stable. In addition, in order to ease the impending K-drug patent cliff, MSD is now fully betting on ADCs. According to MSD's current ADC pipeline plan, 3 of its 6 new ADC drugs are from Daiichi Sankyo, and the other 3 are from Colombotech. With MSD's push and support from parent company Colon Pharmaceuticals, Colon Pharmaceuticals doesn't need to worry about its own cash problems.

Rongchang Biotech, on the other hand, showed a relatively poor performance. According to the company's 2023 annual report, Rongchang Biotech achieved current revenue of 1,083 billion yuan, an increase of 40.26% over the previous year. However, on the other hand, the company's current net loss attributable to shareholders of listed companies was 1,511 billion yuan, mainly due to the company's continued increase in R&D investment in research projects and increased promotion of the commercial products taitacip and verticitumab.

Specifically, Rongchang Biotech's sales expenses in 2023 reached 775 million yuan, an increase of 75.90% year-on-year, accounting for 71.56% of current revenue. This is also related to the fierce competition in the two core product markets of the companies mentioned above.

Since commercialization, Rongchang Biotech has continued to build its own sales team. In 2023, its autoimmune commercialization team has about 750 people. The sales channel covers more than 2,200 hospitals in more than 300 prefecture-level cities in 32 provincial administrative units across the country, and has completed drug access for more than 800 hospitals.

On the other hand, Rongchang Biotech did not disdain R&D because of commercialization of core products. The company's current R&D expenses were 1,306 million yuan, an increase of 33.01% over the previous year. It is worth mentioning that in 2023, the average salary of Rongchang Biotech R&D personnel was 3491,000 yuan, an increase of 26.21% over the previous year.

However, the result is “unable to make ends meet” as a result of focusing on sales and R&D. In terms of cash flow, as of the end of 2023, Rongchang Biotech had only $727 million left in cash and cash equivalents, a sharp decrease of $1,342 million compared to $2,069 billion at the beginning of the year. In addition, the company also has short-term loans of 284 million yuan and long-term loans of 841 million yuan, which already account for 20.35% of the total current assets. Recently, however, Rongchang Biotech issued a fixed increase announcement announcing that it plans to raise 2.55 billion yuan in capital for research and development of innovative drugs.

However, compared to Colunbotai, which has achieved positive cash flow from operating activities, Rongchang Biotech's continued reliance on external financing may cause investors to worry about the company's future sustainable R&D and operation. Especially now that market expectations for the Fed's interest rate cut have declined sharply and the global biomedical financing environment is far from improving, investors are more willing to look at companies with greater certainty. In this context, it will take time for Rongchang Biotech's valuation to improve.