The operations of Cinda, a star company in China's biotech industry, in the past two days have finally made an investor who has firmly held Cinda shares for many years determined to break up: no longer obsessed with Cinda's future, and resolutely clear all Cinda shares. The spin-off of Cinda's subsidiaries and the founder's "low-price" purchase of the subsidiary's equity are still fermenting. The news was announced on Friday night. In the bull market where all industries have been rising for several weeks, Cinda fell 12.54% on Monday, and fell again on Tuesday after a conference call to explain the matter, closing down 4.01% on the day. On Wednesday, Cinda's stock continued to fall, falling 4.85% in midday trading today. "It's mainly because it's a bull market now. If it were three months ago, it would have basically fallen by 30%." An industry insider said.

The market's disappointment with Innovent began on October 25, when Innovent Biologics announced that Fortvita, a wholly-owned subsidiary responsible for overseas business, signed a subscription agreement with Lostrancos, a company mainly held by Innovent founder Yu Dechao. The latter subscribed for 20.39% of Fortvita's shares at a price of US$20.5 million. Innovent's shareholding in Fortvita was reduced, and the reduced portion was purchased by Innovent's founder. The controversy of this transaction lies in the fact that Innovent, which has not yet made a profit, has almost become the biggest profit prospect for innovative drugs when BD going overseas. The overseas subsidiary Fortvita represents the prospects of Innovent going overseas. It can be said to be the future of Innovent, and once contributed a lot to Innovent's current stock price. Now that it has been spun off from Innovent, in the market's view, it may dilute Innovent's future overseas earnings and undermine investors' confidence and expectations for Innovent's future growth. Another piece of news is that on September 30 and October 2, Yu Dechao reduced his holdings in Innovent Biologics by a total of HK$152 million, which is almost the same as the funds needed to purchase 20% of Fortvita's shares this time. The purchase of 20% of Fortvita's shares for HK$152 million aroused the anger of the market: it was considered to be a super low price purchase.

Before the action, the decision was not transparently notified to all shareholders, especially small shareholders, who only learned the news after the announcement. Innovent's emergency conference call on Tuesday not only failed to eliminate doubts, but added fuel to the fire. At the conference call, the company's management explained that Fortvita is not a high-quality asset. All pipelines are in the preclinical stage, high-risk, and still losing money, which may bring losses to the parent company in the future. The management's move is to "get involved" in order not to dilute the interests of Innovent shareholders in the future.

In the eyes of many investors, many innovative pharmaceutical companies are not profitable at the moment, but are burning money, and their valuations will be counted in expectations for future prospects. However, the explanation given in the conference call was that Fortvita was valued at "the company's net assets", which would lower the company's valuation, meaning that at a very low price, one could own a very high stake in the company. Cinda has not yet made a profit, and its 60 billion valuation, in addition to its 10 billion net assets, has 50 billion, all of which are expectations for the company's future sales and overseas prospects. The founder of Cinda cashed out "from Cinda, which has a high valuation that includes the future", and used the cash to buy shares of Fortvita at a low price, which "actually contains future earnings, but is only valued at current net assets". In the eyes of the market, "this is not a small bargain, and it will throw small shareholders out of Cinda's future."

After the conference call, the market was full of irony and doubt about the management's explanation that "it is to help other investors bear risks". "We are also willing to help companies spread risks with this opportunity to invest based on net assets", "We are willing to share the difficulties with Cinda without the need for Cinda's management to sacrifice"... Small shareholders and other investors expressed their dissatisfaction with Cinda's management for "taking advantage and being naive" in a joking way. The market does not believe in tears, let alone whitewashing. The huge difference between the company and the market in the valuation of the overseas subsidiary Fortvita is reflected in the stock price. After the conference call, the stock price of Innovent opened sharply in the afternoon. On October 30, the second day after the conference call, the stock price of Innovent continued to fall.

A subsidiary that represents Innovent's important overseas prospects is now valued at a net asset value of US$80 million without a premium, and 20% of the equity was bought by the founder of Innovent at a "low price".

If it is really as investors worry, Innovent's high-quality assets are transferred to Fortvita, and the founder buys the company's future earnings at a value far lower than the current stock price of Innovent. What is the concept of US$80 million? In comparison, the market value of Innovent's Hong Kong stocks was originally more than 60 billion yuan, about US$8.4 billion, which is more than 100 times the valuation of Fortvita. This transaction reminds people of the latest popular newco model in the biopharmaceutical circle. A few months ago, Hengrui spent only one GLP-1 product portfolio to establish the overseas company Hercules, which was valued at $500 million. This means that going overseas to make money has changed from a beautiful imagination to a real reality. When Hercules is acquired or listed in the future, the valuation is likely to be $1 billion or more.

And Fortvita represents not only a certain product portfolio, but also almost all of Innovent's overseas prospects in the eyes of investors. In the conference call, Innovent said that the division of assets with Fortvita has been completed. According to public information, Fortvita owns the patents of Innovent's PD-1/IL-2 dual antibody, Claudin18.2 ADC, B7H3 ADC, Claudin18.2-CD3 dual antibody and other products. Among them, PD-1/IL-2 dual antibody and Claudin18.2 ADC are Innovent's potential first-in-class and best-in-class products, respectively. They have been granted fast track qualifications by the FDA and are about to start clinical trials in the United States.

In the future, the company's core assets PD-1 sindilimab, the hypoglycemic/weight loss drug Mashidu peptide, which carries market expectations, and whether overseas rights will also be included in Fortvita, the company did not specify. In the two fiscal years of 2022 and 2023, Fortvita has not yet generated revenue, and the net losses were 331 million yuan and 271 million yuan respectively. "Everyone knows that a lot of investment has been made in the overseas pipeline in the front, and it will rely on it to sell at a high price in the future. The founder bought it at the cheapest price at this connecting point in the middle, and he is still the actual controller." Some market voices expressed puzzlement. However, Cinda emphasized the tendency of "Fortvita is not worth too high a valuation" in the conference call: the assets are in a very early stage, the success rate is not high, and the risks are extremely high; no assets have been obtained and approved by the FDA; and it still generates losses of about 300 million yuan every year due to overseas clinical trials. It also stated that the company's valuation was independently conducted by a third-party accounting firm, Ernst & Young.

Cinda also expressed the view that "Fortvita will not completely divide Cinda's overseas prospects". The company's chief financial officer You Fei told Caijing that the operation of Fortvita "does not mean that the future business structure will have to be adjusted significantly, and Cinda will not go international. Cinda is also willing to support Fortvita's international development in the long term." In the conference call, Cinda also emphasized that the transaction followed the company's governance requirements, and was approved by independent directors in the board's vote, and the management abstained from voting. Industry insiders said that secondary listed companies are strong companies, with 1/3 of the independent directors, and they are invited by the management, generally standing on the management side, and investor directors do not have a veto power; on the contrary, the management of primary market companies is weak, and basically the number of investor directors is less than that of management directors and they have veto power.

Cinda once had the determination to let the "firm holder" at the beginning of the article stay with it for a long time. Even if Cinda is not smooth sailing, it has never wanted to break up with it. In 2018, Cinda became the first company in China to launch PD-1 products and the first to taste the sweetness. In 2020, its PD-1 Sindilimab was the first to enter the medical insurance, and its sales reached 3 billion yuan in 2021.

Later, Innovent's PD-1 sales were gradually caught up by major manufacturers Hengrui and BeiGene, and Innovent's "first" in listing speed was not able to maintain the subsequent market share. In 2022, when BD has not yet become the mainstream of China's innovative drugs, companies that still have the dream of biopharma are still building ships and going to sea with high hopes. Sindilimab carries the hope of China's innovative drugs going overseas and became the first domestic PD-1 to apply for listing in the United States. But it returned in failure and was rejected by the FDA. The reason for the rejection was that the main subjects in Innovent's clinical trials were Chinese, and there was a lack of clinical data on European and American races.

To this day, Innovent's setback in going overseas is still a symbolic significance in the history of China's innovative drugs going overseas, which means that the door that the FDA once suspected of opening to drugs with only a single clinical data in China has officially closed. It has become difficult for domestic innovative drugs to go overseas independently, which also wrote an important annotation for the subsequent BD wave. Since then, Innovent has become cautious about going overseas. In the past two years when the BD trend has almost swept the industry, even the "big brother" Hengrui has begun to make moves, but Innovent is timid and has almost no voice in BD. Fortvita was established in 2018. Apart from continuing to invest in overseas clinical trials, there is no more news.

It was not until the announcement of the completion of the division of assets with Fortvita and the purchase of equity by Yu Dechao at a net asset valuation that the outside world was convinced that Innovent has ambitions to go overseas. Innovent is one of the representatives of potential biopharma in China. It currently has 10 products on the market, but it is not profitable. The performance report for the first half of 2024 showed that the company's revenue during the reporting period was 3.952 billion yuan, a year-on-year increase of 46.3%, mainly from the revenue of products such as Sindilimab; the loss was 392 million yuan, an increase from the same period last year, mainly invested in sales and R&D. But Innovent still has products worth looking forward to in the future. Its GLP-1R/GCGR dual agonist Mastolide, developed in cooperation with Eli Lilly, has been accepted by the National Medical Products Administration for weight loss and glucose-lowering indications. In addition, there are several products that are about to be listed, with more than 10 billion yuan in cash on the account.

When value investors invest in a company, they are extremely cautious when they decide to stay together, and they will not let go easily once they hold it. They can make the decision to let go unless there is a reason to break the bottom line. In terms of fundamentals, investors believe that Innovent is somewhat higher than its actual value: reflected in the secondary market, Innovent's market value of 60 billion is at the same level as Kangfang Bio and Baili Tianheng in the first echelon of biotech. Kangfang has a trump card dual antibody that can beat K drug, and Baili Tianheng has a sky-high BD transaction with a total amount of 8.4 billion US dollars.

But some premiums will not make holders completely give up it. "Let investors pay for an uncertain future and bear risks; and through opaque operations, isolate them from possible benefits in the future and enjoy possible benefits themselves." An investor said. As listed but unprofitable biotech companies continue to burn money, what they need is a long-term relationship with secondary market investors. The core of a long-term relationship is strength and morality. Strength is the fundamentals: the ability to create value must be there; while morality is the life and death line: to make those who share the same hardships also share the same happiness. From October 25 to now, the share price of Cinda has fallen by 20%, and the market value has shrunk by HK$14.56 billion.

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