Move over, Nasdaq: BeiGene’s mammoth IPO in Hong Kong sends message to biotech startups.

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The News:

Nasdaq-listed Chinese biotech BeiGene Ltd. (Beijing) has raised an astounding $903 million after pricing its secondary listing in Hong Kong–the first under new exchange rules–near the top of the estimated range, three people close to the deal said last week. The listing comes as Hong Kong works to lure overseas-listed firms to conduct secondary share offerings in the financial hub. It is also the second listing under new rules for early-state drug developers, according to Reuters.

Hong Kong’s stock exchange is seeking to establish itself as a financing center for the growing number of pre-revenue drug developers. Its efforts will pit it against Nasdaq, currently the biggest center for biotech listings, with $2.4 billion worth of such shares sold last year. BeiGene, which develops molecularly targeted and immuno-oncology (I/O) drugs to treat cancer, is selling 65.6 million new shares, or 8.55% of its enlarged share capital, at HK$108 ($13.76) each, close to the top of a price range of HK$94.4 to HK$111.6.

BeiGene has seen its shares jump more than seven times since raising $158 million in its 2016 Nasdaq IPO–a hefty amount at the time for biotech offerings. Each American Depository share (ADS) represents 13 ordinary shares. Four foundational investors–Singapore sovereign wealth fund GIC Private Ltd., US hedge fund Baker Brothers Advisors and two Chinese investment firms, Hillhouse Capital Group and Ally Bridge–have committed $276 million for the offering.

Under Hong Kong’s new rules, in place since April 30, biotech firms without revenue or profit can apply to list. The first listing by Ascletis Pharma Inc. under the new listing system saw shares close flat with their IPO price on their debut August 1.

More than 10 biotech firms–mostly Chinese–plan to list in Hong Kong and some have dropped US IPO plans in favor of a venue closer to home.

“There are a lot of global investors that are specialists in biotech, but they know very little about China. And there are a lot of investors (here) that know a lot about China, but they know very little about biotech. The dual-listing that we’re doing is helping educate both ways,” said John V. Oyler, founder and CEO of BeiGene.

Beigene’s shares started trading in Hong Kong on Aug. 8. The price of its secondary listing represents a discount of 1.54% against its closing price of $175.02 on the US Nasdaq Friday, August 3, 2018.

Steve’s Take:

Globally, the US spent $133 billion on the fight against cancer last year. And the concept of personalized treatments with CAR T-cell therapies and checkpoint inhibitors as a replacement for chemotherapy or radiation has truly caught on here. We’ve seen nearly all of big pharma–including Roche, Bristol-Myers Squibb, and AbbVie–spending billions of dollars to develop the next wave of I/O drugs.

However, Motley Fool notes that the excitement surrounding this new pharmaceutical trend hasn’t yet fully reached China, the world’s most populous country with nearly 1.5 billion people. China’s poor intellectual property protections, lack of regulatory clarity, and still-developing insurance networks have caused most biotech companies to keep their distance and focus elsewhere.

It’s understandable. China has historically been a challenging place to do business. One of their legacy rules required that clinical trials would need to be run within the country’s borders before they’d be accepted on China’s mainland. That involves a lot of work, and most US drug developers weren’t willing to commit the time and effort necessary. As a result, it’s estimated that two-thirds of the drugs already approved by the US Food and Drug Administration (FDA) between 2001 and 2016 are still not available in China.

But don’t be fooled. There’s a new player lurking in the wings. And I don’t mean India and definitely not Russia. And it’s got the scale to reach the top of the industry–sooner than anyone might think.

China’s version of the FDA has finally recognized the need to reform and update its regulations if it wants to attract innovation. It made a bold decision last year to overhaul several of its long-standing policies. As part of those changes, China will now recognize and accept clinical trial data completed in other countries and will allow drugs developed by one company to be sold or manufactured by others (licensing like this is a common practice in the US and Europe).

Founded on the premise of becoming “the Genentech of China,” BeiGene is developing personalized cancer treatments. It is exactly the type of innovative company–built on science by an American and with connections to the developed world–for which China has been yearning.

China is making a massive push to grow its bioeconomy–biopharma, agricultural biotech, and industrial biotech, among other fledgling markets–and BeiGene is taking its role as a prototype incredibly earnestly. It’s been reported by Fox Business that at the end of March, the company announced it had enrolled more than 2,300 patients in over 30 clinical trials worldwide. The following recent announcements typify and affirm its blossoming presence on the global biotech stage.

1) In July, BeiGene announced clinical and regulatory updates for three separate late-stage drug candidates. First, it told investors it planned to pursue accelerated approval of zanubrutinib as a treatment for Waldenstrom macroglobulinemia, a type of non-Hodgkin lymphoma, in the US. It’s currently enrolled in a global Phase 3 trial and has already received fast-track designation from the FDA.

2) Second, the biopharma announced preliminary top-line results for tislelizumab in Hodgkin’s Lymphoma, although the Phase 2 study, which is being conducted in China, is arguably too new to yield results. It’s also a single-arm study, which may not provide enough statistical power to prove the drug’s safety and efficacy. Nonetheless, BeiGene expects to file for approval in China by the end of 2018.

3) Third, BeiGene announced it initiated a Phase 3 trial of tislelizumab combined with chemotherapy as a first-line treatment for non-squamous non-small cell lung cancer, also in China.

4) That was all followed up by the mammoth secondary listing in Hong Kong, which is bound and determined to compete with the Nasdaq exchange in the US for biopharma listings. That raise bolstered BeiGene’s cash position of $1.48 billion at the end of March, 2018. That’s a lot of brute firepower to accomplish many things on its to do list.

Bottom Line:

Often misread as just another biotech with a silly name, BeiGene is actually packing a punch. Motley Fool has it nailed: It’s the right company (novel science and pedigree) in the right place (a huge market) at the right time (changing regulations) and with the right partners.

Steve's Take: @BeiGeneUSA has evolved into a rational bet now, and not just a pure gamble. But only for the high risk-tolerant portfolio. Click To Tweet

The stock has cooled off a bit in 2018 after recently hitting all-time highs of $200 per share. But even with a market cap of $9.5 billion, today’s (August 7, 2018) valuation at $178 per share valuation doesn’t give enough credit to BeiGene’s future opportunity as the world’s most populous country goes full-speed ahead on biotechnology innovation.

BeiGene is clearly well funded, supported by a robust pipeline of drug candidates, and brandishes respectability by owning the right to sell three of US-based Celgene Corp.’s blockbusters–Revlimid, Abraxane and Vidaza–in China for the next 10 years. This could be extremely lucrative, to put it mildly. Celgene hauls in about $10 billion of revenue from these three meds alone each year.

Yes, the corks are still popping and champagne toasts ongoing in Beijing and Hong Kong. But there’s still a lot of risk for investors as the clinical trials BeiGene is conducting specifically for the Chinese market do appear to be hurried and might fall short of the strict regulatory standards of the US or European Union. Still, a significant number of global clinical trials–which must be designed to stricter standards of quality–are also underway.

BeiGene is risky alright. The mean consensus rating among the 7 analysts who follow it is outperform. The 12-month average target price is $209–18% above its current closing price. In my analysis, it’s evolved into a rational bet now, and not just a pure gamble. But only for the high risk-tolerant portfolio.

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