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Author: Taylor, Editor: Xiaoshimei

China's innovative drug dark horse Baili Tianheng has made new progress.

On the evening of August 18, Baili Tianheng announced that the first subject had been enrolled in the Phase III clinical trial of the company's independently developed innovative biological drug BL-B01D1 (EGFR×HER3-ADC) for injection for the treatment of recurrent small cell lung cancer that has failed previous platinum-containing chemotherapy and anti-PD-1/PD-L1 monoclonal antibody treatment.

BL-B01D1 is a dual-antibody ADC drug independently developed by the company that is currently in clinical trials and can simultaneously target EGFR and HER3.

As the king of growth in the Science and Technology Innovation Board in the past two years, Baili Tianheng seems to have been regarded by the market as the new generation king of China's innovative drugs. Currently, the company has 29 approved drugs, mainly chemical generic drugs and traditional Chinese medicines, and its product lines cover anesthesia, anti-infection, pediatrics and other fields.

However, due to the continuous advancement of the centralized procurement policy, the company's operating income has declined for four consecutive years, reaching only 560 million yuan in 2023, a 53% drop from 2019. The net profit attributable to the parent company has accumulated a huge loss of 1.16 billion yuan in the past three years. One of the main reasons is that the company continues to invest money in the innovative drug business, with a three-year R&D investment of up to 1.4 billion yuan.

By the end of 2023, Baili Tianheng had only RMB 400 million in cash on its account (including certain restricted funds), and its debt-to-asset ratio increased significantly to a record high of 89%. The cash flow situation is also not optimistic, with a net outflow of more than RMB 600 million in 2023.

Without a large influx of funds, Baili Tianheng’s capital chain will face considerable risks and will not be able to support such a high-intensity research and development pace.

The turning point occurred on December 11, 2023. On that day, Baili Tianheng officially announced that its wholly-owned subsidiary SystImmune had reached an exclusive licensing cooperation agreement with Bristol-Myers Squibb (BMS) for BL-B01D1, with a potential total transaction value of up to US$8.4 billion.

BL-B01D1 is the third bispecific ADC drug (anti-tumor biologic) in the world and the first in China to enter the clinical research stage. It entered Phase I clinical trials in November 2021, enrolling more than 1,000 patients, covering more than 10 types of tumors such as gastric cancer, nasal cancer, intestinal cancer, and cervical cancer. It has shown good efficacy and safety, and has entered Phase II clinical trials in 2023. Based on its good clinical performance and commercial prospects, BMS finally chose to reach a cooperation agreement with Baili Tianheng.

This is a milestone event in China's innovative drug industry, setting a new record for overseas transactions for a single project.

In March 2024, Baili Tianheng received a down payment of US$800 million from BMS. This was a timely relief, reversing the huge financial pressure. In the first quarter of 2024, the company's revenue and profit soared to more than 5 billion yuan, and the debt-to-asset ratio dropped sharply to 25%, and the cash liquidity risk was also solved.

Baili Tianheng has transformed from an unknown small pharmaceutical company into a darling of the capital market and has obtained record-breaking cooperation. Only the founder Zhu Yi knows how difficult it has been along the way.

In 1991, Zhu Yi gave up teaching and went into business, becoming the director of the Chengdu Biomedical Center Sida Biochemical Factory. He worked there for three years but was eventually fired. Later, he flew to Beihai, Guangxi to start a real estate business and earned his first pot of gold.

In 1996, Zhu Yi returned to Chengdu and founded Baili Pharmaceutical, focusing on generic drugs. Two years later, Baili's first product, Ribavirin Granules, was approved for marketing, achieving sales revenue of 2 million yuan that year.

In 2003, SARS swept across Asia, and Ribavirin granules became a hot commodity. Zhu Yi seized the opportunity to mass-produce them, and Baili's sales exceeded 100 million yuan that year. More importantly, this enabled Baili to open up national drug sales channels, establish close ties with partners, and lay a solid foundation for subsequent businesses.

In the following years, the company stepped up its efforts to develop chemical generic drugs and traditional Chinese medicines, seized the golden period of generic drug development in China, and occupied a place in the pharmaceutical industry.

After more than ten years of accumulation, in 2010, Baili had the realistic conditions to develop innovative drugs - at that time, the company's annual sales exceeded 100 million yuan, and its annual cash flow was several tens of millions of yuan. At that time, the domestic centralized procurement at the provincial level also gradually kicked off. Therefore, Zhu Yi made up his mind and established a new development strategy of "generic drugs supporting innovative drugs".

In retrospect, Baili's transformation was quite fast. You know, it was only at the end of 2018 that the first national-level centralized procurement of generic drugs was launched, and the highest price reduction of varieties was 98%, which shattered the fantasies of many traditional pharmaceutical companies and forced them to turn to innovative drugs.

Of course, Zhu Yi also experienced many setbacks and took many detours on the road to transformation. At the beginning, Baili lacked experience and chose to jointly develop drugs with top domestic research and development institutions and universities, but ultimately failed, wasting three years of time.

Later, Zhu Yi decided to build an independent R&D platform. In 2014, Baili founded SystImmune in Seattle, USA, and invested a lot of resources in the development of ADC drugs. This move was not understood by the outside world at first, and some people even speculated that the company and the boss were going to run away. The domestic banks that lent money to Baili were even more worried.

In 2015, Baili applied for the first ADC drug patent and launched a multi-specific antibody research and development project. At that time, there were very few pharmaceutical companies that were planning to develop ADCs.

After years of continuous R&D, Baili has a large number of ADCs or polyclonal antibodies in its pipeline. All projects are self-developed and have many exclusive varieties in the world. Among them, there are only three quadrispecific antibodies from Baili that have entered clinical research worldwide.

How can a little-known pharmaceutical company headquartered in Chengdu stand at the forefront of global ADC research and development? Zhu Yi has been repeatedly questioned for this reason. However, this criticism was completely ended at the end of 2023 - Baili and BMS reached a sky-high BD cooperation.

Good times will come after bad times. In his 2024 New Year's speech, Zhu Yi said: "Bai Li Tian Heng has begun to participate in the competition among the strong as a strong player."

As one of the leading domestic innovative drug companies, Baili Tianheng has clearly benefited from the explosive growth of the global ADC track. The large-scale cooperation with BMS is the best example.

According to the ADC industry report, the global ADC drug market will exceed US$10 billion in 2023 and is expected to reach US$64.7 billion by 2030. The Chinese market started late, with only RMB 2 billion in 2023 and is expected to reach RMB 66.2 billion in 2030, with a compound growth rate of 63.7% from 2023 to 2030.

Based on its huge market potential, ADC has become one of the hottest tracks in the field of innovative drugs, with mergers and acquisitions and cooperation showing a blowout trend. In terms of mergers and acquisitions, large-scale cases have emerged frequently - Pfizer spent $43 billion to acquire ADC leader Seagen; AbbVie spent $10.1 billion to acquire ImmunoGen; Genmab spent $1.8 billion to acquire Pufang Biopharmaceuticals.

In terms of licensing cooperation, according to incomplete statistics from Biopharma Times, from 2021 to April 2024, there were 25 ADC licensing transactions in China, with a total transaction amount of nearly US$40 billion, surpassing the United States to become the world's largest ADC overseas licensing transaction country.

Precisely because of the hot global environment of mergers and acquisitions and cooperation, Baili Tianheng BL-B01D1 has the opportunity to catch up with the trend and be successfully authorized to go overseas.

However, this is only a phased achievement in the company's development history. There is still a long way to go before the product can be truly launched and commercialized, and it faces considerable operational risks.

First, the risk of order cancellation. According to statistics from the Drug Hunters Club, the cancellation of orders and returns after PD-1 authorization has occurred frequently in recent years. For example, in September 2023, Novartis returned the rights and interests of tislelizumab in Europe and the United States to BeiGene.

The ADC field is also unavoidable. For example, in October 2023, Merck announced that it would abandon the preclinical ADC pipeline in two collaborations with Kelun Biotech and instead reached a total of US$22 billion in cooperation with Daiichi Sankyo. More than a year ago, Merck and Kelun Biotech signed 9 ADC asset agreements with a cooperation amount of up to US$11.8 billion.

At present, Baili Tianheng has received the down payment, but there are still some uncertainties regarding the next US$7.6 billion, which naturally includes the risk of order cancellation.

Second, competition in the ADC market is becoming increasingly fierce, and BL-B01D1 faces constraints from similar blockbuster ADC drugs around the world.

According to incomplete statistics from Medical Cube, there are 363 ADC pipelines in the world that are in the process of clinical application or above, involving 125 targets. Among them, HER2, a particularly crowded target, has 4 drugs approved for marketing, 2 are in the process of marketing application, and 9 are in the phase III clinical stage.

In fact, pharmaceutical companies such as BioAtla and Dongyao Pharmaceutical have successively withdrawn from ADC-related pipeline clinical trials, citing the deterioration of market competition and the difficulty in gaining an advantage in the competition with numerous targeted anti-tumor drugs.

Baili Tianheng has many strong competitors in the ADC field. For example, Rongchang Biopharma is the earliest ADC player in China. As early as August 2021, it reached a $2.6 billion cooperation with Seagen, which obtained the overseas rights of Dixituzumab. Moreover, Dixituzumab has been on the market in China for more than three years and is still the only ADC product approved for marketing in China.

Kelun Biotech is strong and has layouts in multiple ADC target directions. It has a licensing cooperation with Merck of over US$10 billion in 2022. Hansoh Pharmaceutical is on the list of GlaxoSmithKline, and reached a cooperation of US$3.28 billion in 2023. In addition, industry leaders such as Hengrui Medicine, Lepu Biopharmaceuticals, Yilian Biopharmaceuticals, Yingen Biopharmaceuticals, and Shijiazhuang Pharmaceutical Group all have strong strength and have already taken a share of the ADC market.

In short, the cooperation between Baili Tianheng and BMS is just an important step, and victory is far from coming. The commercialization of the project and achieving good economic benefits is a protracted battle with many uncertainties. This may also be an important factor for Baili Tianheng to take advantage of the hot market to go public in Hong Kong for the second time in order to hoard more cash ammunition.

A great era of ADC that takes over the PD-1 banner is on the way. We will continue to pay attention to whether Baili Tianheng can break through the siege of many players and become the new king of innovative drugs.

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The content of this article related to listed companies is the author’s personal analysis and judgment based on the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.); the information or opinions in the article do not constitute any investment or other business advice, and Market Value Observation shall not bear any responsibility for any actions arising from the adoption of this article.