The suspension of Henlius finally reveals the mystery, which is consistent with the previous market rumors: Fosun Pharma will privatize Henlius and delist it, with a privatization valuation of about 12.4 billion yuan.

Fosun Pharma's quote for each share of Henlius is HKD 24.60, with a premium of 30.6% over its pre-suspension closing price. Based on Henlius' net profit of 546 million yuan last year, this privatization is approximately 23x PE.

The overall transaction is HKD 5.4 billion, and will use no more than HKD 3.7 billion in merger and acquisition loans.

The total capital of Henlius is 543.5 million shares, including 163.4 million H-shares and 380.1 million non-listed shares.

The offeror, Fosun Pharma, currently holds 48.94% of the non-listed shares of Henlius. At the same time, Fosun Pharma holds 4.67% of the non-listed shares through its subsidiary Fosun Pharmaceutical Industry and 5.95% of the H-shares through Fosun International.

Fosun Pharma holds a total of 323,696,487 shares, accounting for 59.56% of the total shares of Henlius.

After the completion of the transaction, Fosun Pharma will hold 100% of the shares of Henlius through Fosun Pharmaceutical Industry and Fosun International, and realize 100% control of Henlius. As of now, Fosun Pharmaceutical only holds Henlius, with no other assets.

The consideration for this transaction is divided into cash and equity parts:

Cash consideration: including 219.8 million shares of H-shares and non-publicly traded shares, accounting for 40.44% of the total shares of Henlius, and the total transaction amount is HKD 5.407 billion.

Share consideration: Fosun Pharma will issue 57,724,918 new shares to acquire and cancel the shares of Henlius held by Fosun Pharmaceutical Industry and Fosun International.

At the same time, Fosun Pharma has provided a special option to Henlius shareholders, allowing other shareholders except the above two shareholders to give up the cash consideration and exchange their Henlius shares held in accordance with the specified ratio for shares of the holding platform under certain conditions. However, according to the announcement, the total amount of Henlius shares involved in this option cannot exceed 8% of the total shares, that is, 43,479,588 shares of Henlius.

It is worth noting that for the cash consideration part of this privatization, Fosun Pharma will provide guarantees for its subsidiary Fosun Pharmaceutical to apply for a merger and acquisition loan of no more than HKD 3.7 billion from the bank, and Fosun Pharmaceutical will pledge its 48.49% shares of Henlius, and Fosun Pharma will provide joint and several liability guarantee.

As of Q1 2024, Fosun Pharma had RMB 9.351 billion in cash and cash equivalents, and interest expense for the quarter was RMB 2.214 billion.

Why privatize Henlius?

Since its listing on the Hong Kong Stock Exchange in September 2019, although the business development of Henlius has been continuously improving and achieved a profit of RMB 546 million in 2023, its stock price performance has not been satisfactory in the context of increasing global economic uncertainty and continuous stagnation of the Hong Kong stock market.

At that time, with an IPO fundraising of HKD 3.096 billion, based on the closing price at that time, the market value of Henlius was HKD 26.7 billion. As of the closing price of this privatization proposal, the market value has shrunk by more than 50%, although the company's stock price has rebounded more than 35% this year.

In this context, Fosun Pharma's decision to privatize Henlius with a 30.6% premium can be seen as a win-win strategy.

Benefit to small shareholders of Henlius

For Henlius, privatization means getting rid of the pressure of secondary market fluctuations, and the company can focus more on long-term development strategies without overly focusing on short-term stock price performance.

At the same time, as a non-publicly traded company, Henlius will have greater flexibility in business development and resource allocation, and will be able to focus more on new pipeline research and development and current business without being affected by stock price fluctuations.

In addition, the company explained in the announcement that after delisting, the company can reduce the various costs required to maintain its listing status, such as compliance costs, information disclosure costs, etc., thereby reducing operating costs.

For the domestic pharmaceutical industry, the privatization of subsidiary companies by parent companies is not unprecedented.

In 2019, Wuxi AppTec delisted its subsidiary, Hequan Pharmaceutical, from the National Equities Exchange and Quotations. At that time, the reason for Wuxi AppTec's privatization was also to focus on long-term development strategy, improve operational efficiency, and save unnecessary administrative and other listing-related costs and expenses. From the subsequent effect, the privatization of Hequan Pharmaceutical did play an important role in the internal resource integration of Wuxi AppTec.

This privatization is bullish for small shareholders who started buying Henlius last year, and overall returns for small shareholders who bought at the beginning of this year will also exceed 60%.

Although there is still a possibility of loss for longer-term shareholders, this is a common problem in the H-share market.

Fosun Pharma will further enhance the efficiency of innovative drug research and development.

For Fosun Pharma, the significance of privatizing Henlius is even greater:

Firstly, the most direct impact of privatizing Henlius for Fosun Pharma is to directly improve its profit level and market value, thus increasing shareholder returns.

From a financial perspective, Fosun Pharma's 23x PE acquisition of Henlius is valued lower than Fosun Pharma's current 25x PE. Privatization will directly improve Fosun Pharma's profit level and market value.

According to Fosun Pharma's 2023 annual report, excluding COVID-19-related products, its pharmaceutical business revenue increased by 13.50% year-on-year. Among them, the sales of core products for anti-tumor and immune regulation were 7.638 billion yuan, a year-on-year increase of 38%, mainly benefiting from the rapid growth of Henlius's Hansuo, Hanquyou, and Sukeqin products.

By privatizing Henlius, Fosun Pharma will directly benefit from the rapid growth of these quality assets.

It is worth mentioning that Henlius has made significant achievements in innovative drug research and development and internationalization. Its core product Hanquyou (rituximab) has been approved for marketing in more than 40 countries and regions, including the EU, the UK, China, Australia, etc., and successfully obtained FDA approval in April 2024, becoming the first Chinese monoclonal antibody biosimilar approved in the three major markets of China, the EU and the United States.

In the whole year of 2023, Hansuo realized a revenue of over 1.1 billion yuan, a year-on-year increase of 230.20%; Hanquyou realized a revenue of over 2.7 billion yuan, a year-on-year increase of 58.19%; Sukeqin realized a revenue of over 900 million yuan, a year-on-year increase of 19.67%.

Secondly, Fosun Pharma's privatization of its most competitive Henlius in the innovative drug sector can increase synergy between it and its subsidiaries, enhance R&D efficiency, and reduce resource waste against the background of the overall limitation of the current domestic pharmaceutical market and difficult financing.

In the past decade, Fosun Pharma's R&D investment has grown rapidly, from 503 million yuan in 2013 to 5.937 billion yuan in 2023, and its revenue share has increased from 5.1% to 14.34% year by year.

Although R&D investment continues to grow, the market has long criticized Fosun Pharma's various subsidiaries for duplicated R&D investment and inefficient use of resources. For example, different subsidiaries may be developing products for the same indication at the same time, causing resource waste.

At the Fosun Pharma telephone conference held in May this year, Huaan Securities said:

The company is taking various actions to reduce waste of internal R&D resources.

Last year, the company established a translational research center to strengthen cooperation with research institutes and early-stage R&D organizations, promote upstream innovation transformation, and promote the entry of more efficient innovative achievements into the clinical stage.

At the same time, Fosun Pharma has set up six key decision points, where it will re-evaluate the priority of projects and consider commercial value and market changes. This more market-oriented and efficiency-oriented R&D system will be easier to promote and implement throughout the group after privatization. Especially in the early research stage of the project, the company has said that changes have already taken place.

In addition to independent research and development, Fosun Pharma also lays out the industry frontier fields through fund layout, further integrating R&D. For example, in 2024, Fosun Pharma and the two-level guidance fund of Shenzhen jointly established a 5 billion yuan Shenzhen biomedical industry fund, with Fosun Pharma contributing 1.5 billion yuan and holding a 30% stake. After the privatization of Henlius, Fosun Pharma's R&D funds for both self-research and BD will be more flexible.

Undoubtedly, if the company can integrate and utilize the R&D resources advantageously through Henlius in the future, the overall R&D efficiency of the innovative drugs sector of Fosun Pharma will be further improved.

Of course, considering the traditional operation of Fosun Capital, the market should not exclude the possibility that Fosun Pharma will bring Henlius back to market in the future. Considering the valuation advantage of A-share market, listing on A-share market may be a potential option in the future.

Conclusion:

The domestic pharmaceutical market is experiencing the third year of cold winter, and both biotech and pharma have the same goal: ensuring cash flow, improving R&D efficiency, and launching products to the market faster.

As a representative of domestic pharma, Fosun Pharma's privatization of the innovative drug subsidiary has also brought a new direction to the domestic market - merging and integrating R&D resources to improve overall efficiency.