Innovent Biologics Inc. (1801.HK), a significant player in the Chinese biopharmaceutical sector, recently faced harsh backlash from investors due to a misstep in its strategy. The company aimed to strengthen its executives’ dedication to its international unit, Fortvita, by selling a stake to the company’s founder. However, the low valuation proposed for this deal spooked investors, resulting in a significant crisis of market confidence. This misjudgment led to a substantial drop in the company’s valuation, ultimately forcing Innovent to abandon the controversial transaction.
The Controversial Stake Sale
Innovent’s goal with the transaction was to highlight its leadership’s commitment to expanding its international business. However, the strategic move quickly backfired as market investors grew uneasy about the low valuation presented in the deal. The biopharmaceutical sector in China has been experiencing a period of heightened optimism, yet Innovent’s actions had the opposite effect. Its market capitalization shrank by HK$10 billion (approximately $1.29 billion) in just one day and by more than HK$16 billion over four days. This illustrated the severe repercussions of the ill-fated equity sale.
The controversy stemmed from Innovent’s proposed sale of a 20.39% equity stake in Fortvita, its wholly-owned subsidiary responsible for international activities. The stake sale was intended to be made to Lostrancos, a company primarily owned and managed by Innovent’s founder and CEO, Michael Yu. Investors reacted strongly against the perceived undervaluation of Fortvita for the proposed sale price, prompting Innovent to announce the termination of the unpopular transaction on November 3.
Investor Concerns and Market Reaction
The planned sale, announced on October 25, outlined Lostrancos’ purchase of the stake for $20.5 million, thereby reducing Innovent’s ownership from 100% to 79.61%. Yu holds an 82.93% interest in Lostrancos, while the remaining shares of this entity are divided among Ronald Xi, an executive director of Innovent, and an independent third-party investor. The revelation of the deal occurred against a backdrop of scant public information about Fortvita, which heightened investor uncertainty and concern.
In an attempt to calm stakeholders, Yu provided context for Innovent’s international operations and strategic intentions. Since 2018, Innovent had centralized all its international units, operating in the United States, Europe, and Singapore, under Fortvita. The company aimed to strengthen its international presence by establishing a robust infrastructure, including clinical staff and laboratories, starting in 2021. However, details about Fortvita’s active research projects and potential market prospects remained vague, further exacerbating investor concerns regarding future profitability and the associated risks of Fortvita’s pipeline.
Financial Implications and Strategic Missteps
Despite Innovent’s optimism about Fortvita’s potential role in achieving its goal of becoming a global biopharmaceutical leader, the adverse reaction from investors suggested otherwise. Investors were particularly anxious about potential revenue shortfalls and resulting investment risks from selling a significant stake in an early-stage research-oriented unit within the company’s portfolio. To stem the fallout from the deal, Innovent reassured its commitment to international business goals but had to reverse the controversial transaction.
In the biotech and pharmaceutical industry, profits from international sales are often significantly higher than those from domestic revenues. This is mainly due to higher pricing in developed markets compared to the fixed pricing in China under the national medical insurance system. Furthermore, Innovent has been striving to enter the U.S. market with its anti-cancer drug sintilimab. However, U.S. regulators rejected its application in 2022 due to insufficient clinical trials on Western populations.
Governance and Transparency Issues
Despite the regulatory setback, Innovent continues to develop and trial promising drugs through Fortvita. This includes the advanced-stage drug candidate IBI343, targeted at a particular type of pancreatic cancer and designated as fast track by U.S. regulators, and IBI363, which is undergoing trials in multiple countries. Yet, drug development is notoriously capital-intensive, resulting in Fortvita incurring significant losses.
For 2022 and 2023, Fortvita reported losses of 331 million yuan ($46.6 million) and 271 million yuan, respectively, which were funded by Innovent. Ernst & Young, the independent valuer, utilized an asset-based valuation approach due to the lack of financial projections and comparable benchmarks, arriving at a valuation of approximately $80.03 million for Fortvita in the proposed deal. This valuation alarmed investors because it was lower than the collective investment made into Fortvita over the preceding two years and did not account for potential future revenues from successful drug market entries or licensing.
Leadership Actions and Market Confidence
Innovent Biologics Inc. (1801.HK), a notable entity in the Chinese biopharmaceutical industry, recently encountered severe backlash from investors due to a strategic miscalculation. The company intended to bolster its executives’ loyalty to its international unit, Fortvita, by selling a stake to the company’s founder. However, the proposed low valuation for this deal alarmed investors, causing a significant crisis of market confidence. The miscalculation spurred a substantial drop in the company’s market value, leading to widespread concern among shareholders. As a result, Innovent ultimately had to abandon the contentious transaction altogether. This misstep has placed the company in a difficult position, struggling to regain the trust of its investors while attempting to recover from the significant hit to its valuation. Moving forward, Innovent will need to carefully reassess its strategies and perhaps seek more transparent communication with investors to rebuild confidence in its leadership and direction within the highly competitive biopharmaceutical sector.
