CRO Giant Kanglong HuaCheng Reaps Nearly $1 Billion Return, 13x Gain in Two Years from Proteologix Exit

On May 17, Pharmaron Beijing Co., Ltd. (hereinafter referred to as Pharmaron or the Company) announced the sale of its equity in an overseas participating company.Pharmaron’s wholly-owned subsidiary, Pharmaron Hong Kong Investment, holds a 10.21% stake in Proteologix, which will be sold to Johnson & Johnson for approximately $102.1 million (about 738 million RMB) through a merger and acquisition by Proteologix.

Following the effectiveness of the merger and acquisition, Johnson & Johnson is required to pay an initial payment of approximately US$86.821 million (approximately RMB 628 million) to Pharmaron within 60 days via a paying agent; within 60 days after Johnson & Johnson or its affiliates achieve the agreed R&D project milestone events as stipulated in the agreement, Johnson & Johnson must pay Pharmaron a milestone event consideration of approximately US$15.321 million (approximately RMB 111 million) through the paying agent.

It is reported that Pharmaron's sale of its equity in Proteologix is based on the announcement released by Johnson & Johnson on May 16. The announcement from Johnson & Johnson indicates that it will acquire Proteologix for $850 million in an all-cash transaction, with the potential for additional milestone payments in the future.

Proteologix is a biopharmaceutical company focusing on autoimmune diseases, with a core product portfolio including PX128 and PX130. PX128 is a bispecific antibody targeting IL-13 and TSLP, which is about to enter Phase I clinical trials for moderate to severe atopic dermatitis (AD) and moderate to severe asthma. PX130 is a bispecific antibody targeting IL-13 and IL-22, currently in the preclinical development stage for moderate to severe AD.

Through this acquisition, Johnson & Johnson can further strengthen its layout in skin-related diseases within the autoimmune field, particularly in the enormous market of AD, which affects hundreds of millions of patients and where current therapies have limited efficacy.

Pharmaron, as one of the strategic shareholders of Proteologix due to its mastery of core data and information capabilities in drug development, gained substantial cash flow returns from this acquisition. As a CXO enterprise, most of Pharmaron's revenue comes from providing industry chain-related services to customers, making this equity sale appear to be an "unexpected windfall."

This equity sale is a typical example of industrial chain empowerment investment. Looking at the leading CXO companies in China, there are actually quite a few enterprises with such layouts. On one hand, large CXOs continuously gain revitalization based on their existing businesses. On the other hand, leveraging the substantial cash flow brought by these core operations, CXOs invest in valuable industrial chain projects through subsidiaries or sub-funds to achieve high-value returns.

Besides having a good eye for investment projects, Pharmaron has also done quite well in its "core business." In the context of a downturn in the CXO industry, it can even be considered a逆袭 "clear stream."

According to the information from VCBeat, in 2023, among the 28 CXO companies listed on the A-share market in China, 22 experienced a decline in stock prices, with an average drop of 36.57%. On top of the over 300 billion yuan reduction in total market value in 2022, there was a further shrinkage of approximately 170 billion yuan.

In a sluggish economic environment, Pharmaron achieved a total operating revenue of 11.538 billion yuan in 2023, representing a year-on-year increase of 12.39%; net profit attributable to parent company was 1.601 billion yuan, increasing by 16.48% year-on-year; non-recurring net profit attributable to parent company was 1.514 billion yuan, up by 6.51% year-on-year. It is one of the few CRO companies in China with a net profit of over 1 billion yuan and maintaining positive growth.

Moreover, according to Pharmaron's Q1 2024 report, its total revenue in the first quarter was 2.671 billion yuan, a year-on-year decrease of 1.95%; the net profit attributable to parent company was 231 million yuan, a year-on-year decrease of 33.8%. Compared with other CXO giants in China, its revenue decline in the first quarter was the least, and the number of R&D employees increased compared to the same period last year.

The sale of Proteologix equity this time will bring Pharmaron hundreds of millions of profits in the second quarter.In today's increasingly competitive and rapidly changing trade environment, maintaining one's own advantages and gradually laying out high-quality projects in the industrial chain, combining the existing cash flow with the considerable future returns of innovative projects, is undoubtedly a good way to bring vitality to the industry.

Focusing on this announcement, there are actually more details worth exploring. For instance, the equity Pharmaron sold this time mainly came from two subscriptions in 2021 and 2022.

In September 2021, Pharmaron signed an investment subscription agreement to invest in PROTEOLOGIX, INC. by subscribing to 7.27% of its equity through Pharmaron Hong Kong, with an investment of 3 million US dollars from its own funds.

In November 2022, Pharmaron entered into an additional investment subscription agreement to invest an additional USD 4 million from its own funds to subscribe for newly issued shares of Proteologix. After the completion of this additional investment, Pharmaron's equity interest in Proteologix held through Pharmaron Hong Kong Investment increased to 12.44%. Meanwhile, Shanghai Zhaolan Enterprise Management Consulting Partnership, an affiliate of Pharmaron, also subscribed for newly issued shares of Proteologix in this additional investment.

As of May 17, 2024, after the full dilution of all employee shares and equity incentive shares issued by Proteologix, Pharmaron holds a 10.21% equity stake in Proteologix through its direct investment via Pharmaron Hong Kong, making it the fifth largest shareholder of Proteologix. The fourth largest shareholder is Shanghai Zhaolan Enterprise Management Consulting Partnership, with a shareholding ratio of 16.54%.

Compared to the pharmaceuticals industry's large projects often worth billions, the amount announced this time does not draw much attention.But what is different is that, in more than two years, Pharmaron gained a return of up to 102.1 million US dollars by investing 7 million US dollars in Proteologix.Previously, this investment was consolidated and not classified as a financial asset at fair value through profit or loss, but rather recorded as a long-term equity investment. Therefore, in Pharmaron's current financial statements, there will be an additional profit of RMB 687 million (USD 1.021 billion minus USD 7 million).

A rough calculation shows that if Johnson & Johnson's acquisition is successfully completed, Pharmaron's return on investment will be approximately 13.58 times.

In addition, Pharmaron, as the largest LP of Shanghai Zhaolan Enterprise Management Consulting Partnership, accounts for 21.2% of the capital contribution. The income corresponding to this portion of the fund shares is approximately US$0.297 billion (approximately RMB 210 million). Apart from the Proteologix project, Shanghai Zhaolan Enterprise Management Consulting Partnership has also invested in some other projects. It depends on how the fund manager allocates the exit proceeds from this single project. If the proceeds are directly returned to the LPs, it will form the current investment profit; if the partnership agreement allows for reinvestment, the reported profit will not be realized until the final fund liquidation.

For this sale of Proteologix equity that has resulted in a substantial profit, Pharmaron is likely quite satisfied. In its announcement, the company stated that according to preliminary calculations by Pharmaron's finance department, this transaction is expected to have a significant positive impact on the company’s net profit for the fiscal year 2024. The sale of this equity will help Pharmaron bolster its cash flow, enhance the development of its R&D service capabilities, and further establish the company as a comprehensive, integrated pharmaceutical R&D service platform, promoting its sustainable and healthy growth as well as maximizing shareholder value.

It is expected that more and more CXO enterprises in China, while integrating their own platforms, will make more innovative layouts based on the accumulated resources and cash flow, bringing new opportunities to the declining industry.