CRO Firm Kanglonghua Achieves Over 13x Return in 2 Years, Gains Nearly $102M from Proteologix Sale

On May 17, Pharmaron Beijing Co., Ltd. (hereinafter referred to as "Pharmaron" or the "Company") announced the sale of its equity in an overseas minority-owned company.Pharmaron’s wholly-owned subsidiary, Pharmaron Hong Kong Investment, which holds a 10.21% stake in Proteologix, will sell its shares 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 through a paying agent. Within 60 days after Johnson & Johnson or its affiliates complete the agreed R&D project milestone events as per the agreement, a milestone payment of approximately US$15.321 million (approximately RMB 111 million) will be paid to Pharmaron through the paying agent.

It is reported that Pharmaron's sale of its equity in Proteologix stems from the announcement released by Johnson & Johnson on May 16. The announcement by Johnson & Johnson indicates that it will acquire Proteologix for $850 million in an all-cash deal, with the possibility of 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布局 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 with core data and information capabilities in drug development, gained substantial cash flow returns from this acquisition. As a CXO company, 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 original 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 obtain 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 could even be considered a逆袭 "clear stream."

According to the information from Tongxiyi, 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%. Following a reduction of over 300 billion yuan in total market value in 2022, the market value further shrank by 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 shareholders of 1.601 billion yuan, up 16.48% year-on-year; and non-GAAP net profit attributable to shareholders of 1.514 billion yuan, increasing by 6.51% year-on-year. It is one of the few CRO companies in China with a net profit exceeding 1 billion yuan while 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 shareholders was 231 million yuan, a year-on-year decrease of 33.8%. Compared with other CXO giants in China, its Q1 revenue decline was the smallest, and the number of R&D employees increased compared to the same period last year.

ThisThe sale of Proteologix equity will bring Pharmaron hundreds of millions in profits in the second quarter.In today's increasingly competitive and ever-changing trade environment, maintaining one's own advantages and gradually laying out high-quality projects in the industrial chain, while combining existing cash flow with the promising future returns of innovative projects, is undoubtedly an excellent approach to bringing vitality to the industry.

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

In September 2021, Pharmaron signed an investment subscription agreement to invest in and subscribe to 7.27% of PROTEOLOGIX, INC.'s equity for 3 million US dollars through its Hong Kong entity, Pharmaron Hong Kong.

In November 2022, Pharmaron signed 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 stake in Proteologix held through Pharmaron Hong Kong Investment increased to 12.44%. Meanwhile, in this additional investment, Pharmaron’s related party, Shanghai Zhaolan Enterprise Management Consulting Partnership, also subscribed for newly issued shares of Proteologix.

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 pharmaceutical industry's large projects that often involve billions, the amount announced this time does not attract much attention.But the difference is that, in just over two years, Pharmaron invested 7 million US dollars in Proteologix and gained a return as high as 102.1 million US dollars.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 reporting period, 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, holds a 21.2% stake, and 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 distributes the exit proceeds of this single project. If 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 enhance its cash flow, promote the development of its R&D service capabilities, and further build an end-to-end, integrated pharmaceutical R&D service platform, fostering its sustainable and healthy growth as well as maximizing shareholder value.

It is expected that more and more CXO companies 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.