Backed by Tencent, XtalPi's Valuation Soars Over 1600x in Six Years Amid Nearly RMB 5 Billion Losses in 3.5 Years

Produced by | Bullet Finance

Author | Duannan Nan

Editor | Dan Zong

Art Editor | Qianqian

Review | Songwen

The Hottest Industry in 2023 is Undoubtedly AI. In the Capital Market, Any Stock Related to AI Concepts Has Seen Its Price Soar. As AI Applications Gradually Deepen, the Integration of AI with Various Industries Has Also Become a Key Focus for Investors.

On November 30, AI pharmaceutical unicorn XtalPi submitted its prospectus to the Hong Kong Stock Exchange, planning to list on the main board of the Hong Kong stock market. Unlike other companies, XtalPi intends to seek a listing on the main board of the Hong Kong Stock Exchange through Rule 18C.

Hong Kong Stock Exchange Rule 18C is further divided into two categories: commercialized companies and non-commercialized companies. XtalPi Holdings Limited utilized the listing rules for non-commercialized companies. Under this rule, there are no revenue requirements for applying enterprises, but the company's minimum market value must exceed HKD 10 billion. Additionally, regulations have been established regarding research and development as well as daily operational funds.

For XtalPi, the company can meet the listing standards for non-commercialized companies under Rule 18C. However, as AI-driven drug discovery is still in its early stages, the company still requires substantial funding to support its R&D efforts. With numerous competitors in the industry, XtalPi's path to profitability remains long.

1. Backed by Tencent, Valuation Surges Over 1600 Times in 6 Years

XtalPi's official website shows that the company is a technology company driven by AI and robotics innovation, founded in 2015. Unlike AI companies in China, XtalPi was born at the Massachusetts Institute of Technology in the United States, which is largely related to the company's founder, Shuhao Wen.

The official website shows that Shuhaoyu Wen is a Ph.D. in Physics from the Chinese Academy of Sciences and a postdoctoral fellow at the University of California and the Massachusetts Institute of Technology.

While studying at MIT, Wen Shuhao, along with partners Ma Jian and Lai Lipeng, co-founded XtalPi. In its early days, the company struggled to survive due to a shortage of funds. In 2016, Wen Shuhao and XtalPi encountered their "benefactor," Ma Huateng.

According to Wen Shuhao's recollection, during his conversation with Ma Huateng, Ma Huateng highly praised XtalPi's original intention of serving the country and its people, and expressed his optimism about XtalPi's AI-driven drug development.

In the following years, XtalPi completed several rounds of financing, with Tencent being the largest institutional investor in XtalPi. The prospectus shows that, prior to the IPO issuance, Tencent held 13.66% of XtalPi's equity through its subsidiary Image Frame Investment, making it the company's largest external institutional shareholder.

With the "halo" effect of Tencent and the founding team's generally high academic qualifications, the company has attracted numerous well-known investment institutions. In addition to Tencent, Sequoia Capital, Google, SoftBank, and other enterprises have also invested in XtalPi.

With the support of capital, XtalPi's valuation has surged. The prospectus shows that in September 2015, XtalPi completed its Pre-A round of financing, with a pre-investment valuation of 8.3 million yuan and a post-investment valuation of 10.3 million yuan.

In November 2015, XtalPi completed its Series A1 financing, with its post-investment valuation skyrocketing to 97.9 million yuan. In less than two months, the valuation of XtalPi surged more than ninefold.

(Figure / XtalPi Holdings Limited Prospectus)

Since then, XtalPi has completed the A-2 round of financing, B round of financing, B+ round of financing, B++ round of financing, C round of financing, and D round of financing. After eight rounds of financing, XtalPi has cumulatively raised over 5.2 billion yuan. Following the completion of the D round of financing, XtalPi's post-investment valuation reached 1.968 billion US dollars.

As of December 7, 2023, the offshore RMB exchange rate was 7.17, and the valuation of XtalPi, denominated in RMB, reached 14.1 billion yuan. This also indicates that from its first financing in 2015 to its Series D financing in 2021, over the span of six years, XtalPi's valuation increased more than 1,687-fold.

It is worth noting that XtalPi referenced the listing standards for companies that have not yet achieved commercialization in its IPO. A valuation as high as 14.1 billion yuan is undeniably significant for a startup.

2. In a high-growth track, operating losses nearly 1.4 billion in three and a half years

"Bullet Finance" believes that the reason XtalPi has been able to achieve such a high valuation is largely related to the industry in which the company operates. From the perspective of underlying technology, XtalPi is a technology company driven by AI. At present, the AI industry is growing rapidly.

Moreover, XtalPi is targeting the biopharmaceutical field. With the support of AI and the vast market space in biopharmaceuticals, the company's valuation has continued to rise.

Frost & Sullivan data shows that the global drug research and development outsourcing services market size was $123 billion in 2023, and is expected to grow to $325 billion by 2030, with a compound annual growth rate (CAGR) of 14.9%. The market size of China's drug research and development outsourcing services was $34 billion in 2023 and is expected to grow to $119 billion by 2030, with a CAGR of 19.6%.

Due to high R&D investment and long development cycles, how to reduce costs and increase efficiency has become a key focus for major pharmaceutical companies. XtalPi has developed an intelligent drug discovery platform capable of accurately predicting various critical drug properties, enhancing the efficiency and success rates of preclinical research.

Relying on the vast market scale, theoretically speaking, the AI pharmaceuticals market has enormous potential.

Unlike large CXO companies such as WuXi AppTec, XtalPi's drug research and development mainly focuses on the preclinical stage rather than the entire process of drug development.

But whether the drug can truly be effective still requires multiple clinical trials in the later stages. Past cases have shown that many of the drug discoveries in the preclinical stage of AI pharmaceuticals did not meet expectations.

Data shows that, as of the end of 2022, a total of 80 AI drug pipelines were approved for clinical trials worldwide, with only five progressing to phase III clinical trials. So far, no AI-developed drug has been approved for marketing, which has also limited the profitability of related companies.

The same is true for XtalPi. Data shows that during the period from 2020 to 2022 (hereinafter referred to as the "reporting period"), the company's revenues were 35.636 million yuan, 62.799 million yuan, and 133 million yuan, respectively, with revenue growth of 274.21% over the three years.

In the first half of 2023, XtalPi's revenue increased significantly again, reaching 79.967 million yuan, a year-on-year increase of 86.20%.

However, despite a significant increase in revenue, XtalPi's losses not only failed to narrow but continued to expand.

During the reporting period, XtalPi incurred operating losses of 126 million yuan, 299 million yuan, and 525 million yuan. In the first half of 2023, XtalPi reported another operating loss of 435 million yuan. Over three and a half years, the company's total operating loss approached 1.4 billion yuan.

(Figure / XtalPi Holdings Limited Prospectus)

In this regard, XtalPi explained that although the company's operating revenue has grown strongly, the company's daily operations have incurred losses due to the continuous increase in R&D expenses, administrative expenditures, and marketing costs.

Data shows that during the reporting period, the company's total R&D expenses, administrative expenses, and marketing expenses were 148 million yuan, 377 million yuan, and 604 million yuan, respectively, with related expenditures increasing year by year.

In addition, due to the losses generated by the fair value changes of convertible and redeemable preferred shares and other financial liabilities, XtalPi's actual annual losses from 2020 to the first half of 2023 were 734 million yuan, 2.137 billion yuan, 1.439 billion yuan, and 620 million yuan, respectively, with cumulative losses over three and a half years approaching 5 billion yuan.

From this perspective, XtalPi's path to turning a profit remains long.

3. Difficult to obtain underlying data, customer retention rate declines

From the perspective of XtalPi's industry, the company theoretically has unlimited growth potential. However, due to the immaturity of AI-driven pharmaceutical technology and the presence of many market competitors, there remains significant doubt about whether the company's revenue can continue to expand.

In terms of revenue, XtalPi's business is mainly divided into two parts: drug discovery solutions and intelligent automation solutions.

(Figure / XtalPi Holdings Limited Prospectus)

In the past few years, XtalPi has experienced rapid growth in revenue from both its drug discovery solutions and intelligent automation solutions. Data shows that the total number of projects for the two solutions combined was 110 in 2020, increasing to 293 by the end of 2022.

(Figure / XtalPi Holdings Limited Prospectus)

Due to the significant increase in the number of projects, the company's overall revenue has also risen substantially. In 2020, the company's revenue was only 35.636 million yuan, and by 2022, it had grown to 133 million yuan, with the company’s revenue increasing by 274.21% over three years.

Notably, although XtalPi's projects and revenue have grown rapidly, its customer retention rate has been declining. Data shows that from 2020 to the first half of 2023, the company's customer retention rates were 53.8%, 67.5%, 51.4%, and 51.4%, respectively, showing a year-on-year downward trend. XtalPi has not provided specific reasons for the decline in customer retention rate.

However, fierce industry competition is likely an important reason for the decline in customer retention rates.

Currently, AI pharmaceutical players are mainly divided into the following three categories:

Firstly, leading pharmaceutical companies, such as Pfizer, Johnson & Johnson, Novartis, Bayer, and other top foreign pharmaceutical firms, as well as major Chinese pharmaceutical companies like WuXi AppTec, CP Group's Fenghai Pharmaceutical, Hansoh Pharma, and Yunnan Baiyao, are also involved in AI-driven drug research and development.

Secondly, leading internet companies in China, such as Tencent, are also building their own AI drug discovery platforms by leveraging AI models and platform advantages. For instance, Tencent's "Yunshen Zhikang" is an AI preclinical drug research platform constructed based on its own algorithms and databases.

Thirdly, there is a large number of AI drug discovery companies. Data disclosed by Guanzhi Hainai Consulting shows that globally, there are as many as 392 companies solely engaged in the early drug development field of AI pharmaceuticals, while hundreds more operate in other areas of AI drug discovery.

Among these large pharmaceutical companies, some are existing clients of XtalPi. If the large companies' own AI-driven drug discovery efforts progress smoothly, their procurement from XtalPi will likely decrease.

Moreover, compared with large pharmaceutical enterprises and leading Internet companies, XtalPi has the disadvantage of insufficient data volume. In the process of AI drug research and development, underlying data is the foundation of AI drug research and development. For some public materials such as literature, XtalPi can still obtain them through public channels.

However, the quality of publicly available data is difficult to guarantee, and using such data for calculations would lead to poor reliability in AI model operations. The truly core data, on the other hand, is held by major pharmaceutical companies—this data is non-public and more suitable for training and calculating models.

This also leads to very few AI-selected drugs truly advancing, with only five AI drug pipelines globally having progressed to Phase III clinical trials, as mentioned above.

XtalPi is also facing this common industry challenge. In the prospectus, XtalPi stated that if the quality of the monitored and reviewed data is poor, it will cause significant harm to the company's R&D services, which will then have a major impact on the company’s business, prospects, and reputation.

For XtalPi, being in the rapidly growing AI pharmaceuticals industry offers immense potential for the company’s future. Therefore, in its Series D funding round, XtalPi achieved an ultra-high valuation of nearly 20 billion US dollars.

If XtalPi successfully goes public, can it maintain a valuation of nearly 20 billion US dollars or even higher? Relying solely on the "imaginative potential" of the AI industry is not enough to sustain a company’s stability and growth. If revenue cannot maintain rapid growth, XtalPi's valuation could potentially plummet.

*The image in the article is from: Shutterstock, based on the VRF protocol.

       Title: Backed by Tencent, XtalPi's Valuation Surges Over 1600 Times in Six Years, with Cumulative Losses of Nearly 5 Billion in Three and a Half Years