Kelun-Biotech: Seagen Alternative or Chinese ADC Pioneer Heading for Hong Kong IPO?

In the spring of surging ADC popularity, Kelun-Biotech, one of China’s first innovative biopharmaceutical companies to establish an integrated ADC platform, has filed its application for listing in Hong Kong.

Kelun-Biotech is a controlling subsidiary of Kelun Pharmaceutical and serves as the innovation vanguard spun off from this traditional Chinese pharmaceutical company, which originally built its business on infusion solutions. Following its most recent Series B financing round, the company’s valuation exceeded RMB 10 billion.

Kelun-Biotech was established in 2016, but Kelun Pharmaceutical had already begun its exploration in the field of ADCs since 2012.Over a decade of development has positioned Kelun-Biotech at the forefront of ADC process development, manufacturing, and quality control, making it an indispensable partner for multinational corporations (MNCs) seeking related assets in recent years:From May to December last year, Kelun-Biotech and Merck & Co. reached three collaborative deals covering nine new ADC drugs, with total upfront payments of $257 million, total milestone payments of $11.564 billion, and a total transaction value reaching $11.8 billion, making it the largest global biopharmaceutical collaboration in 2022.

In this regard, VBInsight interviewed several practitioners and investors in the ADC field. We believe that Kelun-Biotech is worth watching, whether from the perspective of the ADC sector or the global expansion of China’s innovative drugs.

• Kelun Pharmaceutical has undergone a prolonged exploration of transitioning from generics to innovation. Kelun-Biotech’s achievements in the antibody-drug conjugate (ADC) field epitomize the transformation and expansion efforts of Chinese pharmaceutical companies, which have sought new growth curves through substantial talent acquisition and capital investment. Its developed linker-payload technology became the key factor in securing collaboration with Merck & Co. Internal decision-making, years of persistence, and a degree of fortune have ultimately helped Kelun-Biotech secure its place in the industry.

• Even though Kelun-Biotech is regarded by some as the “alternative” to Seagen that Merck & Co. was seeking, ADC assets are becoming a “standard offering” for multinational corporations (MNCs), as one of the few emerging therapies to reach commercial maturity. ADCs also represent one of the best entry points for Chinese pharmaceutical companies to establish a global presence. Kelun-Biotech’s overseas collaborations are highly encouraging.

Kelun, the infusion market leader once hailed alongside Hengrui Medicine as one of the “two giants” of China’s pharmaceutical industry, detected business opportunities in innovative drugs in 2012. Influenced by national policies such as centralized procurement of antibiotics and the “Antibiotic Restriction Order,” Kelun embarked on a journey from generics to innovation and officially established Kelun-Biotech in 2016.

Dr. Wang Jingyi, who joined Kelun in 2012, serves as the R&D leader at Kelun-Biotech. Since Dr. Wang’s arrival, Liu Gexin has provided full support to his R&D team in pursuing innovation. According to Kelun, the company initiated the development of ADC products in 2012. Through exploratory efforts in preclinical translational medicine research and clinical-stage studies, it has accumulated extensive clinical data, non-clinical data, pharmacological and toxicological data, and translational medicine experience over the past decade.

Antibody-drug conjugates (ADCs) represent a “long-standing” drug concept; however, the field did not gain significant momentum until the emergence of impressive data for DS-8201. Although ADCs combine the advantages of both targeted therapy and chemotherapy, their design and manufacturing present numerous technical challenges, leading many pharmaceutical companies to remain skeptical about the development prospects of ADCs.

Kelun has not only pioneered research in the field of antibody-drug conjugates (ADCs) but has also remained steadfast in advancing this pathway.This is related to Kelun’s talent acquisition initiatives. To advance its innovative drug business, Kelun has successively recruited over 100 pharmaceutical industry professionals from around the world, including experts specializing in proteolytic enzymes.

Antibody-drug conjugates (ADCs) consist of three components: an antibody, a payload, and a linker. The antibody determines the type of disease to be treated, the payload dictates the mechanism of action, and the linker governs how the payload is attached to the antibody and released. Protease-cleavable linkers are the most widely used type in ADCs; Daiichi Sankyo and Seagen jointly spent seven years developing a next-generation protease-cleavable linker.

It is understood that there were internal disagreements at Kelun-Biotech regarding whether to advance ADC development, and the head of this innovative business unit faced skepticism, yet remained committed to this field.Several key experts recruited by Kelun-Biotech jointly conducted independent R&D of linker-payload technology. Later, Merck & Co. took a fancy to Kelun-Biotech’s linker-payload technology and licensed in a package of ADC projects utilizing this linker-payload.

Over the years, Kelun-Biotech has accumulated extensive knowledge and experience in various aspects, including payload selection, linker selection, drug-to-antibody ratio (DAR) optimization, and antibody properties, establishing itself as one of the first companies in China and among the few globally to build a fully integrated antibody-drug conjugate (ADC) development platform.

Kelun-Biotech’s success in ADCs involves an element of luck, but more importantly, it stems from substantial and sustained investments in human and material resources. According to its prospectus, Kelun-Biotech currently has 1,116 employees, including 762 R&D personnel, accounting for 68.3% of the total workforce. Kelun has long been criticized for its limited achievements in transitioning from generic drugs to innovative therapies. Now, with Kelun-Biotech achieving a milestone in the ADC field, it can be said that “a ray of hope has finally emerged.”

A significant issue arising from Kelun-Biotech’s high level of investment is the company’s persistent losses. According to its prospectus, Kelun-Biotech has not yet achieved profitability; its net losses for the full year 2021 and the first nine months of 2022 were RMB 890 million and RMB 321 million, respectively. It should be noted that the narrowing of losses in the first nine months of 2022 was largely attributable to a substantial increase in revenue driven by upfront payments from Merck & Co. following the establishment of their collaboration.

The prospectus also reveals that Kelun-Biotech’s working capital is primarily derived from substantial loans from its parent company. As of 2021 and as of September 30, 2022, loans from Kelun Pharmaceutical to Kelun-Biotech amounted to RMB 2.358 billion and RMB 2.761 billion, respectively; during the same periods, the company recorded net liabilities of RMB 2.644 billion and RMB 2.944 billion, respectively. On January 3 this year, the company converted RMB 2.5 billion of outstanding debt owed to its controlling shareholder, Kelun Pharmaceutical, into equity.

Kelun-Biotech has filed applications for four new ADC drugs, targeting HER2, Trop2, Claudin18.2, and Nectin-4, respectively. Subsequent innovations continue to center on ADCs, encompassing novel ADC technologies such as bispecific antibody ADCs, immune-stimulating ADCs, radiopharmaceuticals, dual-effect ADCs, and non-oncology ADCs. Its innovative drug R&D remains highly capital-intensive without any commercialized products, leading to Kelun-Biotech’s current situation.

In recent years, multinational corporations (MNCs) have been actively seeking ADC technology platforms and products in this therapeutic area. According to Kelun-Biotech, numerous companies have sought to engage in discussions and collaborations with them. However, given its financial situation, Kelun-Biotech is also looking for a suitable partner to which it can commit itself as soon as possible.

An analysis of the three deals with Merck & Co. reveals that while the total transaction values are impressive, the upfront payments are not substantial:

In May last year, Kelun-Biotech licensed the rights for the research and development, manufacturing, and commercialization of its TROP2-targeting ADC drug SKB264 in regions outside China to Merck & Co. for an upfront payment of $47 million;

In July, Kelun-Biotech further licensed the rights to its CLDN18.2 ADC candidate SKB315 and related product assets based on SKB315 to Merck & Co., with an upfront payment of $35 million;

In December, the company granted Merck & Co. an exclusive global license for seven preclinical ADC assets for cancer treatment, as well as additional exclusive licenses for certain other preclinical ADC assets, with Merck agreeing to pay an upfront payment of $175 million.

First, the price covers a bundled sale of multiple products. Second, the upfront payment constitutes a significantly low proportion of the total transaction value. Notably, SKB264, a key asset in the licensing deal, has advanced to Phase III clinical trials and received Breakthrough Therapy Designation from the CDE last year for the treatment of advanced or metastatic triple-negative breast cancer. For such a late-stage pipeline asset, Merck & Co. offered up to $1.363 billion in milestone payments plus royalties on net sales after product launch.

However, Kelun-Biotech’s technological expertise and accumulated experience in the ADC field are widely recognized; in particular, the company ranks among the top tier in targeting Trop2 and CLDN18.2.Given Merck’s repeated consideration and subsequent abandonment of a high-priced acquisition of Seagen, the deal struck between Kelun-Biotech and Merck is likely one of mutual benefit: the multinational corporation (MNC) enriches its pipeline and improves success rates, while Kelun-Biotech secures funding to support subsequent R&D efforts and sheds the label of being a “drag” on its parent company.

Such licensing deals with overseas giants add value far exceeding the companies’ intrinsic commercial worth, while also alleviating some of the growing pains associated with transitional periods. If Kelun-Biotech can continue to advance its collaborative asset pipeline with Merck & Co., it will set a benchmark for more companies participating in global first-in-class (FIC) and best-in-class (BIC) competition.

Recent developments in the antibody-drug conjugate (ADC) field have been frequent, including the approval of DS-8201 for breast cancer treatment in China, the licensing of CSPC Pharmaceutical Group’s Nectin-4 ADC to Corbus, and the licensing of Claudin18.2 ADC from ConnoMed and Lepu Biopharma to AstraZeneca, among others.

The announcement of various collaborations demonstrates that the advantages of Chinese enterprises in the antibody-drug conjugate (ADC) research and development process are gaining recognition. ADC manufacturing involves multiple stages, imposing stringent requirements on pharmaceutical companies’ capabilities in process development and quality control systems. This necessitates substantial experience with both large and small molecules, as well as profound expertise in linker technology. Although the principle behind ADCs is clear, it is nuanced; the three components—antibody, payload, and linker—require iterative experimentation to achieve balance and must be tailored to different tumors and tissue combinations. The technological platforms, clinical data, and the experience and patience in manufacturing that major pharmaceutical companies seek are precisely the strengths possessed by Chinese enterprises.

The collaboration between Merck and Kelun-Biotech was initiated after reviewing the clinical, non-clinical, and pharmaceutical data of SKB264. Subsequently, both parties established a Joint Development Committee for the SKB264 project. Through close cooperation among clinical, CMC, and management teams, Merck gained a more comprehensive understanding of the SKB264 project, its underlying linker and payload technologies, and Kelun-Biotech’s ADC platform, which quickly led to a second collaborative project.

Not only pharmaceutical companies, but also some domestic startup biotechs have received collaboration inquiries. MNCs’ business development teams are casting a wide net to enrich their ADC pipelines.

It is widely believed in the industry that ADC assets will become the “standard offering” for MNCs in the post-PD-1 era.Currently, antibody-drug conjugates (ADCs) can be developed as standalone therapeutics; however, the exploration of their applications remains in its early stages, and their efficacy ceiling is relatively low. To advance toward first-line treatment status, it may be necessary to further enhance efficacy through combination therapies. Consequently, the combination of PD-1 inhibitors and ADCs has indeed become a focal point in the industry. Multinational corporations (MNCs) with PD-1 assets are actively seeking ADC opportunities to bolster their downstream pipelines. Merck & Co. has been continuously searching for the next generation of “Keytruda” to alleviate pressures from patent expiration and plateauing sales. Meanwhile, Pfizer, which has been frequently linked with Seagen, faces a pipeline cliff; the company has stated that approximately $25 billion in revenue needs to be replaced by assets acquired through business development (BD).

It is an indisputable fact that Seagen’s subsequent pipeline lacks strength; while its flagship products, Adcetris and Padcev, are showing growth momentum, they do not appear to have the potential to become blockbuster drugs.This presents greater opportunities for domestic enterprises. Although multinational corporations (MNCs) may not dedicate exclusive resources to acquired assets, Chinese pharmaceutical companies and biotech firms can leverage antibody-drug conjugate (ADC) overseas expansion to establish their positioning in the global market.

However, industry insiders also noted that relying solely on the differentiated innovation at which Chinese companies excel is insufficient to avoid merely becoming a “generic alternative” to Seagen. “While everyone is discussing and anticipating the next DS-8201, creating such a product will require genuine breakthroughs in technological innovation.”