On the last day of the National Day holiday, a local biotech company welcomed a major merger and acquisition deal.

On October 7th, Jiahe Bio announced in a statement that it had entered into a merger agreement with Eton Pharmaceuticals. Jiahe Bio will acquire Eton Pharmaceuticals through a merger and change the company's name from "Jiahe Biopharma (Cayman) Holdings Limited" to "Eton Jiahe Pharmaceutical Group Limited".

According to the announcement, Jiahe Bio and Eton Pharmaceuticals Group entered into a CDK4/6i outsourcing management agreement. The board of directors expects the commercialization of CDK4/6i to be imminent, and Jiahe Bio's development has reached an important stage, requiring strong commercial capabilities to seize all possible market opportunities. The board believes that Eton Pharmaceuticals meets the above criteria. "The proposed merger is a key step for the company to become a mature and fully integrated biopharmaceutical company, expected to bring complementary and synergistic effects to the group and the target group, and lay a good foundation for the sustainable development of the enlarged group after the merger."

Affected by this news, Jiahe Bio resumed trading today, with shares opening up more than 90% in the morning. As of press time, the stock has risen by 89.09%,报价 at 3.1 Hong Kong dollars.

The driving force behind the merger

Jiahe Bio mainly engages in the development and commercialization of oncology and autoimmune drugs. By establishing a rich and innovative pipeline of drug candidates, it is committed to "first providing innovative therapies for Chinese patients and gradually providing innovative therapies for global patients". This time, after the merger of Jiahe Bio and Eton Bio, the new company Eton Jiahe's shareholders will gather top investment institutions in the pharmaceutical industry such as Hillhouse, Temasek, OrbiMed, and Sequoia.

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This merger is also considered a choice after discussions by multiple parties. According to the announcement, after evaluating several potential target companies, the board of directors believes that Eton Pharmaceuticals meets the above criteria, and the merger with the target group is in the overall interest of Jiahe Bio and its shareholders for the following reasons:

Firstly, Eton Pharmaceuticals has a leading diversified portfolio of innovative patented drugs with huge market potential and original research products with competitive market advantages. Eton Pharmaceuticals is an original research biopharmaceutical company that focuses on anti-infective, cardiovascular disease (CVD), and respiratory system treatments as strategic priorities. From 2020 to 2022, the combined terminal sales volume of the company's three core products, Steno可信, Xi Ke劳, and Yi Rui平, increased by 34.9%, 83.7%, and 182.1%, respectively;

Secondly, Eton Pharmaceuticals has a comprehensive commercial platform to support robust financial performance. For the fiscal year ending December 31, 2023, the total revenue from Eton Pharmaceuticals' three main commercialized original research products was 219.19 million yuan, accounting for 88.3% of the total revenue for that year;

Thirdly, Eton Pharmaceuticals has an industry-leading sales and marketing network to support the future commercialization of synergistic pipelines. According to public information, as of June 30, 2024, Eton Pharmaceuticals has more than 900 sales representatives spread across 30 provinces in China, covering more than 12,000 hospitals, including approximately 2,000 tertiary hospitals and 2,000 secondary hospitals, as well as more than 12,000 pharmacies.Fourthly, Eton Pharmaceuticals possesses an advanced manufacturing platform and a global supply chain management system. In recent years, through in-depth cooperation with top international scientific research institutions and enterprises, Eton Pharmaceuticals has continuously introduced and absorbed global advanced research and development technologies and management experience, promoting the continuous upgrading of its own technical platform and the rapid expansion of its research pipeline.

"Furthermore, the consideration for the proposed merger will be settled in full through the issuance of consideration shares, and Jiahe Bio will not have any cash outlay. The proposed merger is a key step for Jiahe Bio to become a mature and fully integrated biopharmaceutical company, expected to bring complementary and synergistic effects to Jiahe Bio and Eton Pharmaceuticals, and lay a good foundation for the sustainable development of the enlarged group after the merger." The announcement stated.

A pharmaceutical industry analyst from a securities firm told a reporter from 21st Century Economic Report that in the current market situation, continuous attraction of funds must return to the essence of innovation and business, choose the best tracks, focus on high-potential and competitive fields, and enhance enterprise value by building R&D and differentiation capabilities.

"Similar merger cases like Jiahe Bio and Eton Pharmaceuticals may still exist in the future." The aforementioned securities analyst predicted that there are several reasons: first, the financing difficulty faced by start-up biotechnology companies is increasing; second, even if there is an intention to go public through an Initial Public Offering (IPO), the listing path in the A-share market is not so smooth, and choosing to list on the Hong Kong stock market is often out of comparative consideration, a last resort. Many transactions are actually facilitated by a few friends, and even after listing, their overall value may not be ideal, which is actually to avoid the repurchase risk caused by the gamble agreement.

"Under the current situation, due to the lack of cash, for biotechnology companies, conducting clinical trials for different disease targets in promoting such projects will actually consume a large amount of funds. Faced with a shortage of funds, if new funds cannot be raised, how should the company save itself? Cooperation and reorganization to optimize resources is one of the most direct models." The aforementioned analyst added.

The wave of acquisitions continues to rise.

According to McKinsey's data, it can also be found that in 2023, there were 39 transactions where Chinese local innovative products were authorized to American and European enterprises. The industry also believes that if the number and amount of external authorization cooperation projects of Chinese innovative pharmaceutical companies in 2023 have both set historical records, then 2024 is witnessing a historical wave of acquisitions of Chinese Biotech.

Behind this phenomenon, multiple factors are intertwined. On the one hand, under the influence of a cold industrial environment for biomedicine, a stricter listing environment, and an increasingly severe investment and financing environment, the number of biopharmaceutical company IPOs has contracted, and the pace has slowed down, which has affected the exit mechanism of companies to a certain extent. Therefore, Biotech, whose core products have not yet been commercialized and whose own blood-making ability is insufficient, is facing a complex survival test, and investors are also facing huge exit pressures, especially early-stage capital. Being acquired can provide new exit paths for investors, and in addition to successful listing and developing into Biopharma, the outcome of Biotech actually has more possibilities.

On the other hand, it reflects the continuous improvement of the speed of local innovation in China and the competitiveness of clinical value, and has gained more recognition from multinational pharmaceutical companies.

The more in the cyclical adjustment environment, the more "gold mining" can be done. It is not difficult to understand why multinational pharmaceutical companies will frequently take action to explore high-quality enterprises and projects in the Chinese market. It is also because they have seen the "business opportunity" that after the Spring Festival in 2024, large local pharmaceutical companies have also begun to join the "gold mining" team.For instance, on the evening of February 23, 2024, China Resources Pharmaceutical announced that the board of directors had passed a resolution and approved a non-wholly owned subsidiary, China Resources Double Crane, to enter into a share transfer agreement with a wholly owned subsidiary, Beijing Pharmaceutical. According to this agreement, China Resources Double Crane will agree to acquire 100% of the equity held by Beijing Pharmaceutical Group in China Resources Zizhu for RMB 3.115 billion. In February 2024, Sinopharm Group also announced its intention to privatize China Traditional Chinese Medicine at a 34% premium, with a total cost of HKD 15.45 billion. Public information shows that China Traditional Chinese Medicine's main business is the manufacturing and sales of traditional Chinese medicine and pharmaceutical products.

"If the acquired company has strong R&D capabilities, and the future milestone revenue or share revenue of the sold pipeline reaches a predictable level, the company is also a reasonable commercial entity that can exist for a long time, and being acquired is a good exit mechanism," said the analyst. No matter how asset integration is carried out, it is also considered a market response based on the current new competitive situation and policy orientation.

Sun Chuan, the managing partner of the Shanghai office of Morrison & Foerster and a partner in mergers and acquisitions/technology transactions, also stated in an interview with 21st Century Economic Report that the development of innovative drugs in China has gone through more than a decade, starting from around 2009 or 2010, followed by the rise of companies like Hengrui, and many returned scientists began to devote themselves to the research and development of new drugs, fully committing to the development of innovative drugs.

"In the next decade, we are actually in a period of technological explosion, and excellent results are beginning to emerge. In terms of safety and efficacy, these new drugs are very promising. Under these circumstances, when innovative drugs enter the market through acquisition and licensing, they have considerable value," Sun Chuan believes.

Zhao Rongjing, a partner in mergers and acquisitions/private equity at Morrison & Foerster, also told 21st Century Economic Report that mergers and acquisitions undoubtedly benefit the overall maturity of the market and provide timely exit opportunities for excellent companies.

"We absolutely do not want merger and acquisition activities to stagnate. Although going public is a more direct exit method, due to the time cost of going public, it is currently difficult to enter the A-share market, and the valuation of overseas listings is also not ideal, so it is expected that the trend of mergers and acquisitions will continue. In addition, I think it is also a process of industry reshuffling, and some cleaning actions are taking place." In Zhao Rongjing's view, in the long run, industry integration is necessary for the maturity and development of China's overall medical industry. It is not possible to tolerate the phenomenon of numerous companies with low efficiency and high market valuations attracting investor funds for a long time, yet unable to produce actual benefits. Therefore, in the long run, this will help promote the overall healthy development of the industry.