China Medical System Holdings Limited (HKG:867) (CMS or the Company) has been active in the market this year. From the acquisition of Luqa to enter the medical aesthetic market early this year, the Company has attracted the attention of the market. Recently, it announced a series of agreements signed with Trinomab Biotech Co., Ltd. (Trinomab). CMS will make an equity investment in Trinomab, and establish a joint venture (JV) with Trinomab, contributed with cash and related products technologies by CMS and Trinomab respectively. The Joint Venture will entrust CMS with the clinical development and commercialization of all its products in Mainland China, Hong Kong, Macau and Taiwan, and Trinomab with the production of all its products. This collaboration marks the beginning of the CMS’s industrial investment in cutting-edge biotech companies.
1. What has CMS seen in Trinomab?
The announcement has drawn even more attention from the market and people are curious about why Trinomab has successfully attracted CMS to make collaboration with it.
Established in 2015, Trinomab was jointly founded by the worldwide known expert Dr. Liao Huaxin and the entrepreneur Mr. Zheng Weihong. It is an innovative global biopharmaceutical company dedicated to the R&D of original natural fully human monoclonal antibodies and providing corresponding scientific services.
Trinomab has a new-generation, world-class, core patented technology platform highly regarded in the industry, the natural fully human monoclonal antibody R&D integrated technology platform HitmAb, which is dedicated to the development of original and efficient natural fully human monoclonal antibodies with independent intellectual property rights, suitable for the infectious diseases, autoimmune diseases and malignant tumors, etc.
As the fourth-generation antibody technology, “natural fully human monoclonal antibodies” refers to fully human antibodies derived from natural human B-cell clones or its gene expression. It is marked by high safety, having broad spectrum to foreign pathogens and strong affinity with pathogen targets, which can solve the problem of anti-drug antibody reaction in the clinical use of antibody drugs developed by traditional technologies.
Based on the HitmAb platform, Trinomab has developed more than 20 new native natural fully human monoclonal antibodies, including those against infectious diseases (e.g., rabies virus, tetanus toxin, cytomegalovirus, respiratory syncytial virus, varicella-zoster virus, novel coronavirus, etc.) and cancers among which, certain antibody products are in the process of rapid industrialization.
For example, the Fully Human Hla Antibody of Trinomab contributed to the Joint Venture is a natural fully human antibody against Staphylococcus Aureus (SA) infection, developed via the HitmAb platform, and is now in the preclinical stage. This product neutralizes the alpha-hemolysin (Hla) released by SA to avoid immune downregulation to B cells and to improve immune response. For severe and high-risk patients with SA colonization, compared with antibiotics which are commonly used clinically, Fully Human Hla Antibody of Trinomab has good safety and the preclinical studies have shown good Hla toxin neutralizing activity. It is expected to solve the problems of high mortality, resistance to treatment and side effects from SA infection.
With its HitmAb platform technology, Trinomab is constantly discovering new antibodies to advance the iteration of antibody drugs. In addition to keeping projects that are in line with its own strategy for self-development, Trinomab co-develops the rest with partners in the industry, which gives CMS (0867.HK) the opportunity to make this collaboration. From the announcement of CMS, we can find that other than to the product to be incorporated into the Joint Venture, the two sides will negotiate to promote the priority collaboration on other specific products, so we can expect more projects to be incorporated into the Joint Venture in the future.
In General, Trinomab owns a cutting-edge technology platform and can continue to promote the R&D and production of innovative drugs through the technology platform. While having great development potential, the strength of Trinomab’s team is also quite impressive. So why did Trinomab still gladly accept the olive branch passed by CMS?
We believe that although Trinomab has considerable advantages in technology platform and drug R&D, promoting the clinical development and commercialization of new drugs is a major challenge of the channel resources for pharmaceutical companies, and at present, Trinomab does not have the advantages in the clinical and commercialization capabilities, and the accumulation of these capabilities and resources does not happen overnight. Therefore, CMS, which has rich domestic channel resources and strong commercialization ability, chooses to join hands with Trinomab to achieve a win-win combination, which opens up a fast track of commercialization for its subsequent products, and will play an important role in promoting the overall healthy development of Trinomab.
2. Taking this collaboration as a model, CMS will initiate the industrial investment in biotech companies and accelerate the “flywheel” of innovative R&D
From the above, we can see that CMS is precisely interested in the core technology platform of Trinomab. This kind of collaboration is not without a precedent. As early as in 2018-2019, Trinomab had reached cooperation agreements with Changchun BCHT Biotechnology Co. and Wuxi Biologics, etc. It can be seen that the Trinomab’s capability of monoclonal antibody drug R&D based on its patented antibody R&D platform has been fully recognized and supported by well-known companies in the industry.
CMS has been working in the industry for many years and has been highly focused on the two core segments of the pharmaceutical industry chain – R&D and marking. CMS’ promotion capability is undeniable, with an academic network covering about 57,000 hospitals and medical institutions nationwide and a professional academic promotion team of about 3,300 staffs. And the Company has created leading market positions for its many branded drugs. It also achieved fruitful results in the past through equity investments in overseas biotech companies or strategic cooperation with leading pharmaceutical companies for collaborative R&D. In the past three years, CMS has rapidly acquired more than 20 innovative products with unique and differentiated competitive advantages, such as Diazepam Nasal Spray, Tildrakizumab, Cyclosporine Eye Drops 0.09%, etc., demonstrating its strong innovation ability.
The collaboration with Trinomab is an active exploration of CMS’ industrial investment in innovative biopharmaceutical companies. In the past, the Company has always been focusing on overseas markets, but with this collaboration, it also marks the official opening of CMS’ industrial investment in domestic cutting-edge biotech companies.
So, what are the features and advantages of this investment?
a. Exploring a new model for industrial investment and building a unique competitive product innovation capability
Unlike simply building its own R&D team or purely introducing products for sale, CMS has been focusing more on the two core parts of the pharmaceutical industry chain, product competence and promotion capability in its past development. Base on this, in the past, to achieve effective integration of pharmaceutical companies and related resources, the Company’s product pipeline was often more product-based, that is, to invest in a company for a certain product. It can be seen that so far CMS has invested in the equity of 8 overseas biotech companies and has made strategic cooperation with 6 leading overseas pharmaceutical companies.
CMS has developed strong product selection capability and is able to continuously find innovative drugs with market potential in this path. However, due to the emphasis on product selection, there is no direct relationship between new products, or between the companies the Company invested in, making it difficult to achieve a unified effect. Based on this, CMS further optimized its investment layout and began to focus on cutting-edge technology platforms to explore new products. The benefits of doing so include not only expanding the number and scope of selected products and achieving effective synergy within the platforms, but also forming an organic iteration of innovative products and achieving deep control of the industrial ecology.
From the collaboration with Trinomab, through equity investment + establishment of the joint venture, CMS has made early involvement in the domestic leading technology platform and innovative resources, and advanced its current pipeline of mainly mid- and late-stage products to the early stage, so as to rapidly enrich the innovation pipeline, and realize the expansion from the “point” of investing in innovative drugs as the core to the “extension” of investing in innovative technology platforms, in order to form an industrial investment model that can be rapidly duplicated in the future. Under this model, CMS will actively explore leading technology platforms for cooperation, so as to continuously strengthen its core competitiveness in innovative R&D and introduce cutting-edge innovation results, to build a unique product innovation capability.
b. Achieving complementary advantages and giving full play to CMS’ clinical development and commercialization strengths
Behind the Company’s industrial investment in domestic cutting-edge biotech companies lies not only its own financial or product selection strength, but also the strengths in innovative R&D and product commercialization.
From the perspective of clinical promotion ability, the completion of clinical enrollment of 220 patients for the blockbuster innovative drug Tildrakizumab in just around two months fully proves that CMS has the hard strength to quickly enroll patients and promote the clinical development with the synergy of its network and expert resources.
In addition, in terms of commercialization ability, the Company has been in the industry for more than 20 years, with its accumulated extensive industry resources, CMS is able to undertake the commercialization of innovative products and achieve rapid sales growth in its efficient operation system, and ultimately achieve an efficient cash flow cycle. CMS’ commercialization ability is not purely based on its sales capability, as we can see the Company’s selling expense ratio has been maintained at about 22% for years, which is relatively low compared with the industry level, it can be illustrated that CMS is not only very compliant in sales and promotion, but also attached great importance to differentiation advantages and market demands of products rather than blinded innovation, so as to build strengths in its products and brands and achieve win-win for its own economic benefit and the society.
c. Featured with light assets and high efficiency, CMS is aimed at creating VIC model 2.0
At present, there are mainly three models of the innovative drugs R&D in China, namely, big pharma model (independent R&D), biotech model (license in/out) and VIC model (active capital investment).
The big pharma model is often applied to large pharmaceutical companies, as it requires pharmaceutical companies to have sufficient profit-making products to support their investment in R&D. The model requires companies to focus more on the creation of R&D pipeline, as well as the cultivation of research and sales teams, which is apparently an asset-heavy business model.
The biotech model is an R&D model based on drug licensing and development. Under this model, pharmaceutical companies have the key R&D technologies, so they can generate revenue through “License out” clinical stage products, and diversify their R&D pipeline through “License in”.
The VIC model is a combination of “VC (venture capital) + IP (intellectual property) + CRO (R&D outsourcing)”, which is also known as the active new drug investment model. Under this model, the party that owns the IP receives venture capital, sets up a project-based company, and collaborates with a CRO in R&D. Similar to this model, CMS’ industrial investment in innovative biotech companies is featured by being relatively asset-light, low-cost and highly efficient, which can save investment and achieve high cost-effectiveness. For example, with this model, CMS does not need to build its own labs, factories, etc. It acts more as an industry integrator and predator to explore innovative products and technology platforms, and uses its own advantages to integrate resources and continuously realize the incubation and commercialization of innovative products.
The difference between CMS’ industrial investment model and VIC model is that the leading party of VIC model is the capital, whose understanding of the industry and contribution to product innovation is very limited. In contrast, CMS’ industrial investment is a more advanced version of the VIC model, in which the leading party is CMS. With accumulated resources in the industry for a long time and deeper understanding of products, CMS is more capable of promoting the R&D and commercialization of innovative drugs, and is able to create a systematic, replicable and long-term competitive industrial investment model of innovative drugs. CMS will also build a highly competitive barrier for itself in the industry, and with the maturing of the platform ecology, its business will be expanded and the business potential will be unleashed continuously.
3. Conclusion
Based upon the current situation of China Medical System (0867.HK), its existing business has maintained a solid development momentum, with its FY20 annual report showing that the turnover up by 14.4% year-on-year to RMB 6.946 billion, net profit up by 30.7% to RMB 2.556 billion; bank balance, cash and realizable acceptance bills totaled RMB 3.114 billion as of December 31, 2020. The excellent performance shows that the Company has the necessary strength to support its industrial investment in innovative drugs and actively explore innovative platforms and projects in the industry.
At the same time, this model is being continuously optimized in order to make it replicable. With the emergence of the platform ecology of the Company, top advantageous resources in the industry will be absorbed, and the platform will eventually become an important birthplace of innovative products. And the value generated from continuous commercialization will in turn feed the entire ecology, and the flywheel of the Company’s growth will also be fully accelerated.
From another perspective, CMS is not the “star” chased by capital, but more like a “producer” in the pharmaceutical innovation industry, who constantly incubates quality projects to meet the market demand and realize the continuous leap of its own value through the integration and optimization of industry resources.
Gelonghui Statement: The views in this article are from the original author and do not represent the views and position of Gelongghui. As a special reminder, investment decisions need to be based on independent thinking, the content of this article is for reference only, not as actual operational advice. Trade at your own risk.
Gelonghui Statement: The views in this article are from the original author and do not represent the views and position of Gelongghui. As a special reminder, investment decisions need to be based on independent thinking, the content of this article is for reference only, not as actual operational advice. Trade at your own risk.
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