Lepu Biopharma Marches Towards First Sales as Costs Mount

Company’s Puyouheng cancer immunotherapy drug was approved for two indications in China, becoming its first commercialized product

Key Takeaways:

• Lepu Biopharma will incur more operational costs as it builds up its production capacity and sales and marketing teams to commercialize its first approved product
• The company’s stock surged after it said it would list on Shanghai’s STAR Market and be included in the Shenzhen-Hong Kong Stock Connect program

By Emily Chan

After months of languishing in relative obscurity following its February Hong Kong IPO, Lepu Biopharma Co. Ltd. (2157.HK) has become the recent beneficiary of a steady stream of good news.

The cancer treatment maker looked like just another revenue-challenged drug startup at the time of its listing, despite having a healthy development pipeline that included antibody-drug conjugates (ADC), oncolytic viruses (OV) and immuno-cancer drugs. Its shares priced in the middle of their range at HK$7.13, and failed to excite after that, trading mostly in the HK$6 to HK$7 range.

Then on Sept. 1, the company announced a plan to raise up to 2.5 billion yuan ($351 million) through a listing on China’s Nasdaq-style STAR Market. Four days later its shares were included in the Shenzhen-Hong Kong Stock Connect program, allowing mainland investors to buy the Hong Kong-listed stock. The successive good news proved strong tonic for its stock, which soared by nearly four times to reach a record HK$31.80 on Sept. 9. But the high didn’t last long, and the stock fell back to HK$8 to HK$9 after a little over a week. But at least symbolically, the company can now say its stock no longer trades below its IPO price.

While the brief investor euphoria has faded, the goods news keeps coming. Last Thursday the company announced that its patented immune-cancer drug Puyouheng, a humanized antagonist monoclonal antibody to human programmed cell death protein 1 (PD-1), was approved by the Chinese National Medical Products Administration (NMPA) for the treatment of melanoma. That came after the same drug was approved in July for the treatment of late-stage colorectal cancer. But its stock price did not rise much on the day of the latest announcement, gaining only a slight 1.1% to HK$8.20.

Puyouheng is Lepu Biopharma’s first commercialized product. It works by inhibiting PD-1 signals to prevent the fusion of PD-1 and its ligands PD-L1 and PD-L2, which can restore immune cells’ cancer-killing capacity. The drug is designed for patients with unresectable or metastasizing melanoma for whom full-body systemic therapy has failed.

The company received more good news when MRG003, another one of its drugs that is an epidermal growth factor receptor (EGFR) targeted ADC, was certified by the U.S. Food and Drug Administration (FDA) as an orphan drug in late September. The drug was also accredited by the Center for Drug Evaluation under the Chinese NMPA as a major medical breakthrough and granted a breakthrough therapy designation to treat recurrent or metastatic nasopharyngeal cancer. Both designations are reserved for drugs used to treat relatively rare conditions, and shorten the application period as incentive for companies to develop such treatments.

EGFR is an important target for drugs used to treat many malignant solid tumors like those seen in colorectal cancer, lung cancer and head and neck cancer. Lepu has done phase 2 clinical trials for MRG003 to treat many EGFR-related cancers. Now the drug is mainly being used in clinical trials to treat head and neck squamous cell carcinoma (HNSCC) and nasopharyngeal carcinoma (NPC). Studies are also in progress to explore its potential efficacy in treating other common cancer types.

The big advances for its two key products are obvious cause for optimism. But as reflected by the stock’s recent rise, and subsequent fall back to earth, investors might be well advised not to get overly optimistic too soon.

Small patient pool

Puyouheng is a second-line therapeutic drug and was approved with conditions. It can only be used in late-stage colorectal cancer patients who have already received designated drug treatments, patients with other late-stage solid tumors with no better alternative treatment protocol but whose conditions have improved after receiving first-line treatment, or patients with unresectable or metastasizing melanoma who have failed to respond to full-body systemic treatment. With so many restrictions, the actual number of patients that stand to get treated with the drug is quite limited.

The drug is also the 10th PD-1 antibody approved in China, meaning stiff competition could further dampen its prospects. Cases of other companies with PD-1 treatments do not bode well for Lepu. Innovent Biologics (1801.HK)’s stock has lost nearly half its value since the beginning of the year, and shares of Junshi Biosciences (1877.HK) are also down by more than 55%. Not exactly a glowing reception for this group of up-and-coming cancer fighters.

Lepu Biopharma’s main operational costs to date have come mostly from R&D. But now that it has a drug approved, it will need to invest in production facilities to commercialize its products. Its existing facilities in Beijing have limited capacity of about 2,000L to support clinical trials for antibody products. It is currently building a biological park in Shanghai with labs and production facilities with designed capacity of 12,000L and an estimated cost of at least 500 million yuan.

Product commercialization also requires dedicated sales and marketing staff, prompting the company to assemble a team of 50 to 100 people for academic promotion, marketing and commercialization. Lepu Biopharma also revealed in its interim results that it was conducting exchanges with multiple cancer centers, hospitals, clinics and doctors, and would start visiting medical centers and experts and take other promotional steps that would result in major additional expenses.

Its interim results showed the company has set aside 57.24 million yuan out of the 658 million yuan raised in its Hong Kong IPO for the manufacture and commercialization of Puyouheng, and 151 million yuan for similar costs involving MRG003. In another major expense, the company previously agreed to pay Hangzhou Hansi Biomedicine 350 million yuan in cash and promised 4.375% of its future annual sales for HX008, a fundamental technology behind Puyouheng, in exchange for 40% of the equity behind HX008. Lepu Biopharma only paid 200 million yuan of that sum before the IPO, meaning it still needs to pay the remaining 150 million yuan by the end of this year.

In terms of valuations, Lepu Biopharma’s latest price-to-book (P/B) ratio stood at 10.5 times, much higher than Innovent Biologics’ 3.4 times and Junshi Biosciences’ 2.9 times. Investors might want to see how the company’s early sales pan out after it starts generating revenues before deciding whether such a big premium is justified.

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