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Analysis of private placement of biopharmaceutical listed companies in recent years

 Last Update: 2023-01-01
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Private placement is the main tool for refinancing A-share listed companies, with 264 of the 414 refinancing projects issued in the A-share market in the first ten months of 2022.

Private placement helps listed companies expand new projects and new businesses according to their own development needs, and on this basis, they can achieve multiple goals such as optimizing capital structure, introducing strategic investors, and improving business governance, and the issuance cost is relatively low and flexible, which is favored by many listed companies
.

The biomedical industry is a scientific and technological innovation industry supported by the state and capital market, and is in the wave of new knowledge, new technologies and new fields in life sciences
.
Due to the unique industry characteristics of the biopharmaceutical industry, in order to maintain the market competitive advantage of enterprises, it is essential for biopharmaceutical listed companies to continuously invest in talents, technologies and products, which has an urgent practical demand
for refinancing.
This article reviews the private placements of A-share biopharmaceutical listed companies in Shanghai and Shenzhen from 2020 to October 2022 (only counting the cases of private placements subscribed by cash) and market responses, and sorts out the key issues of concern of regulators, in order to provide some references
for market participants.

I.
Overview of private placement

(1) What is a private placement

(1) What is a private placement and what is a private placement

Ask the canal to be as clear as promised, for there is a source of living water
.
The development of enterprises is inseparable from financing, and listed companies are also indispensable
.
Different financing tools can be used for refinancing of listed companies, and according to the actual implementation situation, private placement is the most popular refinancing tool
for A-share listed companies.
According to the current regulatory rules, a private placement refers to the non-public
offering of shares by a listed company to a qualified small number of specific investors.
The keyword "targeted" means that the newly issued shares are directed to a certain target, of which the number of issuance targets shall not exceed 35; For qualified specific investors, most of them refer to large institutions and large financial owners, especially for strategic investors, and the new refinancing regulations further stipulate
how to determine them.
What factors attract investors to participate in private placement? The most intuitive elements are the price discount and potential expected benefits of the private placement, but both of these points require the uncertainty
caused by the loss of liquidity during the lock-up period.

(2) Advantages of private placement

Private placement is an equity refinancing, which has no pressure on debt refinancing and repayment of principal and interest, and can obtain long-term and stable support
from shareholders.
Innovation is the only way for biopharmaceutical enterprises to build their core competitiveness, but innovation has the characteristics of "three highs and one long" (high investment, high risk, high return and long cycle), and it is obvious that the long-term support funds obtained by choosing private placement are more in line
with the long-term and high-risk innovation activities of biopharmaceutical listed companies.
Compared with the refinancing method of public issuance and issuance of convertible bonds, under the current rules, private placement does not set strict index requirements
for the financial situation of listed companies, such as profits.

Therefore, for unprofitable biopharmaceutical listed companies, they can also choose the method of private placement for specific projects or replenish liquidity
in a timely manner.
In addition, in order to further improve the financing efficiency of listed companies, enhance the financing capabilities of small and medium-sized enterprises, and achieve convenient financing, the Science and Technology Innovation Board and ChiNext Market, which implement the registration system, revised and improved the refinancing management measures in 2020, and raised the amount limit of "small and rapid" directional additional financing (not exceeding RMB 300 million and not exceeding 20% of net assets at the end of the latest year).

The "small and rapid" private placement financing provides more listed companies that are still in the development stage with a way to quickly obtain financing funds and grasp the issuance window period according to their own development
.
For example, the "old face" Tong Yuan Medicine (300254.
SZ) is the first company to implement a "small and fast" private placement under the ChiNext registration system, and obtained approval from the China Securities Regulatory Commission in September 2020, and finally successfully raised 110 million yuan
.

2.
Overview of the private placement market of biopharmaceutical listed companies

(1) Overview of private placement of biopharmaceutical listed companies

During the period from 2020 to October 31, 2022, a total of 142 new private placement plans were made by A-share biopharmaceutical listed companies, with an estimated total financing of RMB165.
216 billion, of which 65 cases of private placement were successfully issued, with a total financing of RMB84.
332 billion
.
Judging from the quarterly trend of the number of new private placement plans, the new refinancing rules in 2020 stimulated the enthusiasm of the market for private placement, followed by a slight cooling in 2021 and a gradual recovery in 2022 (Figure 1).

Figure 1 Overview of private placement plans of biopharmaceutical listed companies (statistical period: 2020-October 31, 2022) Data source: Kangcheng Investment, Wind

From the perspective of subdivided industries, the top three biopharmaceutical listed companies that issued private placement plans were listed companies engaged in chemical pharmaceuticals, medical devices and traditional Chinese medicine (Figure 2), and the number of additional issuance plans accounted for 75% of the number of additional issuance plans of all biopharmaceutical listed companies, and the total financing accounted for 62.
75% of the total estimated financing amount
, which is also in line with the trend of the state to encourage the modernization of innovative drugs, innovative medical devices and traditional Chinese medicine.

Figure 2 Distribution of biopharmaceutical listed companies issuing private placement plans by industry segments (statistical period: 2020-October 31, 2022) Data source: Kangcheng Investment and Wind

The price of the private placement is the focus
of all market participants.
According to the current regulatory rules, the private placement price should not be less than 80% of the benchmark price (the average trading price of the stock in the 20 trading days prior to the pricing benchmark date); Among them, the pricing base date is the first day of the issuance period of this private placement, and for the situation where the board of directors of the listed company resolves to determine all the issuance targets in advance and meets specific conditions, the announcement date of the board resolution of the board of directors or the announcement date of the resolution of the general meeting of shareholders on this private placement can also be selected as the pricing reference date
.

Among the 65 private placement cases of biopharmaceutical listed companies that have been successfully implemented in the range from 2020 to October 31, 2022, bidding issuance has become the mainstream of the market, with the number of cases reaching 46
。 In the successful implementation of private placement cases in the statistical time range, the proportion of most private placement prices to benchmark prices fell in the range of 80%-90% (Figure 3), of which the proportion of the issue price of auction and lock-in issuance to the benchmark price was 85.
99% and 80.
70%, respectively, indicating that biopharmaceutical listed companies that choose the bidding method can obtain relatively higher private placement prices, for example, Jiuzhou Pharmaceutical (603456.
SH) and BGI (300676.
SZ) The private placement price implemented by two biopharmaceutical listed companies was slightly higher than the benchmark price
.

Figure 3 Distribution of the proportion of private placement price of biopharmaceutical listed companies relative to the benchmark price (statistical period: 2020-October 31, 2022) Data source: Kangcheng Investment, Wind

Looking back at the average review cycle of successful private placement cases in the statistical time interval (Figure 4), from the average time between the issuance of the private placement plan and the approval/registration by the CSRC, the average review period in 2021 (267 days) is longer than that in 2020 (196 days), indicating that the supervision of the private placement market has become stricter.
From the average time from approval/registration by the CSRC to the formal issuance, the average issuance cycle in 2021 (91 days) is shorter than that in 2020 (143 days), indicating that more biopharmaceutical listed companies prefer to quickly obtain funds from the capital market to tide over the capital winter
。 It is particularly worth mentioning that the implementation of "small rapid private placement" through simplified procedures has gradually attracted the attention of biopharmaceutical listed companies, and a total of three biopharmaceutical listed companies have chosen "small and fast" private placement during the statistical time period (Table 1); Among them, two cases of private placement have been successfully implemented so far in 2022 - Navitas (688690.
SH), Frontier Bio-U (688221.
SH), are all cases
where "small and rapid" directional additional issuance is implemented through simple procedures.

Table 1 Cases of biopharmaceutical listed companies implementing "small and rapid" private placement through simplified procedures (statistical period: 2020-October 31, 2022)

Source: Kangcheng Investment, Wind

Figure 4 Overview of the private placement and issuance cycle of biopharmaceutical listed companies (statistical period: 2020-October 31, 2022) Data source: Kangcheng Investment, Wind

In the statistical time range, biopharmaceutical listed companies with a market value of less than 20 billion yuan and more than 50 billion yuan are the main force for the successful implementation of private placement, of which the proportion of large-capitalization biopharmaceutical listed companies with a large market value of more than 50 billion yuan is higher in terms of both average fundraising and full fundraising, indicating that large-capitalization biopharmaceutical listed companies are more concerned by the capital market when implementing private placement (Table 2).

In addition, well-known intermediaries may also play a role in escorting the smooth promotion of private placement of biopharmaceutical listed companies (Table 3).

Table 2 Distribution of market value of private placement of biopharmaceutical listed companies (statistical period: 2020-October 31, 2022)

Data source: Kangcheng Investment, Wind Table 3 Representative intermediaries participating in the private placement of biopharmaceutical listed companies (statistical period: 2020-October 31, 2022)

Data source: Kangcheng Investment, Wind (2) Market reaction of private placement of biopharmaceutical listed companies

(2) Market response to private placement of biopharmaceutical listed companies

In the private placement cases of biopharmaceutical listed companies that have been successfully issued and have been lifted in the range from 2020 to October 31, 2022, from the overall market response, there are suitable investment opportunities
.
By sorting out the intraday market reaction of important events of private placement (Table 4), the results show that the release of private placement plans by medium-capitalization biopharmaceutical listed companies is a relatively positive market signal.
By reviewing the market situation during the private placement lock-up period, it is found that there was a more positive market performance during the private placement lock-up period of small and medium-capitalization biopharmaceutical listed companies (Table 5).

Table 4 Intraday market reaction to important events of private placement of biopharmaceutical listed companies (statistical period: 2020-October 31, 2022)

Source: Kangcheng Investment, Wind Table 5 Market performance of biopharmaceutical listed companies during the lock-up period of private placement (statistical period: 2020-October 31, 2022)

Source: Kangcheng Investment, Wind

III.
Key Points of Concern for Private Placement of Biopharmaceutical Listed Companies

By reviewing the feedback and inquiries of a number of biopharmaceutical listed companies that have successfully issued private placements, the key points
of the regulators' concerns about private placements of biopharmaceutical listed companies are sorted out and summarized.

(1) The purpose of the funds raised

At present, the regulatory policy is oriented to raise funds to serve the real economy, and the purpose is to distinguish between real and fake financing, rather than replenishing liquidity in large
amounts.

1.
During the review process, it will focus on whether the use of the funds raised by the private placement complies with the national industrial policy and whether it is mainly invested in the company's main business
.
For example, in the review inquiry of the private placement of a biopharmaceutical listed company, the regulatory authorities paid attention to the specific investment composition of the raised investment projects, the necessity of each investment expenditure, the calculation assumptions of the funds required for each detailed project, and the main calculation process and reasonableness of the calculation
.

2.
The regulatory authorities focus on the necessity and reasonableness of the fund-raising investment project, the synergy with the company's current business, and whether it has a significant impact
on the operation of the listed company 。 For example, in the review inquiry of the private placement of a listed company B biopharmaceutical, the regulatory authorities paid attention to the preparation and progress of the implementation of the fundraising and investment project, the capacity reserve, the estimated implementation time, the overall schedule plan, and the implementation obstacles or risks of the fundraising project, and required the issuer to make a longitudinal comparison with the operation of the existing business and the operation of comparable companies in the same industry, indicating whether the benefit forecast was reasonable and prudent
.

3.
If the funds raised by the private placement are invested in industrial projects, whether the fundraising projects involve performance gambling, and whether the raised funds can have a positive impact on the performance of the invested projects needs to be fully evaluated
.
For example, in the audit inquiry of the private placement of C biopharmaceutical listed companies, the regulatory authorities focused on the production and operation arrangements of the fundraising and investment projects during the performance commitment period, whether independent production, independent sales and independent accounting could be achieved, and also focused on the scientific nature
of the performance commitment indicators.

4.
As for whether it is judged to be supplementary working capital, the current regulatory authorities' review guidance determines that R&D expenditure in the capitalization stage is not included in supplementary working capital, and if it is used to pay non-capital expenditures such as personnel salaries, payment for goods, and bottom working capital, it is regarded as supplementary working capital
.
For large-scale raised funds used to supplement liquidity, the regulatory authorities usually require the listed company to demonstrate the reasonableness of the reason and scale of the replenishment of liquidity based on the company's business scale, business growth, cash flow status, asset composition and capital occupation
.

(2) Target of issuance

(<>) Target of issuance

With no more than 35 investors participating in the private placement, regulators will also focus on the composition of investors, such as whether major shareholders and related parties are involved, whether strategic investors have been introduced, and require intermediaries to issue explanations
on the compliance of the subscribers.

At present, the regulatory authorities have relatively strict regulatory requirements for the identification of strategic investors, and usually pay attention to whether there is business competition between strategic investors and issuers, pay attention to the specific content of strategic cooperation/investment agreements with issuers, and examine whether strategic investors can bring international and domestic leading markets, channels, brands and other strategic resources
to the issuer 。 For example, in the case of the private placement of a listed company D biopharmaceutical, another listed company of E biopharmaceutical was introduced, and the regulatory authorities paid special attention to whether the strategic investment agreement clearly defined the advantages of the strategic investor E biopharmaceutical listed company and its synergy effect with the listed company D biopharma, the cooperation method, cooperation field, cooperation objectives, cooperation period, the number of shares to be subscribed by the strategic investor, the pricing basis, the arrangement for participating in the operation and management of the listed company, the holding period and future exit arrangement, Liability for breach of contract for failure to perform relevant obligations, etc
.

(3) Verification of the source of funds

Driven by the pursuit of short-term interests, there may be behaviors such as the controlling shareholder making a minimum income guarantee commitment to the target of the private placement, the source of funds is unknown, the illegal increase or decrease of holdings, and concept speculation, so the regulatory authorities will focus on the source of funds of
investors participating in the private placement.

Regardless of the situation where the board of directors resolves to determine the subscription target of the private placement or the private placement subscription target is determined by auction, the regulator will be concerned about whether the issuer directly or through its stakeholders provides financial assistance, compensation, promised income or other contractual arrangements
to the subscription target 。 For example, in the review inquiry of the private placement of a company listed on F-Biopharma, the regulatory authorities paid special attention to the actual operating conditions and shareholders' capital contributions of the subscription target, whether the subscription target was a "shell" company, and whether the source of subscription funds was external fundraising, nominee holding, structured arrangement, or direct or indirect use of the issuer and its affiliates' funds for this subscription
.

(4) Policy impact of the biomedical industry

In recent years, the policy reform of the biopharmaceutical industry has affected the innovation activities and daily operations of biopharmaceutical companies, which has also triggered the regulatory authorities to pay attention to the impact of relevant industry policies on the implementation of
private placement and investment projects.
For example, in the review inquiry of the private placement of H Biopharmaceutical listed companies, the regulatory authorities paid attention to whether policies such as centralized procurement and medical insurance negotiation had a significant adverse impact
on the company's operation and the implementation of this private placement fundraising project.

(5) Research and development of unprofitable biopharmaceutical listed companies

For unprofitable biopharmaceutical listings to promote the R&D pipeline through private placement and fundraising, the regulatory authorities will focus on the scientificity, necessity and related risks of the product pipeline involved in the private placement and investment project, and ensure that the unprofitable biopharmaceutical listed company that intends to implement the private placement ensures the effective management and use
of the raised funds when multiple R&D pipelines are implemented simultaneously 。 For example, in the audit inquiry of the private placement of the unprofitable J biopharmaceutical listed company, the regulatory authorities paid attention to the difference and connection between the private placement product pipeline of Company J and the research projects of Company J and the previous fundraising and investment product pipeline; For the same product that has carried out clinical trials for different indications, the main reasons, necessity and related risks of the selection of indications for this fundraising project, and requires Company J to explain the feasibility and necessity of planning international multi-center clinical studies in combination with the selection of international multi-center drug clinical trial strategies and the regulatory requirements of drug registration applications
.

Four summary and recommendations

In the current capital market winter, it is suggested that biopharmaceutical listed companies can use private placement tools to effectively expand the business of listed companies, enhance profitability and supplement liquidity, and can also improve the business governance structure and enhance the comprehensive competitiveness of
the industry by introducing strategic investors.
In order to better grasp the issuance window of private placement according to their own development, it is recommended that biopharmaceutical listed companies pay attention to the opportunity
to implement "small and fast" private placement through simplified procedures.
Under the general trend of fully implementing the registration system, the quality of private placement projects and the quality of information disclosure will be the core
of determining whether they can be successfully approved at the review end and whether they can attract the attention of the capital market at the issuance end.

appendix

1.
Procedures for private placement

Source: Kangcheng Investment II, changes in the private placement system

2.
Changes in the system of private placement

Source: Kangcheng Investments

3.
Rules for private placement on the Main Board, the Science and Technology Innovation Board and the Growth Enterprise Market

The regulatory documents mainly include the Administrative Measures for the Issuance of Securities by Listed Companies (Revised in 2020), the Implementation Rules for the Non-public Issuance of Shares by Listed Companies (Revised in 2020), the Administrative Measures for the Registration of Securities Issuance of Listed Companies on the Science and Technology Innovation Board (for Trial Implementation), the Administrative Measures for the Registration of Securities Issuance of Listed Companies on the Growth Enterprise Market (for Trial Implementation), and the Q&A on Issuance Supervision - Regulatory Requirements for Guiding and Regulating the Financing Behavior of Listed Companies (Revised Version
).

Source: Kangcheng Investments

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