Summary of the Key Points
Recently, Lannacheng, a clinical-stage nuclear medicine company with zero revenue and headquartered in Yantai, Shandong, has submitted its application to the Hong Kong Stock Exchange for a second time, utilizing the 18A listing route specifically designed for unprofitable biotech companies. Its parent company is Dongcheng Pharmaceutical, a traditional pharmaceutical firm that started by selling heparin extracted from pig intestines on the A-share market. Over the past decade, Dongcheng has quietly invested in building a nuclear medicine production and distribution network that covers 93% of China's population. However, its traditional heparin business is currently in a period of decline, while its high-growth nuclear medicine innovation business is being hindered by the low valuation of the traditional business. As a result, Dongcheng has decided to spin off its most capital-intensive nuclear medicine research and development division, Lannacheng, for separate listing. Essentially, this is a strategic move to support each other before the traditional business becomes completely obsolete.
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Detailed Explanation of the Key Points
1. Why has nuclear medicine suddenly become a hot target for capital investment?
Nuclear medicine isn't some mysterious high-tech; the contrast agents used in PET-CT scans and certain radioactive cancer drugs all fall under this category. Its unique characteristic is the extremely short shelf life of these substances. For example, the commonly used contrast agent fluorine-18 loses half its effectiveness after 110 minutes and becomes completely ineffective after a few hours. In the past, the domestic nuclear medicine market was not very active due to strict policies and the difficulty in obtaining licenses for the production and transportation of radioactive substances. However, recent policy changes have decentralized approval authority to the provincial level, setting a goal for the domestic nuclear medicine market to reach 26 billion yuan by 2030 with an annual growth rate of over 20%. This makes it one of the few pharmaceutical sectors with both high barriers and high growth potential, attracting a large amount of capital investment. There is now a long queue of companies seeking to list on the Hong Kong Stock Exchange in this field.
2. Dongcheng Pharmaceutical: The traditional pharmaceutical firm that secretly built a nationwide nuclear medicine distribution network
Dongcheng's early business focused on extracting heparin sodium and chondroitin sulfate from pig intestines and animal cartilage. In 2015, when nuclear medicine was still an unexploited field, the company began to make a strategic shift. Through continuous acquisitions, it acquired most of the key assets in the domestic nuclear medicine industry, establishing a complete industrial chain. It now owns a goodwill of 2.4 billion yuan and has:
- Its own reactors and particle accelerators for producing radioactive isotopes, reducing its dependence on foreign suppliers;
- 31 nuclear medicine production centers across the country, providing nearly instant delivery of nuclear medicines to patients within an hour, covering 93.5% of the population. By the time other companies were still in the research phase, Dongcheng had already established a nationwide distribution network, creating a barrier that new entrants cannot easily overcome.
3. The spin-off listing is not just for raising funds; it's a last-ditch attempt to save both companies
Dongcheng is facing a significant valuation mismatch: its traditional heparin business has seen a 22% decline in revenue this year and is continuing to decline, while its nuclear medicine business is growing at nearly 10% with a gross margin of around 70%. However, the capital market does not recognize a mixed financial report with one part declining and the other growing. Investors are willing to offer high valuations to pure nuclear medicine companies, but they apply traditional chemical company valuations to Dongcheng due to its traditional business. The high costs of nuclear medicine research and development, coupled with the company's existing debt, make it difficult to sustain the growth. By listing Lannacheng on the Hong Kong Stock Exchange, Dongcheng can isolate its innovative nuclear medicine business and receive the necessary funding to support further research and development, while also realizing the value of its heavy investments from the past decade.
4. Lannacheng's strengths: A strong foundation and a powerful parent company
Lannacheng is among the leading nuclear medicine startups in China, with 13 drugs in development. Its approach focuses on precisely identifying and killing cancer cells. Its core product for prostate cancer has already submitted for approval and is expected to be launched by 2027. Several other drugs in the later stages of clinical trials can directly treat cancer. Lannacheng's unique advantage is the extremely short shelf life of its products, which requires immediate delivery to patients within two hours. Other startups would need to spend billions over several years to build their own distribution network; Lannacheng can leverage Dongcheng's existing infrastructure, significantly reducing the barriers to commercialization.
5. Risks and challenges
Both companies are heavily reliant on each other. Lannacheng has incurred a cumulative loss of 270 million yuan over the past two years and has relied on state-owned funds for financing. If it fails to list within 18 months, it must buy back the investors' shares at high interest rates. With only 670 million yuan in cash and 257 million yuan in its own funds, Lannacheng can only sustain operations for 12 months. A failure in listing would pose a serious cash flow problem for both companies. The entire industry is racing against the clock: nuclear medicines have a limited shelf life, and Dongcheng's traditional business is declining rapidly. Lannacheng must succeed in listing before its resources are exhausted and before the nuclear medicine market experiences a major boom to continue its growth and complete this critical transformation.