On January 22nd, Hangzhou Jiuyuan Gene Engineering Co., Ltd. (referred to as &#34;Jiuyuan Gene&#34;) submitted an IPO application to the Hong Kong Stock Exchange.
Currently, Jiuyuan Gene's listed drugs include innovative medical devices in the fields of orthopedics, oncology, and hematology, as well as similar biological products and generic drugs. In 2021 and 2022, Jiuyuan Gene's revenue was RMB 1.307 billion and RMB 1.125 billion, respectively, with net profits of RMB 119 million and RMB 60 million during the same period.
As the largest shareholder of Jiuyuan Gene, HUADONG MEDICINE (000963.SZ), a wholly-owned subsidiary of Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (referred to as &#34;Zhongmei Huadong&#34;), holds a 21.06% stake in Jiuyuan Gene.
However, Jiuyuan Gene's core products are facing more uncertainties.
One of Jiuyuan Gene's core drugs, bone repair material BMP (bone morphogenetic protein) &#34;Bone OptiGuide,&#34; may face centralized procurement risks.
In November 2023, the National Joint Procurement Office for High-Value Medical Consumables released the fourth batch of high-value medical consumables procurement list, which stated that BMP bone repair material companies can choose to voluntarily participate in the centralized procurement activities. Prior to this, such consumables did not appear in the procurement documents for the third batch of high-value medical consumables.
Furthermore, the industry where Jiuyuan Gene's other important business, heparin raw materials, is located is facing destocking. Several heparin raw material companies have experienced significant declines in performance in 2023, which also brings certain performance pressure to Jiuyuan Gene.
All of these factors bring more uncertainties to Jiuyuan Gene's IPO.
<h2>Centralized Procurement and Competitive Pressure</h2>
Jiuyuan Gene's commercially available products cover one innovative medical device combination, two biological products, and five chemical drugs, involving the fields of orthopedics, metabolic diseases, oncology, and hematology.
Among them, the bone repair material &#34;Bone OptiGuide&#34; of the innovative medical device combination is mainly used for the treatment of bone defects, non-union, joint fusion, etc., and is the main source of revenue.
The bone repair market does have certain market prospects.
According to CIC data, the size of China's bone repair market reached RMB 2.587 billion in 2022, an increase of 368.71% compared to 2018.
Generally speaking, bone repair materials can be divided into three categories: bioactive artificial bone, non-bioactive artificial bone, and natural bone.
The disadvantages of non-bioactive artificial bone and natural bone are more obvious. The repair speed of non-bioactive artificial bone is relatively slow, and although natural bone has the advantage of faster repair speed, its source is limited.
In comparison, bioactive artificial bone is becoming an important choice after natural bone due to its higher biological activity, the ability to promote bone repair, and the ability to reduce traumatic treatment.
Bone OptiGuide belongs to bioactive artificial bone, and its core component, recombinant human bone morphogenetic protein 2 (rhBMP-2), has various advantages such as high biological activity and scalability.
In 2009, Bone OptiGuide was approved for marketing by the China Food and Drug Administration, making it the first domestically approved and commercially available rhBMP-2 bone repair product.
In 2021 and 2022, Bonelead generated revenues of CNY 355 million and CNY 444 million, accounting for 27.2% and 39.5% respectively. Among them, Bonelead's revenue in 2022 accounted for 17.2% of the domestic bone repair market, ranking second.
Currently, Bonelead has not been included in the centralized procurement.
&#34;In 2023, the National Joint Procurement Office for High-Value Medical Consumables will publish the fourth batch of high-value consumables VBP (volume-based procurement) list, which covers several orthopedic medical devices.&#34; Jiuyuan Gene pointed out, &#34;The medical devices selected for the fourth batch of VBP list have seen a significant price reduction. The unique characteristics and innovative BMP bone repair materials that combine biological drugs and medical devices are not included in this list, but are subject to several price restrictions implemented by the relevant regulatory authorities.&#34;
Nevertheless, BMP-type bone repair materials have already made an appearance in the fourth batch of high-value medical consumables centralized procurement list.
In November 2023, the National Joint Procurement Office for High-Value Medical Consumables released the &#34;National Organized Volume-Based Procurement Document for Artificial Crystals and Sports Medicine Medical Consumables,&#34; which showed that enterprises producing BMP-type bone repair materials can choose to voluntarily participate in the centralized procurement activities.
Prior to this, BMP-type bone repair materials did not appear in the procurement documents for the third batch of high-value medical consumables.
In fact, if we look at the previous situation of orthopedic material procurement, it has indeed had a significant impact on the performance of some listed companies.
Comparing before and after the centralized procurement, in the first half of 2023, the revenue of Dabo Medical (002901.SZ) in the trauma orthopedic consumables segment decreased by 35.25% YoY, and the revenue of spinal products decreased by 11.53% YoY during the same period.
Under the potential impact of centralized procurement, new players have entered the BMP-type bone repair materials market.
According to the official website of the National Medical Products Administration, Zhenghai Biotechnology (300653.SZ) received approval for its rhBMP-2 &#34;Active Biological Bone&#34; to be listed in 2022.
According to Zhenghai Biotechnology's disclosure, as of December 2023, its Active Biological Bone has been listed in 2/3 of the provinces.
The revenue growth of Bonelead may be facing challenges.
<h2>Heparin encounters a cyclical winter</h2>
The B-side of Bonelead's business faces potential uncertainties, and the heparin raw materials that bring significant income to Jiuyuan Gene are being heavily impacted.
In 2022, Jiuyuan Gene's sales revenue from heparin raw materials was only CNY 47 million, a decrease of 61.3% YoY.
&#34;This is mainly due to the impact of geopolitical conflicts on our sales to an overseas customer,&#34; Jiuyuan Gene pointed out.
However, since 2023, the growth of the heparin raw materials business has still been challenged by destocking in the downstream industry, and the performance of many heparin pharmaceutical companies has seen a significant decline.
On January 13, 2024, heparin company Jianyou Co., Ltd. (603707.SH) issued a profit warning, expecting a net loss of CNY 200 million to CNY 100 million for 2023, and planning to make a provision for inventory impairment of CNY 1 billion to CNY 1.2 billion in 2023.
&#34;With the gradual recovery of the global supply chain, downstream customers in the pharmaceutical industry have adjusted their inventory strategies, transitioning from relatively cautious high inventory levels to normal levels. As a result, downstream companies in the heparin industry are facing destocking situations, leading to a significant decline in demand for upstream products and intensified competition. The heparin industry has been impacted to a certain extent,&#34; said Jianyou Pharmaceutical.
Recently, Heparin pharmaceutical company Hepu Pharmaceutical (002399.SZ), which has been hit by telecommunications fraud, reported a year-on-year decline of 24.69% and 78.05% in revenue and net profit attributable to shareholders in the first three quarters of 2023, reaching RMB 4.063 billion and RMB 143 million, respectively. During the same period, Changshan Pharmaceutical (300255.SZ) reported a decline of 36.47% and 677.10% in revenue and net profit attributable to shareholders, amounting to RMB 1.14 billion and RMB 388 million, respectively.
Alongside the decrease in demand, the price of heparin raw materials has also experienced a significant decline.
Public data shows that the average export price of heparin in October and November 2023 decreased by 45.1% and 33.3% year-on-year, respectively.
The cyclical changes in the heparin industry may be putting more pressure on Jiuyuan Gene's performance.
<h2>A Competition in the Weight Loss Drug Market</h2>
Jiuyuan Gene's technological platform does possess a certain level of innovation, which gives it an advantage over other companies focusing on raw materials.
Currently, Jiuyuan Gene has established four major technological platforms: recombinant proteins, peptides, innovative drug-device combinations, and antibody drugs.
For example, the &#34;Bone Optimizer&#34; mentioned earlier is a product of the innovative drug-device combination technology platform.
The peptide drug technology platform has also produced the first domestically approved GLP-1 weight loss drug, &#34;Liraglutide&#34;.
In 2005, Jiuyuan Gene began the development of GLP-1 receptors and transferred the rights to Liraglutide for the indications of diabetes and obesity to Huadong Medicine in 2017 and 2019, receiving a total of RMB 105 million in technology licensing fees.
According to Huadong Medicine's semi-annual report, Huadong Medicine needs to pay Jiuyuan Gene a technology usage fee of 3% of the net sales each year for the first six years after the launch of Liraglutide.
The fact that Jiuyuan Gene is willing to authorize the rights to a drug it has been developing for over 10 years to Huadong Medicine may be closely related to their close connection.
In 1993, Huadong Medicine's wholly-owned subsidiary, Huadong Medicine East China, jointly established Jiuyuan Gene with several companies, including Lin'an Fushi Biotechnology Company and Taiwan Yuyou Construction Co., Ltd. Among them, Yuyou Construction holds a 35% stake, making it the largest shareholder, while Huadong Medicine East China holds a 30% stake, ranking second.
Subsequently, Fushi Biotechnology, Yuyou Construction, and other companies withdrew from the list of shareholders of Jiuyuan Gene, leaving only Huadong Medicine East China as a shareholder.
As of the filing date, Huadong Medicine East China still holds a 21.06% stake in Jiuyuan Gene, making it the largest shareholder. However, since it does not reach the controlling stake, Jiuyuan Gene filed for an IPO as a non-controlling shareholder.
However, the management of Jiuyuan Genetics has the imprint of both China and the United States, especially HUADONG MEDICINE.
As the Chairman and Executive Director of Jiuyuan Genetics, Fu Hang served as Deputy Director and Director of the China-US East Office from 1993 to 1996, and then as the Director of the Comprehensive Office of HUADONG MEDICINE from 1997 to 2000. Ma Honglan, a non-executive director responsible for the operation and development of Jiuyuan Genetics and major decision-making, held various positions such as cost accountant and financial manager in China-US East from 1994 to 2019.
It is worth mentioning that Jiuyuan Genetics and HUADONG MEDICINE will also compete in the market for semaglutide.
Although Jiuyuan Genetics has not firmly grasped semaglutide, it still has a backup plan.
In October 2023, Jiuyuan Genetics' semaglutide for the treatment of diabetes has completed Phase III clinical trials, but the clinical trials for the indication of weight loss have just obtained approval.
Currently, HUADONG MEDICINE, Shiyao Group (1093.HK), and at least 9 other pharmaceutical companies have semaglutide in Phase III clinical trials. This also means that the market competition for semaglutide is equally fierce, and it remains to be seen how much market share Jiuyuan Genetics can capture.
Jiuyuan Genetics, nurtured by HUADONG MEDICINE, is eagerly awaited to see if it can successfully go public. The market is watching closely.

Leading bone repair material company Jiuyuan Gene prepares for Hong Kong IPO: May face challenges in centralized procurement and heparin cycle