As the pandemic continued to affect the market, China Biotech Services (HKG: 8037), which owns one of the largest nucleic acid testing laboratories in Hong Kong, recently announced its 2021 annual report.
According to the annual report, China Biotech Services recorded revenue of HK$624 million and a net profit of HK$133 million during the reporting period due to strong demand for nucleic acid testing, as a result of the ongoing epidemic in Hong Kong. Thanks to the overall decline in the cost of materials used for nucleic acid testing, the Company’s gross profit margin increased by 5.69 percent to 57.4%.
In order to expand the business capabilities of the testing business segment, China Biotech Services increased its expenditure during the reporting period, which, combined with greater R&D investment, placed pressure on its net profit margin. Excluding investments in new product launches and R&D, the Company’s actual net profit would have exceeded that of 2020.
With the advent of the post-pandemic era in view, the Company’s development path has become clearer. While enriching the product pipeline of the testing business and providing diversified testing services to generate stable cash flow, it has strengthened its investment in the latest precision radiotherapy technology and CAR-T innovative drugs to create new growth drivers and laid a solid foundation for the Company’s rapid growth in the future and raise its intrinsic value.
Precision testing enriches product lines, with channels expanded to accelerate business development
Committed to becoming the world’s leading integrated platform for cancer treatment, China Biotech Services has formed three business segments, namely precision testing, precision treatment, and all-around precision-targeted drug research and development, through both in-house R&D initiatives and patent introduction. The synergistic development of the sectors has continued to enhance the core competitiveness of the platform.
Among them, precision testing is the “ballast” for the Company’s steady development, not only because it is the main source of income, but also because the profits generated from this business play a key role in the cultivation and incubation of the other two major businesses. In order to ensure the continuous and stable development of the precision testing business in the post-pandemic era, China Biotech Services has made a multi-dimensional layout.
Regarding the Sunrise Diagnostic Center (SDC), the fifth wave of the COVID-19 epidemic in Hong Kong has not yet subsided, with around 2,000 new cases reported on the 10th and 11th April. Although the peak has passed, the number of infections has not yet dropped to a comfortably low level. Hong Kong Chief Executive Mrs Carrie Lam Cheng Yuet Ngor previously said that universal COVID-19 testing would still be considered if the timing was right.
At the same time, SDC offers testing services at a number of major immigration control points. It has been stationed at Hong Kong International Airport, Shenzhen Bay Port and HZMB Hong Kong Port, and offers testing services to China-Hong Kong cross-border drivers. According to the Zhitong Caijing APP, Hong Kong lifted flight bans on nine countries on the 1st April. With the continuous resumption of flights, Hong Kong, as one of the largest airports with the highest passenger flow in the world, will significantly drive the demand for nucleic acid testing. Moreover, the border between Hong Kong and the Mainland is about to open, which will surely drive the demand for nucleic acid testing.
In addition to nucleic acid testing, SDC has been cooperating with the government to develop large-scale screening for public health programs including HPV and colorectal cancer, thus expanding the testing product lines. In the meantime, SDC has also made efforts at the service channel front. In March 2022, it established a joint venture laboratory with Town Health International (03886) to achieve complementary advantages. Through Town Health International’s clinic network, SDC’s testing services can be quickly introduced to the market and facilitate sustainable development for the group’s testing businesses.
The Asia Molecular Diagnostic Laboratory (AMDL), which provides cancer precision testing and concomitant diagnostic services, established a strategic partnership with Pillar Biosciences, Inc., a clinical cancer diagnostic company based in Boston, MA and Shanghai, China in 2019. We jointly provide tumor precision diagnostic products and services to Hong Kong, Macau, the Great Bay Area, South Korea and Southeast Asia markets, and have built a high-throughput sequencing innovation laboratory at Hong Kong Science & Technology Park.
Recently, the laboratory has passed the NGSST-B 2021 (Next-Generation Sequencing Solid Tumor) external quality assessment conducted by the College of American Pathologists (“CAP”) with a perfect score. This demonstrates that the laboratory’s professionalism and capability in data analysis and interpretation of tumor high-throughput sequencing have reached an advanced international level.
Meanwhile, AMDL owns the first & sole commercialization rights of the Pillar Biosciences FDA-approved NGS companion diagnostic (CDx) test for lung and colorectal cancers which guides the prescription of targeted therapies. The CDx test will soon be launched in Hong Kong, where around 37,200 cancer patients seek medical treatment every year, and the demand for cancer diagnostic testing is still rising. Currently, the FDA-approved CDx test conducted in Hong Kong is currently sent to the US for test diagnosis, resulting in long-turn around time and high costs (ranging from HK$45,000 to HK$100,000). Moreover, AMDL continues to develop various genetic tests in the fields like tumor mutational burden (TMB), microsatellite instability (MSI), homologous recombination deficiency (HRD) detection and minimal residual disease (MRD) monitoring.
As the exclusive test provider and cancer diagnostic products distributor of Pillar Biosciences’s FDA-approved CDx kits in Hong Kong, AMDL boasts a clear monopolistic advantage. Its upcoming testing services are expected to provide at a reasonable price which aims to provide an accurate and robust cancer diagnostic test service to clinicians and their cancer patients for appropriate targeted therapies. The services are also expected to quickly penetrate the markets in Hong Kong and the Mainland and even the surrounding Southeast Asian markets.
With a development history of more than 50 years and high brand recognition, PHC Medical Diagnostic Centre (PHC), one of the largest third-party medical testing centers in Hong Kong, captures a stable market share in traditional testing services. Zhitong Caijing learned that, in addition to introducing the latest WHO-recognized neutralizing antibody test targeting the Omicron variant, PHC has also cooperated with internationally renowned pharmaceutical companies for a contract period of five years to provide testing services for clinical trials. PHC will also continue to contribute stable income and cash flow to the group.
It is foreseeable that, through the deployment of new growth drivers such as SDC and AMDL, as well as the stable development of PHC, China Biotech Services’ precision testing business is expected to grow steadily and continue to play a key role in establishing a solid foundation.
BNCT project commences construction, expected to be operational in 2024
If precision testing is the main growth driver of current results performance, the boron neutron capture therapy (BNCT) segment is expected to become the new growth driver for China Biotech Services in the medium to long term. It is reported that BNCT therapy, which was introduced in Japan by China Biotech Services, is the world’s first BNCT technology to be approved for marketing and inclusion on the National Reimbursement Drug List.
Compared with other particle therapies, BNCT therapy can kill tumor cells and tissues with only one radiotherapy treatment, and the course of treatment is significantly shortened. Therefore, the therapy is regarded as a “crown jewel” in the field of radiotherapy and is widely recognized by the industry as a new generation tumor treatment with great development potential.
In November 2021, China Biotech Services’ BNCT project officially passed the admission assessment of the International Medical Tourism Pilot Zone of Boao Hope City in Hainan, and an agreement for the entry into the pilot zone was signed on 28 February 2022, marking the official commencement of the project’s construction. The project is expected to be completed by the end of 2023 and will be ready to start operation and receive patients in 2024.
Upon completion, the BNCT Center will become China’s first boron neutron treatment facility able to provide commercialized treatment services. It will also become the first cancer center in China to provide BNCT, meeting the BNCT treatment needs of cancer patients nationwide, in Southeast Asia countries and even globally.
In terms of market capacity, according to the 2017 Eighth National Radiotherapy Survey Report issued by the (Report of the 8th National Radiation Therapy Survey in 2017) of the Chinese Medical Association, China’s radiotherapy equipment was 1.57 units per million people, far less than the 12.4 units per million people in the US, and also falling short of WHO’s a recommendation of two to four units per million people. Based on 0.5 BNCT devices per 1,000,000 people, the corresponding market demand in China is 700 sets.
Compared with 33 proton radiotherapies, BNCT therapy has a higher pricing power thanks to the convenience and safety of only one radiotherapy treatment. The cost of one treatment can be around RMB 300,000 to RMB 400,000, which is still very attractive. Assuming China Biotech Services opens five treatment centers in the future with 10 devices installed and treats 10,000 people a year (in 2020, there were 4.57 million new cancer cases in China and cases of head and neck cancers alone already exceeded 140,000), it can realize an income of RMB 3 to 4 billion in a year, with obvious room for growth.
Clinical trials progressing steadily, the first subject dosing successfully completed
The continued advancement of cell therapy clinical trials has also increased the Group’s intrinsic value. On 21 January 2021, the IND application for LY007 Cellular Injection developed by Shanghai Longyao Biotech, a subsidiary of China Biotech Services, was officially approved by the National Medical Products Administration of China. This is the first CD20-targeted chimeric antigen receptor T-cell (CAR-T) product filed and approved in China.
It is reported that LY007 introduces an independent co-stimulatory signaling receptor OX40 into the structure of CAR, which is experimentally proven to reduce T-cell exhaustion, enhance the proliferation and killing ability of CAR-T cells and facilitate the release of more effector molecules, thereby improving the performance of CAR-T in terms of both safety and effectiveness. Given these mechanisms, LY007 has the potential to treat solid tumors, for which the majority of existing CAR-T cell therapies have no significant efficacy.
On 25 January and 27 January 2022, the launch event for Phase I registered clinical trial of LY007 for the treatment of relapsed/refractory CD20-positive B-cell non-Hodgkin’s lymphoma was successfully held at Shanghai Ruijin Hospital and Jiangsu People’s Hospital, respectively. The trial is co-hosted by Zhao Weili, Vice President of Ruijin Hospital, and Li Jianyong, Head of the Department of Hematology at Jiangsu People’s Hospital.
On 1 March 2022, the first subject was enrolled in the LY007 Phase I registered clinical program at Shanghai Ruijin Hospital, and on this 7th April, the infusion of cells for the first subject was completed. The infusion process was generally smooth, and the subject was in good condition following the procedure. The Company expects to compile the preliminary data by the end of September 2022, and the interim data will be released by the first half of 2023. The Phase II clinical trial application is expected to be approved in the first half of next year and will be completed in the second half of 2024, according to China Biotech Services.
As we all know, the disclosure of clinical data is a key factor in determining the real value of drug R&D companies. Once the data meet the expectations, the Company’s intrinsic value will grow exponentially, and the market has been eagerly awaiting the data of Phase I clinical trial by Shanghai Longyao Biotech.
Moreover, Shanghai Yaolong and the Affiliated Hospital of Xuzhou Medical University officially launched clinical research on an innovative CAR-T (LY011) for treating pancreatic cancer and gastric cancer in October 2021, and four patients have been enrolled. The safety, PK characteristics and preliminary efficacy findings suggest that the LY011 is worthy of further research and development.
From the capital market perspective, China Biotech Services has been significantly undervalued. According to data released by China Merchants Securities (Hong Kong), the market value of comparable clinical-stage CAR-T companies listed on the main board of The Stock Exchange of Hong Kong is more than US$1.2 billion, while the market value of comparable CAR-T companies listed on NASDAQ is more than US$6 billion. The current market value of China Biotech Services is actually less than US$200 million, which means that the market’s perception of China Biotech Services is still limited to precision testing, and the market value only reflects the valuation of the precision testing segment.
Nonetheless, China Biotech Services’ model of using the profits and cash flow from the testing business to incubate other new growth drivers has proved effective. The BNCT segment and CAR-T cell therapy have been steadily progressing and have become the Company’s new growth drivers in the medium to long term, laying a solid foundation for sustainable growth in the future. With the implementation of the BNCT project and the announcement of the clinical trial of the LY007 injection, the intrinsic value of China Biotech Services will be greatly enhanced and is expected to be reflected in its market value, and the present moment is probably the best time to formulate a development plan.
In addition, China Biotech Services has achieved profitability for two consecutive years. According to its current operating trend, its performance is expected to maintain stable growth. After achieving profitability this year, the factors restricting the transfer of its listing to the mainboard will be eliminated, and the Company’s financial position will meet the conditions required for the transfer of its listing from the GEM to the mainboard. Once the transfer is successful, the increase in liquidity will lead to restoration in valuation. At that time, the Company’s market value is expected to rise sharply under the allocation of passive investment funds, and the valuation is expected to be on a par with comparable companies.
Source: Zhitong Caijing