In Depth: Deal or No Deal, Aborted Sale Wipes $2 Billion From Drug Company’s Market Value

A profitable Chinese drug company that made a baffling decision to sell its controlling stake in a promising vaccine-maker for a steal — then aborted the plan after investor pressure — has seen its share price plunge by one-fifth this week, wiping off more than 14.1 billion yuan ($2.1 billion) in value.

Shares in Walvax tanked on Monday morning after the firm walked back the sale in the wake of protests, opening at 36.53 yuan after closing at 45.67 yuan on Friday evening. Prices hovered around the 36 yuan to 38 yuan range until Wednesday when they dropped below 35 yuan.

The decision to abort the sale came after a heated investor call Saturday, a recording of which has been obtained by Caixin, in which furious investors asked whether company chiefs had sought to “tunnel” (transfer) its assets for personal gain, and in which they responded that because human papillomavirus (HPV) vaccine competition was fierce, they were pivoting to Covid-19 vaccines.

The saga started to unfold on Friday when Walvax Biotechnology Co. Ltd. announced it was going to sell more than half of its stake in Shanghai Zerun Biotechnology Co. Ltd., the vaccine-maker whose HPV vaccine was expected to soon be approved by the Chinese medical regulator, which accepted it for review mid-year.

Walvax Biotechnology said its board of directors had on Thursday night agreed to sell 32.6% of Zerun for 1.14 billion yuan ($174.6 million), giving up control of the firm and leaving it with a 28.5% share. One of the two buyers — Zibo Yunze Venture Capital, founded last month — would become the controlling stakeholder with 29.9%.

Zibo Yunze planned to invest 110 million yuan in the vaccine-maker, according to Walvax.

Investor backlash

But investors in Walvax were left scratching their heads, wondering why the equity swap had valued Zerun at just 3.5 billion yuan, given one of its vaccines appears close to approval. Walvax has since said the valuation accorded with an assessment by Shanghai Lixin Asset Appraisal Co. Ltd., which took into account that Wison (China) Investment Co. Ltd., a founding shareholder, sold its 6.5% stake in the company in October for nearly 230 million yuan.

Shenzhen’s securities regulator wrote to the company on Friday requesting answers to several questions related to the deal, including reasons for its decision to sell, an explanation of the quantity of the sold shares, and the backgrounds of the two buyers, Zibo Yunze and Yongxiu Guanyou Zhaode Equity Investment Fund Center.

The regulator gave Walvax until Tuesday to answer. But things were already moving. In a call Saturday, retail investors vented their frustration at the board and questioned the motive for what they saw as a bargain basement sale.

“Do you have the minimum respect for us secondary shareholders at all? Why sell the stocks at such a cheap price right before the HPV vaccine is due to hit the market? Is there undisclosed tunneling going on?” one investor asked.

In a statement to the Shenzhen securities watchdog Tuesday night, Walvax said the sale was an attempt to bring on strategic investors and would not have harmed the interests of small to midsize investors.

Walvax sought to dismiss accusations of share tunneling by detailing the share structures of the two buyers, among which Zibo Yunze was considered the most mysterious as it was founded only last month. It said the directors and senior officers of the companies involved had no relevant relationships or interests.

Walvax said Shanghai Zerun’s bivalent HPV vaccine, which was accepted for evaluation by China’s National Medical Products Administration in mid-2020, would not be commercially available until 2022, but did not give a reason for this later-than-expected timeline.

It said it expected Zerun’s more advanced 9-valent vaccine to hit the market in 2026.

Nevertheless, it did not disclose any issues with the bivalent vaccine’s regulatory approval, and said given the alternatives on offer and in the pipeline, it predicted it would take a 30% share of China’s bivalent HPV vaccine market in 2022, and predicted this would grow to a 45% stake by 2025.

Shanghai Zerun was valued at 3.5 billion yuan based on an evaluation of its future gains, Walvax said.

Pipped at the post?

The logic of the Walvax sale remains muddy. Li Yunchun, chairman of Walvax Biotechnology told investors during the Saturday call that Zerun’s HPV bivalent vaccine had lagged behind an equivalent from Fujian-based Innovax Biotech Co. Ltd. and Xiamen University, which was cleared to go to market last December.

Continuing to invest in Zerun would put more pressure on Walvax, he said, with Zerun also facing fierce competition in its bid to develop and commercialize its 9-valent HPV vaccine, which appears to have been languishing in early trials.

The sale would open up Zerun’s development pipeline, improve employee morale and help recruit new talent, Li said.

Industry observers told Caixin the bivalent vaccine — which targets the two most common virus strains causing cervical cancer, HPV types 16 and 18 — was expected to be a lucrative product for Walvax. The firm has secured a five-year license to sell Zerun’s HPV vaccines after they are launched, a Walvax spokesperson confirmed Monday.

Big market

The timing of Zerun’s new vaccine would appear fortuitous, as Chinese authorities began administering free vaccines against the virus that causes cervical cancer in a remote county in North China in August, in a signal that it was widening access to the treatment which remains hard to obtain in China, even though various foreign vaccines having been approved there for years.

Scarce supplies, high prices and patchy public awareness have thwarted widespread inoculation, a Caixin investigation found in August.

Innovax Biotech’s was the first domestic HPV vaccine to be approved in China, but jabs have been available at Chinese public hospitals since 2016, when health authorities green lit British pharmaceutical giant GlaxoSmithKlein’s bivalent vaccine Cervarix. Vaccines that target more than the two most common strains of HPV followed, including the 9-valent vaccine Gardasil 9 from American vaccine-maker Merck & Co., which Chinese authorities approved in 2018.

Shanghai Zerun will be the second domestic manufacturer of a bivalent HPV vaccine if it gets approval from the Chinese drug authority.

“Besides the market uncertainty and fierce competition in the field, we also need at least another 1 billion to 1.5 billion yuan to finish our vaccines’ research and development, and to meet their national and global demands,” Li said.

Li’s concerns about competition seemed to jar with other comments he made suggesting the firm was pivoting to vaccines for the novel coronavirus, for which China already has five in late stage clinical trials.

Li said in the Saturday conference call the firm was targeting Covid-19 mRNA vaccines. It signed a partnership with Suzhou Abogen Biosciences in May to develop and produce a Covid-19 mRNA vaccine, which is currently in phase 1 clinical trials, Li said. The technologically advanced mRNA approach is promising, but Pfizer and Moderna have both already released healthy data from last-stage trials, and a rollout of Pfizer’s shot has already begun in the U.K.

On Monday, the Yunnan-based drugmaker’s board announced it was canceling a review of the proposal to sell its controlling stake in Zerun, thereby halting the deal indefinitely, according to a filing Monday morning before the start of trade.

Healthy profits

Walvax Biotechnology has seen its profit more than triple to 435 million yuan in the first three quarters, due to the booming demand for its self-developed 13-valent pneumococcal conjugate vaccine (PCV). In the first half-year, the drugmaker received orders for over 1.2 million PCV doses. Its revenue also doubled to 1.57 billion yuan in the first three quarters.

The company has been working with Tsinghua University on another Covid-19 vaccine based on recombinant adenovirus technology, according to Li.

Investors remain doubtful of the firm’s pivot into Covid-19, given the extreme competition and head start of other vaccine-makers, and some question Walvax’s ability to deal with such competition when it couldn’t properly handle an investor dispute.

Matthew Walsh contributed reporting.

Contact reporters Flynn Murphy (flynnmurphy@caixin.com) and Anniek Bao (yunxinbao@caixin.com)

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