In Depth: Smash IPO Doesn’t Shake Investors’ AI Pharma Doubts

QuantumPharm Inc., a Chinese AI-driven pharmaceutical company, recently became the first firm in its sector to go public in Hong Kong under new IPO regulations encouraging tech company listings. The company's IPO, backed by Tencent Holdings Ltd., marks a shift in investor sentiment toward AI pharmaceuticals, albeit cautiously, as the industry hasn't yet produced profitable products or market-ready drugs. Despite QuantumPharm's successful IPO, the profitability of AI-designed drugs remains undetermined due to challenges in achieving market-ready products and narrowing operational losses. [para. 1][para. 2][para. 3][para. 4]

The advent of AI technology has led to a rising number of startups in China aiming to expedite drug development. AI has potential advantages over traditional methods, such as quickly identifying drug targets, screening clinical trial participants, predicting drug toxicity, and generating new molecules. Traditional pharmaceutical giants and tech companies like Baidu, Alibaba, and Huawei have also started exploring this field. Despite these promising technological advances, AI pharmaceutical firms face significant hurdles in bringing new drugs to market. For instance, Insilico Medicine, QuantumPharm's main competitor, has made progress with drug candidates discovered using AI, yet QuantumPharm was quicker to capitalize on Hong Kong's favorable listing reforms, aimed at accommodating tech firms with high market potential despite no revenue. [para. 5][para. 6][para. 7][para. 9]

QuantumPharm's IPO, under Chapter 18C of Hong Kong's listing rules, allowed the company to sell shares with a high market capitalization projection even before generating revenue, capitalizing on tech market conditions. A press conference revealed a substantial jump in interest, with QuantumPharm's stock price rising after the IPO, largely due to its dual identity as both a tech and a medical company, garnering higher stock valuations than traditional health care firms. [para. 11][para. 12][para. 13][para. 15]

AI pharma investments have seen a slight recovery, with companies like Leman Biotech, METiS Pharmaceuticals, and BioMap securing new funding. However, industry insiders express concerns about the sustainability of this renewed investor interest, as the true potential of AI-driven drug development remains unfulfilled, and the path toward disruptive industry changes is long. Moreover, many AI pharma firms have yet to produce new market-ready drugs, which signifies a crucial gap in delivering enticing returns to investors. [para. 16][para. 17][para. 18]

Data from Boston Consulting Group indicates a cautious optimism, with 24 AI-discovered drugs completed phase I clinical trials and 10 undergoing phase II; however, none have reached phase III, required for drug market entry. The flourishing scene of AI-driven drug discoveries was dampened by a decline in the broader biotech funding boom post-pandemic, alongside tightened IPO rules in China and faltering economic growth, leading to a drop in private funding for the health care industry. [para. 19][para. 20][para. 22]

The burgeoning AI pharmaceutical landscape in China includes over 100 firms, yet profitability remains elusive for most. Schrodinger Inc. stands out as the first AI pharma industry firm to become profitable, highlighting the industry's challenge. Analysts suggest AI pharma companies need to develop strategic partnerships with established drugmakers and focus on new drug development; the latter is riskier but potentially more rewarding. Different business models vary from AI software services to complete drug pipelines, with collaborative efforts offering a more stable path forward by leveraging partnerships with major pharma players. [para. 25][para. 26][para. 27][para. 28]