By FAN Jiazhi

On the afternoon of December 5, investors and executives including Walvax Biotechnology's chairman LI Yunchun, lost their cool during a conference call led by Haitong Securities. The reason for their anger? Walvax’s latest announcement on an equity transfer involving Shanghai Zerun Biotechnology Co., Ltd.

Walvax is poised to transfer its 32.6-percent stake in Zerun to Zibo Yunze Venture Capital and Yongxiu Guanyouzhaode Equity Investment Fund for 1.14 billion yuan (US$175 million).

Zerun is among the biggest subsidiaries of Walvax, and is developing an array of vaccines including bivalent and nine-valent HPV vaccines and a hand-foot-mouth disease vaccine.

Institutional investors are disappointed with Walvax's management, questioning Shanghai Zerun's valuation and the reasons for the sale. Compared to a valuation near to 80 billion yuan for Wantai BioPharm, the only domestic maker of a bivalent HPV vaccine, Zerun's valuation is a mere 3.5 billion yuan, a veritable "bargain." What's more, the company's bivalent HPV vaccine is at a critical preproduction juncture.

Bargain of a lifetime?

Zerun’s audit report indicates gross revenue of 7.6 million yuan and a net loss of 47.3 million yuan in 2019. In the first half of 2020, revenue settled at 1.1 million with a net loss of 11.2 million yuan. An income approach and an asset-based approach calculates the value of Zerun as 3.5 billion yuan and 2.7 billion yuan, respectively.

The asset-based approach gives weight to the valuation of the firm's assets or, in some instances, the cost of replacing those assets, but rarely accurately reflects a company's potential profitability. The income approach takes expected returns as the standard and reflects the asset's profitability. Since Shanghai Zerun develops HPV vaccines for widespread use, there is huge profit potential so it is clearly more suited to the income valuation approach.

At present, there is a huge market for HPV vaccines. So what’s the big deal with a 3.5 billion yuan valuation? The reason is the valuation by secondary market investors. According to vaccine manufacture Chongqing Zhifei Biological Products, quadrivalent HPV vaccine sales rose 29.8 percent in H1. Nine-valent HPV vaccine sales rose 83.1 percent.

Wantai BioPharm, another company in the A-share market that focuses on HPV vaccines, has a market value close to 80 billion yuan. The firm also operates in-vitro diagnostics and other businesses, so the valuation of its HPV segment stands at about 60 billion yuan. Shanghai Zerun is somewhat behind Wantai BioPharm in clinical trials, so market participants speculate that a reasonable valuation is around 20 billion yuan, quite a bit more than 3.5 billion yuan. Hence the conflict between Walvex Bio and scattered investors.

Unnecessary transfer

Walvax claims that equity transfer is a simple development strategy in line with changes in the vaccine industry. Specifically, the company intends to focus on the pneumococcal 13-valent vaccine (PCV13), technology and new products such as mRNA and adenovirus vectors.

PCV13 is one of the world's largest vaccine products, with the general purpose of preventing pneumococcal diseases in children and infants. Demand for PCV13 in China far outstrips supply. Walvax's PCV13 was approved on March 30, and the first injection was made on April 22. From January to September 2020, Pfizer and Walvax respectively sold 3.8 million and 3.3 million shots, with the former up by 32 percent year on year. From this data, it can be seen that although its market share has shrunk, Pfizer's sales are still rising, illustrative of soaring demand.

PCV13 is behind Walvax’s growth and improved financial status. Its third-quarter turnover was up 96.5 percent with the net profit attributable to the parent company up 262 percent at 435 million yuan. As of September 30, Walvax had a book balance of 2 billion yuan, current assets of 4.1 billion yuan, and an asset-liability ratio of 20.4 percent. With PCV13 as a cash cow, Walvax is in pretty good shape. Sales of PCV13 products have no conflict, and even a certain synergy, with the HPV sector where Shanghai Zerun operates.

Walvax plans to make mRNA technology the focus of R&D investment, but Moderna’s mRNA coronavirus vaccine has wrapped up its phase III trials, with Walvax lagging far behind in phase I. At the same time, vaccines developed Sinopharm and Sinovac is awaiting approval. The prospects for Walvax's coronavirus vaccine are monumentally bleak. Distant water can't put out a nearby fire. Compared with the HPV vaccine, the commercialization of mRNA-based vaccines is nowhere in sight.

PCV13 will be one of the few star products in the hands of Walvax following the sale of Shanghai Zerun, but no one knows whether demand can be sustained. The number of births in China has been on the decline since 2017, an issue to be reckoned with.

Changes will also take place in the market structure. Today, there are only two PCV13 vaccines on the market, but Minhai Biotechnology is seeking approval and vaccines by the Lanzhou Institute of Biological Products is in phase III trials. Other listed companies such as Chongqing Zhifei Biological Products Co., Ltd. and CanSinoBIO are standing by. The sales of Walvax Biotechnology's PCV13 in the first year were good but did not beat expectations, suggesting that the bonus period in the sector may have ended.

Change of plans

Walvax stock stands at a little more than 45 yuan per share, with a market value of about 70 billion yuan. If Zerun's supposed 20 billion yuan is deducted, the market value of Walvax slides to around 50 billion yuan. Taking into account the 20 percent daily trading limit on the ChiNext board, there is a limit down or two ahead for the vaccine maker.

There is no denying that the trading partners of this transaction, Zibo Yunze and Yongxiu Guanyou, are potential beneficiaries. Neither company has been around long. Zibo Yunze was established on November 19, 2020, Yongxiu Guanyou on June 25, 2019. Behind both is Hangzhou Tiger Equity Investment Company, the controlling shareholder of Hangzhou Tigermed Consulting.

Walvax Biotechnology's equity transfer needs to be submitted to a shareholder meeting for approval. Walvax's shareholding structure is relatively decentralized, and the greenlight is far from a formality.

Walvax Biotechnology has received a letter of concern from Shenzhen Stock Exchange asking for clarification of the move, the basis for determining the proportion of the transferred equity, and whether anything, such as tunneling, may harm the interests of listed companies and investors.

Walvax has said it will press on Shanghai Zerun's product development and industrialization in keeping with its strategy and Zerun's long-term prospects. The company will not submit the transfer to shareholders this year.