In late October, Hengrui Pharmaceuticals captured the attention of China’s pharmaceutical sector with rumors of an upcoming secondary listing in Hong Kong. Reports surfaced on the same day as the release of Hengrui’s third-quarter results, speculating that the company plans to raise at least USD 2 billion via the Hong Kong Stock Exchange.

On the A-share market, Hengrui holds a premium valuation as a leading Chinese pharmaceutical company with few comparable domestic rivals. However, a Hong Kong listing may not afford it the same advantage. Historically, dual-listed companies on both A-shares and H-shares show higher valuations in the A-share market, with few exceptions where Hong Kong stocks exceed their mainland counterparts. The Hong Kong listing could potentially impact Hengrui’s A-share price negatively.

Following the financing news, Hengrui’s A-shares saw a drop of up to 5.7% that day, erasing nearly RMB 13 billion (USD 1.8 billion) in market value.

Amid market volatility, Hengrui clarified its position, stating that, while it has conducted preliminary research on overseas financing, no final decision has been made. The company emphasized that any potential capital raising would primarily serve to deepen its innovation and expansion strategy.

Hengrui’s push into international markets is emblematic of a broader shift for Chinese pharmaceutical giants. Initially, Hengrui was confident in building an independent international presence, establishing overseas subsidiaries and acquiring Chinese companies with innovative drugs nearing global approvals. However, these early efforts often came at high costs with limited returns.

Recently, Hengrui’s efforts to expand internationally have gained traction, changing its perception from an underdog in overseas markets to a more strategically savvy player. Notably, Hengrui licensed its GLP-1 product line via NewCo, sparking interest in Chinese pharmaceutical exports. Additionally, the company brought on Jens Bitsch-Norhave, a former senior Johnson & Johnson executive, as its new head of global development, signaling Hengrui’s seriousness about engaging in the global pharmaceutical arena.

While its overseas financing plans remain tentative, Hengrui is clearly adopting a collaborative approach, inviting new partnerships and resources, from talent to capital, to propel its global journey.

In a recent industry conference, Zhang Lianshan, Hengrui’s vice president and board director, spoke publicly about the company’s evolving international strategy. Reflecting on previous strategies, Zhang said, “Approaches like our camrelizumab and apatinib combination wouldn’t be feasible now—the costs are simply too high.” He explained that Hengrui’s strategy has shifted, stating, “Now, for any product at any clinical stage, we’re looking to collaborate internationally.”

Camrelizumab, Hengrui’s self-developed PD-1 inhibitor, has performed well domestically, helping the company establish itself as one of China’s top PD-1 providers. However, in overseas markets, camrelizumab has lagged behind similar drugs. Its combination with apatinib only reached Phase 3 trials before Hengrui began seeking international partnerships, and in early 2023, the US Food and Drug Administration (FDA) postponed approval due to issues at the production site.

Hengrui’s openness to collaboration grants it greater flexibility in its international strategy. Known for its efficient R&D and extensive pipeline, the company is advancing over 90 innovative products in clinical stages this year alone. According to 36Kr, multinational companies often view established Chinese pharmaceutical firms as reliable partners, given their experience in manufacturing and data integrity—key attributes in global business development.

In May, Hengrui’s GLP-1 product line entered a NewCo arrangement with a valuation of USD 6 billion, marking a shift from traditional licensing to a more collaborative business development model. NewCo allows companies to spin off product lines into new entities co-owned with US funds, receiving both cash and equity stakes.

While this model may present exit challenges for smaller biotech startups, Hengrui’s extensive pipeline allows it more leeway to test international strategies with minimal risk. It’s a more viable approach than venturing solo into unfamiliar markets.

Hengrui’s recent hiring of Bitsch-Norhave as global development head underscores its commitment to breaking into the mainstream US pharmaceutical sector. Based in Boston, Bitsch-Norhave brings over two decades of experience in BD, marking Hengrui’s first appointment of an international executive to manage BD operations—a move widely seen as a step toward greater US market integration.

With these foundational changes, Hengrui’s consideration of overseas capital markets seems a natural next step.

For Q3 2024, Hengrui reported RMB 6.589 billion (USD 922.5 million) in revenue, up 12.72% year-on-year, with a modest 1.91% increase in net profit. While quarterly growth has steadied, Hengrui doesn’t seem in urgent need of an immediate capital influx.

Moreover, for a company focused on financing R&D, there are faster funding routes. For instance, in the first half of this year, Hengrui recognized EUR 160 million (USD 173 million) in revenue from its licensing deal with Merck, substantially boosting its profit. The GLP-1 product line is also expected to generate over RMB 1 billion (USD 140 million), although revenue from these products remains recorded as contract liabilities, likely to be recognized by Q4 based on previous reporting practices.

Considering the lengthy IPO process, these alternative financing methods seem more efficient.

A pharmaceutical investor told 36Kr that, if Hengrui is open to domestic funding, backing from state-owned enterprises (SOEs) might be more cost-effective. “For SOEs, Hengrui is a valuable asset—for Hengrui, this represents a partnership that dilutes equity without compromising control.”

In light of this, the potential Hong Kong listing may serve more as a gateway for attracting international partners than as an urgent financial maneuver.

After two decades without external share issuance, Hengrui now faces a pivotal question: Is it prepared to reshape its ownership and governance structure to access the global stage?

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Hu Xiangyun for 36Kr.