With Its Sale To AstraZeneca, Gracell Blazes Exit Trail For Cash-Challenged Chinese Biotechs

seekingalpha01-05

AstraZeneca will acquire Chinese cell therapy maker Gracell for up to $1.2 billion, representing an 86% premium to the company’s pre-announcement share price.The U.S. FDA announced an investigation ...

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Some unprofitable innovative drugmakers managed to list, only to see their shares wilt, making it difficult to raise further funds. But as the year ended, a landmark deal that will see innovative drugmaker Gracell Biotechnologies Inc. (NASDAQ:GRCL) acquired by European drug major AstraZeneca (AZN) could point the way forward for some of these struggling companies. Gracell is the first Chinese biotech to be acquired by a multinational pharmaceutical company, part of a broader cross-border boom for pharmaceutical M&A. The deal offers hope that some of the dozens of other cash-challenged, publicly traded Chinese companies could reach similar deals, providing attractive exits for their investors. According to their deal announced last Tuesday, AstraZeneca will acquire Gracell for a down payment of $1 billion in cash, and the equivalent of $10 for each of the Chinese company’s American depositary shares (ADSs), representing a 62% premium to its closing price before the announcement. AstraZeneca will also pay another $1.50 per ADS if certain regulatory milestones are reached, bringing the deal’s total value to up to $1.2 billion, representing an 86% premium to Gracell’s valuation just before the deal’s announcement. Gracell’s shares jumped 60.3% to $9.92 after the announcement on volume that was more than 40 times the previous day’s level, as investors applauded the deal. The acquisition is easily the company’s biggest coup since its Nasdaq listing three years ago, which was followed mostly by sluggish trading and sagging prices. Gracell was founded in 2017 to develop innovative cell therapies for treatment of cancer. It listed on the Nasdaq in January 2021, selling its ADSs at $19 apiece and raising $200 million. The stock initially jumped 31.9% on its first trading day, giving the company a market value of $1.64 billion. But investors were quickly put off by Gracell’s long road to profitability, since its products are still in the early clinical trial stages that require continual new capital infusions. After a brief post-IPO honeymoon, the stock fell into a downward spiral and traded as low as $1.40 last April, approaching the $1 threshold that would trigger the threat of delisting. Such a fate has been common among listed Chinese biotechs these days, as investors grow impatient with their constant need for new cash. Adding to their woes is negative sentiment towards Chinese stocks in general, and also difficulties in the Chinese drug market as Beijing demands steep discounts for any products included in the national health plan. Gracell has been registering steady losses since its establishment in 2017, and its most advanced product, GC012F, is still in phase 1 clinical trials. The company has managed to reduce its spending significantly by suspending R&D on some of its other products, helping to trim its R&D expenses to $90.1 million in last year’s third quarter from $133 million a year earlier. That helped the company to narrow its net loss to $67.6 million from $172 million over that period. Gracell raised up to $150 million in a private placement last August, providing funds to support the company’s day-to-day operations through the second half of 2026. After the acquisition, AstraZeneca will take over the company’s remaining $234 million in cash and short-term investments, which it will be able to use towards its $1 billion cash down payment. Cell therapy focus Gracell’s core GC012F product is a CAR-T cell therapy involving extraction of a patient’s own immune T cells for genetic modification, followed by injection back into the patient to target and attack pathogenic cells for precision cancer treatment. This type of therapy is extremely expensive due to production costs associated with its high degree of personalization. The company has three self-developed technology platforms. Its FasTCAR platform, which is being used to develop GC012F, can improve cell production efficiency substantially, significantly reducing production costs. AstraZeneca said the acquisition would further strengthen its own capabilities in the field of cell therapies. It will take over GC012F and position it as the treatment of choice for patients with hematologic tumors, also drawing on its own production techniques and existing CAR-T and TCR-T products for treatment of solid tumors. Gracell has also initiated a phase 1b/2 clinical trial in the U.S. to evaluate the potential use of GC012F to treat relapsed/refractory multiple myeloma (RRMM), with the latest results showing a promising overall response rate (ORR) of 100%. The U.S. Food and Drug Administration (FDA) and China’s National Medical Products Administration (NMPA) have also approved clinical trials for GC012F to treat refractory systemic lupus erythematosus (rSLE). The need for cash to fund those new trials may have also prompted Gracell to sell itself to AstraZeneca. At the same time, the outlook for CAR-T therapy products became clouded at the end of last year when the U.S. FDA announced in late November that it was investigating the serious risk that CAR-T therapies targeting BCMA or CD19 may cause T-cell malignancies. GC012F is a dual-target product that works on both BCMA and CD19, and it is unknown whether it might be affected by the FDA’s investigation. From an industry perspective, AstraZeneca’s acquisition of Gracell represents a potential new exit path for investors in early-stage Chinese drug companies whose profits – if any – may still be years away. Zheshang Securities pointed out that domestic biotech companies could face difficulty getting new funds for a variety of reasons, from weak and volatile share prices to a lack of exit channels for investors. But the brokerage is optimistic about the future for such innovation-driven sectors, believing China’s national health insurance is planning to increase its support for high-end innovative products. 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