The first share of AI pharmaceutical, XtalPi, innovation or bubble?

"Investor's Network" Wang Jianfan

On June 13, 2023, XtalPi (stock code: 2228. HK) was successfully listed on the Hong Kong Stock Exchange. As the "No. 1 domestic AI pharmaceutical stock", XtalPi has also surpassed Black Sesame Intelligence and become the first "special technology" stock on the Hong Kong Stock Exchange.

In the public offering, XtalPi introduced eight cornerstone investors, including Lee Shau Kee's son Li Jiajie, angel investor Gong Hongjia, Guosheng Capital, Biocytogen and Societal Capital. The above-mentioned cornerstone investors subscribed for a total of HK$337.7 million of the Offer Shares, representing 34.12% of the new issue size and 1.88% of the total issued share capital of the Company after listing.

In terms of financing, XtalPi issued at a price of HK$5.28 per share, raising net proceeds of approximately HK$896 million in its initial public offering (IPO). As of the close of trading on August 1, 2023, XtalPi was trading at HK$5.5 per share, corresponding to a market capitalization of approximately HK$18.9 billion.

From shelving plans to go to the U.S. in 2021 to successfully listing in 2023, the company attributes this to the timely launch of Chapter 18C of the Hong Kong Stock Exchange. However, in the current context of the cooling capital market, it remains to be seen whether XtalPi's listing can become a turning point for the recovery of investment and financing in the AI pharmaceutical industry.

Step on the tuyere

In March 2023, tech giants such as Nvidia and Google expressed their emphasis on AI healthcare, and the spotlight once again focused on the emerging field of "AI pharmaceuticals".

The advent of AI tools such as AlphaFold and ChatGPT was the first to bring the concept of "AI pharmaceutical" into the public eye. Since then, the development of high-throughput sequencing technology has generated massive amounts of drug, disease, genetic, and protein data, and algorithm iteration and computing power have provided the necessary conditions for processing these data. The convergence of multiple technological advancements has opened up new possibilities for AI-driven drug discovery.

Compared with the traditional new drug R&D model, AI+ Pharma is expected to significantly shorten the R&D cycle, reduce cost investment, and may even completely change the future R&D methods of pharmaceutical companies.

Founded in 2015, XtalPi originated from the Massachusetts Institute of Technology in United States and is committed to digital and intelligent research in the field of life sciences and new materials. The company claims to provide services for industries such as biomedicine, chemical industry, new energy, and new materials based on technologies such as quantum physics, artificial intelligence, cloud computing, and experimental robots.

The company's talent structure also reflects its strong scientific research attributes. The three founders, Jeremy Wen, Jian Ma and Lipeng Lai, are all postdoctoral fellows at MIT. Among the 989 employees, R&D personnel account for 71.8%, and more than half of the employees have master's or doctoral degrees.

Under the tuyere of AI, XtalPi has received active attention from many investors since its establishment.

The company completed eight rounds of financing before going public, with a cumulative financing amount of up to $732 million. After the Series D funding in 2021, the company was valued at $1.968 billion. The company's shareholders include Sequoia Capital, Tencent, China Life Chengda, Wuyuan Capital and Google. Among them, Tencent has increased its holdings several times since participating in Series A financing in 2015, holding a cumulative 13.66% of the shares, becoming the largest external institutional shareholder of XtalPi.

As a company in the early stages of development, XtalPi's valuation is considered by some market watchers to be on the high side. At present, the company's stock price performance after listing has not fully met market expectations. Except for a brief rise on the first day of listing, such as an intraday increase of as much as 25%, the stock price then fell back quickly and fell below the issue price several times.

Revenue growth could hardly hide the pressure of losses

According to incomplete statistics, more than 20 AI pharmaceutical companies have been listed around the world, and their business models can be roughly divided into three categories: AI Biotech (self-developed product pipeline), AI SaaS (providing AI-assisted development platform for pharmaceutical companies) and AI CRO (developing lead compounds according to customer needs).

According to this classification, XtalPi belongs to the AI CRO type, and its business model is closer to that of preclinical CRO, and its main business includes drug discovery solutions and intelligent automation solutions.

Unlike AI biotech companies, which need to make drugs in person, XtalPi mainly undertakes orders from downstream customers, completes the agreed preclinical research and development process, and recognizes revenue accordingly.

This model is relatively safe, does not need to bear the risk of failure of new drug development, and can also avoid the dilemma of no revenue in the research and development stage. Benefiting from this, XtalPi has achieved steady growth in recent years, achieving annual revenue of RMB62.8 million, RMB133 million and RMB174 million respectively from 2021 to 2023, with a compound annual growth rate of 66.7%.

The growth in performance stems from the stability of customers. According to public information, XtalPi has provided services to more than 300 institutions around the world, including many of the world's top biotechnology and pharmaceutical giants. From 2020 to 2023, the company's customer retention rate has always remained above 50%.

The core of AI+CRO enterprises to undertake orders lies in their strong R&D capabilities and the ability to win the trust of customers, which requires continuous and substantial R&D support.

From 2021 to 2023, the company's R&D expenditure surged from 213 million yuan to 481 million yuan, with a compound annual growth rate of 50%, accounting for about 52.4%, 53.5% and 49.8% of operating expenses, respectively, and maintaining a high proportion of revenue of 338.5%, 269.2% and 275.6%.

It is worth noting that the current AI pharmaceutical track has not yet given birth to real commercial products. According to the Boston Consulting Group, by the end of 2023, only 24 AI-discovered drug molecules worldwide have completed Phase I clinical trials, and 10 have completed Phase II clinical trials.

In the context of the delay in the "collision line" of AI pharmaceutical achievements, most of the relevant investment of pharmaceutical companies is still in the stage of exploration and attempt, and the amount of orders outsourced to AI+CRO companies like XtalPi may still be relatively limited.

In this context, XtalPi's current revenue scale is not enough to cover the high R&D, sales and other expenses, and it is still in a loss-making state. From 2021 to 2023, the company's net loss will be as high as 2.137 billion yuan, 1.439 billion yuan and 1.906 billion yuan respectively.

At present, the development prospects of XtalPi are largely determined by the prosperity of the global drug and materials science R&D market.

However, in the context of the current domestic pharmaceutical financing environment has not been significantly improved, the company still faces many uncertainties: the acquisition of orders is easily affected by the domestic and foreign situation, the market space may be relatively limited, and the industry competition is becoming increasingly fierce.

Stand at the crossroads

Looking at the global AI pharmaceutical landscape, it is not difficult to find that this sunrise industry is in a relatively embarrassing situation: on the one hand, technological progress and industrial applications are deepening; On the other hand, it will take time for commercialization to land.

At present, the pharmaceutical industry has formed a lot of consensus on the boundaries of what AI technology can deliver. Put simply, new technologies can dramatically improve the efficiency of drug development, but they are still a long way from completely disrupting traditional processes.

Against this backdrop, the vast majority of companies are still struggling with losses. According to statistics, among the related companies, only Schrödinger will turn around its losses for the first time since its listing in 2023, achieving a net profit of $40.7 million.

Judging from the reaction of the capital market, the heat of the AI pharmaceutical field has cooled down since 2021, and capital, whether in China or overseas, has begun to shift from the past "storytelling" to a more pragmatic "performance look".

According to the statistics of the "Intelligent Pharmaceutical Bureau", among the domestic AI pharmaceutical companies, except for XtalPi, which has been listed, the Hong Kong Stock Exchange for the second time, and Insilico Medicine, which has been listed within the year, only Pharmaceutical Ranch, Shenshi Technology, and Pharmaceuticaltech have reached the C round of financing. The vast majority of the remaining companies are still in the angel round to A+ round stage, and only one company has obtained B+ round financing, and the middle and late stage financing cases are very rare.

The road ahead is uncertain, and the situation is changing. The peaks and turns of this revolution have yet to be witnessed. (Produced by Thinking Finance)■