Lacking Revenue, Jenscare Scientific Hopes IPO Investors Take Heart in Its Potential

Key Takeaways:

• Jenscare Scientific is preparing to raise a reported $30 million in a Hong Kong IPO, even though it doesn’t expect to earn any product-related revenue until the latter half of next year at earliest
• The company’s valuation reached $1.36 billion last year, but could possibly dive by the time it debuts due to weak overall market sentiment

By Molly Wen

These are both the best of times and the worst of times for Chinese medical equipment makers. On the one hand, the group is getting strong support from China’s medical regulator, which approved 35 applications for their products last year, up 35% higher from 2020. But on the other, shares of many listed companies have fallen below their IPO prices as investors grow impatient for elusive profits.

Despite the cool climate, Jenscare Scientific Co. Ltd. is still trying to convince stock market investors to believe in its future. The company initially applied to list in Hong Kong in June 2021, but the application lapsed six months later. It tried again not long afterwards, only to see that second application also lapse in June this year. It finally struck gold in its third attempt when it passed its listing hearing early this month. Market sources have said the company is aiming relatively low by targeting a modest $30 million at the start of its investor road show.

Jenscare develops products to treat structural heart conditions, targeting patients suffering from heart diseases involving the tricuspid, mitral and aortic valves, as well as congestive heart failure. It has 10 products under development. The most advanced is LuX-Valve, whose clinical trials are set to wrap up in this year’s third quarter, with marketing approval expected in the second half of 2023. The product is a self-developed first-generation transcatheter tricuspid valve replacement system.

LuX-Valve is specially designed for high-risk patients who suffer from several tricuspid valve regurgitation conditions and are not suitable for surgery, using stents to replace dysfunctional valves. According to Jenscare’s prospectus, the product is very likely to become one of the first transcatheter tricuspid valve replacement products in the world. But we should also note that nine similar products are now in clinical trials, showing the field isn’t exactly empty.

Tricuspid valve regurgitation occurs when valves in right atriums or ventricles cannot close properly. The condition is becoming increasingly common, and can lead to heart failure and atrial fibrillation.

The prospectus shows that over 51.7 million patients suffered from the condition in 2021, including 9.3 million in China. As the country’s population ages and its capabilities in interventional surgeries improve, the domestic market for transcatheter interventional products for the treatment of tricuspid valve regurgitation is expected to reach 24.6 billion yuan ($3.5 billion) by 2030.

In addition to LuX-Valve, the company is also developing a transcatheter aortic valve replacement system called Ken-Valve catering to patients suffering from severe aortic valve regurgitation. The company expects that product to be approved by China’s medical regulator in the first half of 2024. The rest of its products are still in early clinical trials or at the pre-clinical-trial stage, meaning they won’t bring much heart – or revenue – for investors in the near-term.

Bleeding red ink

Given its early stage of development and lack of revenue, it should come as no surprise that Jenscare is deeply in the red. The company posted losses of 300 million yuan, 500 million yuan and 73.50 million yuan, respectively, in 2020, 2021 and 2022, mostly due to heavy spending on R&D and administration as it ushers its products through the clinical testing phases.

Government procurement plans are both a godsend and a scourge to startups like Jenscare. Such bulk purchases save companies huge sums in marketing expenses and can help them quickly gain big market share. But that comes at a cost, as such big government customers demand low prices that ultimately erode profit margins. “Centralized procurement is the single policy with the most far-reaching impact on our industry,” the founder of a medical equipment company once said in an interview. “It shows we need to not only make innovative medical devices, but to try our best to control the cost of products.”

At a Sept. 3 event, China’s medical regulator addressed the topic by noting such products are not being purchased in government procurement projects yet because their clinical use hasn’t been adequately proven and demand is still hard to estimate. Orient Securities believes such lack of inclusion has eased market concerns that all such products could eventually be included in such plans, including the low margins they bring. At the same time, it said policy support for such innovation in the field is still strong.

The company also states in its prospectus that once approved for sale, its key products are unlikely to be initially included in China’s national health plan during their early commercialization phase. It expects LuX-Valve to be priced at around 220,000 yuan to 300,000 yuan after being approved for sale, with the price possibly coming down by 5% to 15% if and when it is covered by the national health plan.

Highly valued

In addition to its Hong Kong listing, Jenscare is also considering raising funds on China’s domestic A-shares market, and would make such a listing when the timing is right time, according to its prospectus. It has already registered and applied for pre-IPO tutoring to prepare for such an A-share listing, and the application was accepted by the Chinese Securities regulator in July 2022.

The company has obtained investment from a number of big names since its inception in 2011, including the likes of Hillhouse Capital, Primavera Capital, Proxima Capital and China Life Private Equity Investment, which have collectively given the company 1.5 billion yuan. Its valuation reached $1.36 billion in its latest funding round in May last year.

It’s hard to estimate how stock market investors might value the company due to its current lack of revenue and profit. But other peers that are earning revenue can be used as a reference. MicroPort CardioFlow Medtech(2160.HK), which makes products to treat aortic and mitral valve conditions, is valued at around HK$7.2 billion. Zylox-Tonbridge Medical Technology (2190.HK), focused on products to treat nerve and peripheral blood vessel conditions, is valued at HK$3.1 billion. Both figures were lower than valuations given for the companies in their most recent pre-IPO funding.

If the same happens for Jenscare, the company could well see its post-IPO valuation fall below the $1.36 billion from its last funding round. That certainly looks like a possibility, given recent negative market sentiment as central banks worldwide raise interest rates to tame stubbornly high inflation, even if such moves come at the cost of economic growth.