AI pharmaceutical unicorn XtalPi went public in Hong Kong, and the profit problem behind "no shortage of money" needs to be solved

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Another AI pharmaceutical company has started the road to IPO.

Recently, XtalPi, an AI pharmaceutical unicorn company, submitted a prospectus to the Hong Kong Stock Exchange. In 2021, XtalPi considered going public in the United States, but switched to the Hong Kong Stock Exchange in March this year.

Under the appearance of "no shortage of money", XtalPi is still facing the dilemma of continuous losses and unsuccessful profit model. And as more and more companies pour into the AI pharmaceutical track, XtalPi will face more competitive pressure.

There are sufficient funds on the books, and they are still listed to raise funds

In 2015, XtalPi was born at the Massachusetts Institute of Technology (MIT) and was co-founded by three PhDs from the school, including Jeremy Wen, Jian Ma and Lipeng Lai. After 8 years of growth, XtalPi has become a leading unicorn in the AI pharmaceutical industry. As early as 2021, after the Series D financing, the company's valuation has reached $1.968 billion.

On November 30, XtalPi submitted its application to the Hong Kong Stock Exchange to raise funds to enhance its R&D capabilities, solution delivery capabilities, commercialization capabilities and replenish working capital.

However, on paper, XtalPi is not short of money at the moment.

Since 2015, XtalPi has gone through a total of 6 rounds of financing from Pre-A to Series D, with a total financing amount of US$732 million, equivalent to approximately RMB 5 billion. Investors include well-known institutions and enterprises such as Tencent, Sequoia, Chinese Life, Mirae Asset, and Alphabet. According to data from Frost & Sullivan, XtalPi ranks first in the world in terms of total financing among AI-enabled drug discovery companies.

According to the prospectus, as of the end of June 2023. XtalPi's cash and cash equivalents, the current portion of time deposits, restricted cash and the current portion of financial assets at fair value through profit or loss totaled RMB3,211 million. In the first half of 2023, XtalPi's monthly cash burn was approximately RMB61 million, and if XtalPi's average cash burn ratio in the future is close to the average for the first half of 2023, the company's current book funds will be sufficient to maintain its financial viability for 53 months.

So, why did XtalPi, which is not short of money on its books, choose to go public to raise funds?

In 2022, against the backdrop of the overall cold financing of the biopharmaceutical industry, the financing situation of the AI pharmaceutical track is still relatively active. According to the MedAlpha database, in 2022, the financing amount of the AI pharmaceutical track will exceed 4 billion US dollars, although it has declined from 2021, it is still higher than the level of 2020. The number of financing events was close to 150, higher than the level in 2021. However, the situation in the industry has not been reflected in XtalPi, which has not received institutional investment since its Series D financing in July 2021.

In this context, the company's R&D expenditure is still growing rapidly, and the expenditure is much higher than the current revenue level. From 2020 to 2022 and the first half of 2023, XtalPi's R&D expenditure was RMB84 million, RMB213 million, RMB359 million and RMB234 million, accounting for 234.4%, 338.5%, 269.2% and 293.1% of the company's operating income in the current period, respectively.

In the prospectus, XtalPi also said that its operating expenses will increase significantly as it continues to invest in integrated technology platforms, solutions and services, as well as sales and marketing-related activities. It is expected to continue to incur significant expenditures, with a net loss and negative operating cash flow in the coming years.

In other words, XtalPi's current R&D expenditures and business operating expenses are largely supported by previously raised funds. In order not to fall into a situation of "sitting on the sidelines and eating nothing", XtalPi chose to alleviate the financial pressure by going public.

The profit model has not yet been completed, and it is facing competitive pressure

As an AI pharmaceutical company, XtalPi's main businesses include drug discovery solutions and intelligent automation solutions. Among them, the drug discovery solution can provide solutions across different modules in the whole process of drug discovery and research, while the intelligent automation solution mainly includes solid-state R&D services and automated chemical synthesis services.

But at present, it seems that for all companies in the AI pharmaceutical industry, how to achieve profitability is a headache for enterprises. Taking XtalPi as an example, in recent years, XtalPi's operating income has continued to grow, but it still continues to be in a loss-making state. From 2020 to 2022 and the first half of 2023, the company's operating income will be 36 million yuan, 63 million yuan, 133 million yuan, and 80 million yuan respectively, and the loss during the period will be 734 million yuan, 2.137 billion yuan, 1.439 billion yuan, and 620 million yuan respectively.

AI pharmaceuticals have been facing losses for a long time, which is closely related to the company's business model, in addition to the company's large-scale investment in R&D.

In fact, the business of AI pharmaceutical companies represented by XtalPi does not cover the whole process of drug research and development, but focuses on the preclinical stage. According to the prospectus, XtalPi's drug discovery solutions cover target validation, hit identification, lead generation, lead optimization and preclinical candidate recommendation. And this also limits the profitability of the business. After all, whether a drug can really work needs to be verified by a series of studies such as follow-up clinical trials.

So far, the results of AI pharmaceuticals have not been significant. In July 2022, DSP-1181, the first AI-designed molecule to enter clinical trials, was halted from development by Japan's Sumitomo Pharma on the grounds that the Phase I clinical study did not meet the expected standards. By the end of 2022, a total of 80 AI drug pipelines have been approved for clinical trials worldwide, of which only 5 pipelines have advanced to Phase III clinical trials. And so far, no AI-developed drug has been approved for marketing.

Perhaps because of this, AI pharmaceutical companies have a low voice in the voice, and even if they win a large order from a pharmaceutical company, it is difficult to obtain a higher down payment. For example, in 2022, AI pharmaceutical company Insilico Medicine signed a $1.2 billion cooperation deal with Sanofi, but the down payment was only $21.5 million. In May, XtalPi and Eli Lilly also reached a $250 million partnership, but the company did not disclose the amount of the down payment.

However, in this context, AI pharmaceutical startups such as XtalPi also face competitive pressure from outside the industry. As the track becomes more and more popular, traditional large pharmaceutical companies and Internet giants are also stepping up their entry into the AI pharmaceutical industry. Among the traditional large pharmaceutical companies, in addition to multinational pharmaceutical companies such as Sanofi, Merck, AstraZeneca, and Pfizer, domestic pharmaceutical companies such as WuXi AppTec, Hongbo Pharmaceutical, and Haoyuan Pharmaceutical have also integrated their own businesses with AI. In addition, major Internet companies such as Baidu, Tencent, Alibaba, and ByteDance have also relied on their own AI algorithm advantages to create AI pharmaceutical R&D platforms in order to take a share of the industry.

Under the influence of multiple factors, XtalPi's ability to retain customers has also declined. From 2020 to 2022, the number of customers of the company increased from 43 to 120, but fell to 107 in the first half of 2023. From 2020 to 2021, the customer retention rate of enterprises was 53.8% and 67.5%, respectively, but in 2022 and 2023, this figure dropped to 51.4%.