Biotech Values

[DewDiligence]

Chinese Healthcare IPOs Proliferate

[See #msg-49465915 and #msg-51490876 for background reads, and caveat emptor!]

http://online.wsj.com/article/SB10001424052748704229004575370623395697604.html

›JULY 18, 2010
By PETER STEIN

The budding promise of China's health-care sector is prompting a spate of deals and share offerings that has defied the broader market malaise.

n the last 10 months, 23 pharmaceutical and heath-care related companies have gone public in mainland China and Hong Kong, according to Dealogic. Many deals are small: 17 of them raised less than $200 million, and eight were for $100 million or less. But cumulatively they have packed a punch, raising $5.37 billion, the data show, with companies continuing to list even through the market turbulence stirred up by debt problems in Europe.

Interest in takeovers has picked up, too. In April, U.S. pharmaceutical-research company Charles River Laboratories International Inc. agreed to buy one of China's largest drug-research contractors, WuXi AppTec Co., for about $1.6 billion in cash and stock. (Activist hedge fund Jane Partners LLC, which owns about 7% of Charles River, is trying to block approval for the deal.)

"We have more than a handful of M&A situations brewing now" involving Chinese health-care companies, says Brian Gu, head of China corporate finance and M&A at J.P. Morgan Securities (Asia Pacific) Ltd. He said there are "quite a few small to mid-cap companies on the way" in the Hong Kong IPO market.

Across Asia, pharmaceutical, life-science and health-care service companies are attracting attention from investors as increasing affluence drives demand for better medical services and governments invest in improving the quality of public health care. For some companies, low manufacturing costs and rising quality control are opening up export opportunities as well. Adding to the appeal is the belief that these companies are defensive plays whose prospects aren't subject to the ups and downs of banks, commodity stocks or other more-cyclical parts of the economy.

"Overall, we're very focused on the sector," says Stephen Peel, managing partner at private-equity firm TPG in Hong Kong. He calls China "especially interesting." The level of health-care spending is low relative to gross domestic product, he says. He and others note that ambitious health-care reforms announced by Beijing last year are a big driver of interest in Chinese companies.

Last year, TPG invested an undisclosed amount in NT Pharma, a Hong Kong-based maker and distributer of pharmaceutical products in China. In October 2007, it invested more than US$30 million in ShangPharm Corp., a China-based company focused on research and development in pharmaceuticals and biotechnology.

A turning point for the sector came last September when Sinopharm Group Co., China's largest distributer of pharmaceutical products, successfully raised US$1.3 billion in a Hong Kong IPO. Sinopharm's listing, say bankers, proved that the China health-care story could successfully drum up serious money, rerating the entire sector. Since the listing, Sinopharm's stock has risen 73%, although shares fell 2.1% on Friday in an overall down market.

Private-equity firms and other big investors looking for deals have now turned their sights on Chinese health-care companies listed in Singapore and New York, where valuations remain well below levels in Hong Kong and China's domestic exchanges. The aim, ultimately, is to relist in Hong Kong or the mainland and capture that higher valuation.

A company backed by Morgan Stanley's Asian private-equity arm took over Singapore-listed Sihuan Pharmaceutical Holdings Group Ltd., in an acquisition last fall that valued the Chinese drug maker at 458.3 million Singapore dollars (US$333.6 million). Morgan Stanley also is advising New York Stock Exchange-listed Tongjitang Chinese Medicines Co., in a bid to take the company private led by the company's chairman and Fosun Industrial Co., a unit of Shanghai Fosun Pharmaceutical Group Co., who together control more than 80% of the company's shares. The bid values the company at US$117.1 million.

Enthusiasm for health-care deals has in some cases led to excessive valuations, as was the case with Shenzhen Hepalink Pharmaceutical Co. The Chinese maker of heparin, a blood-thinning product made from pigs' intestines, listed on the Shenzhen stock exchange in May with a share price equal to 73 times its 2009 earnings on a diluted basis, raising 5.93 billion yuan (US$875.9 million).

Helping generate enthusiasm for the stock was its selling point as the only Chinese heparin producer with approval from the U.S. Food and Drug Administration to provide heparin's active pharmaceutical ingredient to the U.S. market. [This is no longer true.]

Since the listing, the stock has fallen 23%. But on paper, at least, it has still been a hugely profitable deal for Goldman Sachs Group, which bought into the company through its principal investment arm. At the latest market price, Goldman's 11.2% stake in the listed entity, which is subject to a 12-month lockup period, is worth about five billion yuan, or US$739 million. That's about 150 times Goldman's initial investment of $4.9 million.‹