Biotech IPO Watch: Tongjitang Chinese Medicines
by Richard Daverman, PhD
Centient Biotech Investor
Tongjitang Chinese Medicines (TCM), which is located in Shenzhen, Guangdong Province, is scheduled to make its IPO next week. As always, the IPO of a Chinese company sheds some light on how the pharmaceutical business is conducted in China.
Tongjitang makes modernized forms of traditional Chinese medicines for the Chinese market. That means the company specializes in pill, tablet, gel or powder formulations of traditional herbal medications that the Chinese have been using for as long as one thousand years. Its main offering is Xianling Gubao, a formulation of barrenwort that is intended for osteoporosis (barrenwort is sometimes used as a ground cover in the US). Xianling Gubao contributed 77% of Tongjitang’s $62.1 million in revenue for 2006.
Although Tongjitang has 10 other products, only three contribute significantly to its revenues: Zaoren Anshen Capsules, an OTC medicine for treating insomnia; Moisturizing and Anti-Itching Capsules, an OTC medicine for treating inflammatory skin conditions; and Dianbaizhu Syrup, a prescription medicine for treating vertigo.
Tongjitang will offer 9.9 million ADSs in its IPO, each one representing 4 ordinary shares of the company, and it is proposing a range of $15-$17 for the ADSs. After the IPO, Tongjitang will have 133.7 million ordinary shares outstanding, the equivalent of 33.4 million ADSs. The midpoint of the range, $16, implies a value for the company of $535 million or 8.6 times its revenue last year. The $16 figure would also give Tongjitang a price-earnings ratio of 31. During the last three years, Tongjitang has achieved a CAGR of 43.8%, so even though its P/E may seem high, it is considerably below its growth rate.
Out of the 9.9 million ADSs, 8.5 million are offered by the company and another 1.5 million by selling shareholders. Before the IPO, Mr. Xiaochun Wang, CEO and Chairman of the company, owned 56.8% of the total number of shares outstanding. Presumably, he is one of the selling shareholders, though the company does not disclose that. The original investors paid 33.4 cents per ordinary share or $1.34 per ADS for their stock.
The company cites two possibilities that could hurt its profit margins, neither of which it can control. The price of its raw material, barrenwort, is seeing an increase in demand, and the supply does not seem to be increasing. That’s on the cost side.
Even more dire, on the revenue side, prices can arbitrarily be decreased by the government. In August 2006, the government lowered the price ceilings on 400 drugs by an average of 30%. Although Xianling Gubao was not included in that order, a future reduction, should it take place, would affect the company’s profit margins.
In 2006, Tongjitang produced $62.1 million in revenue. Its gross profit was $41.4 million, and it saw a net of $17.2 million. It had $29 million in cash at the end of the year.
Tongjitang will net $119 million in the IPO, if it goes off at the $16 midpoint. Tongjitang plans to spend $40 million to build up its marketing effort, $10 million on its research infrastructure, and the rest (which would be $69 million) on general corporate purposes, which in this case probably means strategic acquisitions. All in all, the IPO is a lot of money for a company that does not have a voracious appetite to feed a large R&D operation.
Just for comparison, 3SBio (SSRX), another recent Chinese biomedical IPO, is a Chinese biotech that is built around a copy of Amgen’s (AMGN) EPO for the Chinese market (see story). It priced above its range at $16 and rose to over $18 per share in the days following its IPO. But in subsequent activity over if first month of trading, 3SBio has failed to sustain investor interest, trending lower in price. It currently has sunk to about $10.50.
Tongjitang, founded in 1995, makes Xianling Gubao for both the pharmaceutical and OTC markets. The appetite for drugs in China is growing along with its middle class and their disposable incomes. According to Tongjitang, the combined market for pharmaceutical and OTC drugs reached $70.1 billion in 2004, enjoying a CAGR of 61% over the preceding three years.
Xianling Gubao was approved as a prescription (and OTC) medication by the SFDA in 2002, with an indication of osteoporosis. Tongjitang has succeeded in getting Xianling Gubao on the formulary of 2,257 hospitals in China, including 448 of the Class 3 hospitals - the biggest and the best ones. That level represents a penetration of just under 50% of the biggest hospitals. In China, some 37,000 retail pharmacies also carry the drug.
The company says that the average urban resident over the age of 60 in China spends $126 on medicines annually, which is 5 times the average person under 60. Although the over-60 segment is just 10% of the population, it numbers some 144 million people. Of these, 22.6% suffer from osteoporosis, and they spent $1.9 billion on treatment for the disease in 2005.
Recently, Wall Street had seemed to have an appetite for all things Chinese. But the abrupt fall of the Shanghai market in late February may have dampened that interest. It will be interesting to see how the market responds to the Tongjitang offering.
Source: CentientInvestor.com
RELATED READING:
- Offshoring of Biotech Research to China
____________________
Centient Biotech Investor
Tongjitang Chinese Medicines (TCM), which is located in Shenzhen, Guangdong Province, is scheduled to make its IPO next week. As always, the IPO of a Chinese company sheds some light on how the pharmaceutical business is conducted in China.
Tongjitang makes modernized forms of traditional Chinese medicines for the Chinese market. That means the company specializes in pill, tablet, gel or powder formulations of traditional herbal medications that the Chinese have been using for as long as one thousand years. Its main offering is Xianling Gubao, a formulation of barrenwort that is intended for osteoporosis (barrenwort is sometimes used as a ground cover in the US). Xianling Gubao contributed 77% of Tongjitang’s $62.1 million in revenue for 2006.
Although Tongjitang has 10 other products, only three contribute significantly to its revenues: Zaoren Anshen Capsules, an OTC medicine for treating insomnia; Moisturizing and Anti-Itching Capsules, an OTC medicine for treating inflammatory skin conditions; and Dianbaizhu Syrup, a prescription medicine for treating vertigo.
Tongjitang will offer 9.9 million ADSs in its IPO, each one representing 4 ordinary shares of the company, and it is proposing a range of $15-$17 for the ADSs. After the IPO, Tongjitang will have 133.7 million ordinary shares outstanding, the equivalent of 33.4 million ADSs. The midpoint of the range, $16, implies a value for the company of $535 million or 8.6 times its revenue last year. The $16 figure would also give Tongjitang a price-earnings ratio of 31. During the last three years, Tongjitang has achieved a CAGR of 43.8%, so even though its P/E may seem high, it is considerably below its growth rate.
Out of the 9.9 million ADSs, 8.5 million are offered by the company and another 1.5 million by selling shareholders. Before the IPO, Mr. Xiaochun Wang, CEO and Chairman of the company, owned 56.8% of the total number of shares outstanding. Presumably, he is one of the selling shareholders, though the company does not disclose that. The original investors paid 33.4 cents per ordinary share or $1.34 per ADS for their stock.
The company cites two possibilities that could hurt its profit margins, neither of which it can control. The price of its raw material, barrenwort, is seeing an increase in demand, and the supply does not seem to be increasing. That’s on the cost side.
Even more dire, on the revenue side, prices can arbitrarily be decreased by the government. In August 2006, the government lowered the price ceilings on 400 drugs by an average of 30%. Although Xianling Gubao was not included in that order, a future reduction, should it take place, would affect the company’s profit margins.
In 2006, Tongjitang produced $62.1 million in revenue. Its gross profit was $41.4 million, and it saw a net of $17.2 million. It had $29 million in cash at the end of the year.
Tongjitang will net $119 million in the IPO, if it goes off at the $16 midpoint. Tongjitang plans to spend $40 million to build up its marketing effort, $10 million on its research infrastructure, and the rest (which would be $69 million) on general corporate purposes, which in this case probably means strategic acquisitions. All in all, the IPO is a lot of money for a company that does not have a voracious appetite to feed a large R&D operation.
Just for comparison, 3SBio (SSRX), another recent Chinese biomedical IPO, is a Chinese biotech that is built around a copy of Amgen’s (AMGN) EPO for the Chinese market (see story). It priced above its range at $16 and rose to over $18 per share in the days following its IPO. But in subsequent activity over if first month of trading, 3SBio has failed to sustain investor interest, trending lower in price. It currently has sunk to about $10.50.
Tongjitang, founded in 1995, makes Xianling Gubao for both the pharmaceutical and OTC markets. The appetite for drugs in China is growing along with its middle class and their disposable incomes. According to Tongjitang, the combined market for pharmaceutical and OTC drugs reached $70.1 billion in 2004, enjoying a CAGR of 61% over the preceding three years.
Xianling Gubao was approved as a prescription (and OTC) medication by the SFDA in 2002, with an indication of osteoporosis. Tongjitang has succeeded in getting Xianling Gubao on the formulary of 2,257 hospitals in China, including 448 of the Class 3 hospitals - the biggest and the best ones. That level represents a penetration of just under 50% of the biggest hospitals. In China, some 37,000 retail pharmacies also carry the drug.
The company says that the average urban resident over the age of 60 in China spends $126 on medicines annually, which is 5 times the average person under 60. Although the over-60 segment is just 10% of the population, it numbers some 144 million people. Of these, 22.6% suffer from osteoporosis, and they spent $1.9 billion on treatment for the disease in 2005.
Recently, Wall Street had seemed to have an appetite for all things Chinese. But the abrupt fall of the Shanghai market in late February may have dampened that interest. It will be interesting to see how the market responds to the Tongjitang offering.
Source: CentientInvestor.com
RELATED READING:
- Offshoring of Biotech Research to China
____________________
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