IPO Watch: Simcere Supplies High-End Generics In China
by Richard Daverman, PhD
Centient Biotech Investor
Simcere Pharma (SCR) of China, a company that bills itself as a maker of branded generic drugs for the domestic (Chinese) market, has filed to make its IPO and list on the NYSE. The company focuses on first-to-market generics, including an anti-stroke drug and an anti-cancer medication. The Simcere portfolio of drugs has high margins, because they treat serious diseases or are in high demand.
The cancer drug is Endu, the first recombinant human endostatin injection approved for sale in China. The drug has an anti-angiogenic mechanism. Simcere acquired the drug when it bought an 80.0% equity interest in Yantai Medgenn in 2006. Endu supplied only 3% of the company’s revenue last year, though Simcere was distributing it for just three months and then producing/distributing it during the final three months of 2006. Simcere looks to Endu for most of its profit growth in the near future.
Although the company has permission to market over 100 drugs in China, it presently markets just 35, and 83% of its revenue comes from its top five sellers: Zailin, Bicun, Yingtaiqing, Anqi, and Biqi. In addition to the stroke and cancer drugs, it produces antibiotics, and it distributes three drugs for other companies, including anti-inflammatories.
Simcere currently has an additional 12 drugs in development. These are aimed at cancer, cerebrovascular diseases, infections, rheumatoid arthritis, nasal allergies, and nausea and vomiting associated with chemotherapy. Despite this activity, Simcere spent just 3.6% of its revenue (about $4 million) on R&D last year.
A Tilt toward the West
That could change. In the Use of Proceeds section of its IPO prospectus, Simcere allocates $52 million for R&D, including $35 million for clinical trials and preclinical studies in partnership with international companies. Those numbers represent a large jump from the $4 million it spent on R&D in 2006. Included in these plans is a project, already underway, to produce a cancer drug from a compound owned by Advenchen. Simcere says it is in talks with other western biopharma companies, but no other deals have been signed to date.
Terms of the Deal
In its IPO, Simcere will offer 15.625 million ADSs in a $12.50-$14.50 range. Each ADS is worth 2 ordinary shares, and after the IPO, there will be 125 million ordinary shares, including those represented by the ADSs. That means the IPO represents exactly one-fourth of the outstanding stock in the company. Of the 15.625 million ADSs, 12.5 million are being offered by the company, while the other 3.125 million come from selling shareholders. A price of $13.50 would give the company a market cap of $845 million.
If the IPO prices at the midpoint of the talk range, the company would net some $151.3 million (selling shareholders will receive about 25% of the total proceeds). Simcere plans to spend the aforementioned $52 million for R&D. Another $13 million will go to conduct clinical trials for its cancer drug, Endu, including trials for other indications, a Phase IV test, and improved delivery systems for the drug. $4 million will go to purchase research equipment.
Outside of R&D, Simcere will use $30 million to repay short-term bank loans, $14 million to build a GMP manufacturing facility, another $5 million to bring existing facilities up to snuff, and $13 million to expand its sales and marketing efforts.
Simcere’s Numbers
In 2006, Simcere had revenues of $121.8 million and profits of $22.1 million, representing a net margin of 18%. Revenues have grown at a CAGR of 30% in the past 3 years. Last year, the cost of manufacturing took just 20% out of the company’s revenues, and G&A were just 10%. Sales, marketing and distribution, however, were responsible for a very substantial 47% cut.
The numbers show that Simcere is seeking a Price/Revenue multiple of just 7, and a Price/Earnings multiple of 38 (both figures are based on the IPO going off at $13.50, the midpoint). Neither of these is especially high for Chinese companies, especially when the company is growing at 30% per year and has a profit margin of 18%.
The company has cash of only $13.6 million, and a quick look at its balance sheet shows that its current liabilities are $72.8 million, which is larger than the current assets of $52.7 million. However, the liabilities include $42.7 million in short-term borrowings, and the company has promised to repay $30 million of these after the IPO. That change, plus the added cash, would bring the figures back in line.
Market Opportunity
The story about China is not the growing population, because the one-child policy, in place in much of the country since the 1970s, has all but stopped any increase in the number of people, past the 1.3 billion already there. Instead, the news in China is about the increasing amount of discretionary cash available in the urban population (about 40% of the total), and the aging of the populace, which means greater demand for medicines. According to the Simcere prospectus, the CAGR for drugs in China is estimated at 13.6%, while pharmaceutical spending will grow just 5%-8% in the rest of the world.
On the other hand, Simcere warns that the government has unilateral power to force a reduction in prices, and Simcere lists exactly when and by how much the government has done so to various medications in the past. Nevertheless, despite the price cuts, Simcere has been able to maintain a 20% profit margin, so the changes put through by the government have not been draconian.
Source: CentientInvestor.com
RELATED READING:
- China Biotech Review: Simcere Pharma Files for American IPO
_______________________
Centient Biotech Investor
Simcere Pharma (SCR) of China, a company that bills itself as a maker of branded generic drugs for the domestic (Chinese) market, has filed to make its IPO and list on the NYSE. The company focuses on first-to-market generics, including an anti-stroke drug and an anti-cancer medication. The Simcere portfolio of drugs has high margins, because they treat serious diseases or are in high demand.
The cancer drug is Endu, the first recombinant human endostatin injection approved for sale in China. The drug has an anti-angiogenic mechanism. Simcere acquired the drug when it bought an 80.0% equity interest in Yantai Medgenn in 2006. Endu supplied only 3% of the company’s revenue last year, though Simcere was distributing it for just three months and then producing/distributing it during the final three months of 2006. Simcere looks to Endu for most of its profit growth in the near future.
Although the company has permission to market over 100 drugs in China, it presently markets just 35, and 83% of its revenue comes from its top five sellers: Zailin, Bicun, Yingtaiqing, Anqi, and Biqi. In addition to the stroke and cancer drugs, it produces antibiotics, and it distributes three drugs for other companies, including anti-inflammatories.
Simcere currently has an additional 12 drugs in development. These are aimed at cancer, cerebrovascular diseases, infections, rheumatoid arthritis, nasal allergies, and nausea and vomiting associated with chemotherapy. Despite this activity, Simcere spent just 3.6% of its revenue (about $4 million) on R&D last year.
A Tilt toward the West
That could change. In the Use of Proceeds section of its IPO prospectus, Simcere allocates $52 million for R&D, including $35 million for clinical trials and preclinical studies in partnership with international companies. Those numbers represent a large jump from the $4 million it spent on R&D in 2006. Included in these plans is a project, already underway, to produce a cancer drug from a compound owned by Advenchen. Simcere says it is in talks with other western biopharma companies, but no other deals have been signed to date.
Terms of the Deal
In its IPO, Simcere will offer 15.625 million ADSs in a $12.50-$14.50 range. Each ADS is worth 2 ordinary shares, and after the IPO, there will be 125 million ordinary shares, including those represented by the ADSs. That means the IPO represents exactly one-fourth of the outstanding stock in the company. Of the 15.625 million ADSs, 12.5 million are being offered by the company, while the other 3.125 million come from selling shareholders. A price of $13.50 would give the company a market cap of $845 million.
If the IPO prices at the midpoint of the talk range, the company would net some $151.3 million (selling shareholders will receive about 25% of the total proceeds). Simcere plans to spend the aforementioned $52 million for R&D. Another $13 million will go to conduct clinical trials for its cancer drug, Endu, including trials for other indications, a Phase IV test, and improved delivery systems for the drug. $4 million will go to purchase research equipment.
Outside of R&D, Simcere will use $30 million to repay short-term bank loans, $14 million to build a GMP manufacturing facility, another $5 million to bring existing facilities up to snuff, and $13 million to expand its sales and marketing efforts.
Simcere’s Numbers
In 2006, Simcere had revenues of $121.8 million and profits of $22.1 million, representing a net margin of 18%. Revenues have grown at a CAGR of 30% in the past 3 years. Last year, the cost of manufacturing took just 20% out of the company’s revenues, and G&A were just 10%. Sales, marketing and distribution, however, were responsible for a very substantial 47% cut.
The numbers show that Simcere is seeking a Price/Revenue multiple of just 7, and a Price/Earnings multiple of 38 (both figures are based on the IPO going off at $13.50, the midpoint). Neither of these is especially high for Chinese companies, especially when the company is growing at 30% per year and has a profit margin of 18%.
The company has cash of only $13.6 million, and a quick look at its balance sheet shows that its current liabilities are $72.8 million, which is larger than the current assets of $52.7 million. However, the liabilities include $42.7 million in short-term borrowings, and the company has promised to repay $30 million of these after the IPO. That change, plus the added cash, would bring the figures back in line.
Market Opportunity
The story about China is not the growing population, because the one-child policy, in place in much of the country since the 1970s, has all but stopped any increase in the number of people, past the 1.3 billion already there. Instead, the news in China is about the increasing amount of discretionary cash available in the urban population (about 40% of the total), and the aging of the populace, which means greater demand for medicines. According to the Simcere prospectus, the CAGR for drugs in China is estimated at 13.6%, while pharmaceutical spending will grow just 5%-8% in the rest of the world.
On the other hand, Simcere warns that the government has unilateral power to force a reduction in prices, and Simcere lists exactly when and by how much the government has done so to various medications in the past. Nevertheless, despite the price cuts, Simcere has been able to maintain a 20% profit margin, so the changes put through by the government have not been draconian.
Source: CentientInvestor.com
RELATED READING:
- China Biotech Review: Simcere Pharma Files for American IPO
_______________________
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