Back in 2007, when China’s Simcere Pharmaceutical (SCR) raised $181m in a New York float underwritten by none other than Goldman Sachs (GS), it left a significant equity interest in the hands of Jinsheng Ren, its founder, chairman and chief executive.
Six years on, the same Mr Ren is heading up a bid to take the business private again – at a 34% discount to the IPO. Without doubt the approach is opportunistic, barely valuing the company at its price of a year ago. But it also brings home the harsh new reality of China’s drug price controls, the 2008 market crash and the blind faith once put in emerging economies.
Simcere was one of the worst-performing Chinese pharma companies listed in the US last year, and underperformed the S&P 500 by some 25%. Last September, with the stock down 48% on its IPO price, Mr Ren resigned as CEO but remained as chairman as well as continuing to control New Good Management, a fund that through a 36% stake is Simcere’s biggest holder.
The company has failed to deal with some severe economic headwinds, and its biggest problem seems to have been the healthcare reform implemented in China over recent years. This has seen local tendering put pressure on drug prices at a time of weak export growth when the underlying cost of raw materials and labour has risen.
China has implemented no fewer than 30 rounds of drug price cutting since 1997. Simcere, a local manufacturer of generic and proprietary medicines, has been hit hard: its top three therapy areas by revenue – neuroscience, oncology and infectious disease – have each been subjected to price cuts over the past two years.
In a recent note on China’s fragmented healthcare sector Goldman Sachs said the key to withstanding the turbulence lay in diversification towards differentiated products with limited competition. Yet despite Simcere’s new CEO, Hongquan Liu, promising to speed market access and cut costs, the company has continued to struggle.
Its 2012 annual report made sorry reading, showing a single-digit rise in group sales squeezed out by margin pressure and a one-off charge to write off certain assets associated with an acquired vaccines business, whose revenue forecasts were deemed to have been overblown.
All of which makes the struggling business a perfect target for private equity, which would typically overhaul management and slash costs. The fact that the bid has been mounted by the founder and ex-CEO adds an ironic touch.
Mr Ren’s New Good Management has teamed up with Assure Ahead Investments, holder of a 17% equity stake, to take Simcere private at a valuation of $505m, versus the $767m valuation these same two investors had achieved at IPO.
Of course, back then the appetite for emerging markets had yet to be tempered by a realisation that selling more drugs to more people for more money was harder than it sounded. Moreover, the pre-crash attitude to risk was somewhat more cavalier, and is perhaps only now being matched by enthusiasm for US biotech.
Simcere has yet to recommend the takeover approach, but given the bidders’ upper hand shareholders who bought into the 30% stake floated in 2007 will presumably have to walk away nursing a loss and a lesson learned.
Still, anyone feeling hard done by need only turn to Simcere’s SEC filings, which throughout the company’s time as a US-listed entity had spelled out the risk that “non-public shareholders have substantial influence ... and their interests may not be aligned with the interests of our other shareholders”.
Perhaps the most surprising thing is that Simcere was able to get its US float away at all, let alone price at the top of its range and raise nearly $200m.