China Nuokang Bio-Pharmaceutical Banks on a Favorable U.S. IPO

China Nuokang Bio-Pharmaceutical (NKBP), a company focused on hematological and cardiovascular drugs, will offer 4.5 million ADSs on the Nasdaq exchange at a price between $10 and $12. The mid-point of the range represents a $50 million debut for Nuokang.

The offering gives further evidence that investors are looking favorably at China biopharma IPOs. Most of the recent IPOs have taken place in China, but Nuokang is banking on transferring the magic to the US, even though the IPO window in the US shuts down as the end-of-year holiday season approaches.

Nuokang has a portfolio of fourteen products, three of which it considers particularly important: Baquting for bleeding control, Aiduo, a cardiovascular stress imaging agent, and Aiwen, an anti-arrhythmic agent. An additional four products are in development, one to serve the bleeding control sector on which Nuokang depends, and the others for hematological, cardiovascular and cerebrovascular disease diagnosis, treatment and prevention.

The company has also signed an exclusive agreement to distribute Kaitong in China. Kaitong is an intravenous injectable lipid emulsion of a vasodilator that treats peripheral vascular diseases, cardiocerebral microcirculation disorders and post-surgery thrombosis.

All of this sounds very diversified, but 94% of the company’s revenue in the first nine months of the year came from its clotting agent, Baquting. Nuokang launched the drug in 2001, and it now commands a 38% share of its market. A hemocoagulase, Baquting contains the proteolytic enzyme batroxobin, derived from the venom of a pit viper.

Baquting also contains trace amounts of a blood clotting activating factor X activator (FXA), a metalloprotease that promotes the conversion of factor X to factor Xa, which is another essential step in the coagulation pathway. Batroxobin and FXA both promote the blood coagulation process, and Nuokang maintains that a drug containing both substances is more effective than either signal-agent drug.

In 2008, Nuokang reported revenues of 225 million RMB ($33 million) and net income of 64 million RMB ($9.3 million), a margin of 28%. Revenues were up 50% from the year earlier, while profits almost doubled.

In the first nine months of 2009, the company said revenues climbed to 200 million RMB ($29.3 million) and net income to 42 million RMB. That means the company’s sales rate is slowing and net income will have a hard time matching the year earlier results.

The company’s net income worked out to just 6 cents per share last year, and it won’t do much better this year. Asking $11 for that level of net income is a reach. It will have to convince potential investors that the future will be much more profitable.

On September 30, Nuokang had $12 million in cash. If the IPO goes off as planned, it will have $55 million.

The company would net $41.3 million at the $11 price. Each ADS, which will trade under the symbol NKBP, is equal to 8 ordinary shares. The shares being offered in the IPO will constitute about 23% of the company after the IPO is completed.

The actual gross proceeds for the IPO will be $55 million (at $11 per ADS) because a shareholder is offering 473,000 ADSs, bringing the total number in the IPO to 5 million, and he has also granted underwriters the right to purchase up to 750,000 additional ADSs to cover overallotments.

Nuokang is in a strong position to make its IPO. The company has solid revenues and better profits, a good cash position and reasons to believe it can grow in the future. Its drawbacks are that the company’s other products have not had the same success as its bleeding control drug Baquting, the growth rate for Baquting is slowing and the company has set a high price relative to earnings for its current financial performance.

Disclosure: none.