China is currently the world's seventh-largest pharmaceutical market and the fastest growing, according to the Boston Consulting Group. In 2006, pharmaceutical sales in China were $16.8 billion, and are projected to grow at over 20 percent annually through 2010 due to China’s robust economy and the rising standard of living of the Chinese middle class. The urban population accounts for 40% of total China population and is expected to grow to 60% by 2016. As the urban population increases, so does the standard of living.
Until 1997, Beijing Med-Pharm was 100 percent owned by Chinese physicians. During that year, a Bermuda-based wealth-management investment group, Abacus, acquired a 60 percent stake. In 2001, Abacus bought the rest of the company, and in 2003, Beijing Med-Pharm incorporated in Delaware, and the next year, through a reverse merger, became a public company. In 2005, the company became the first foreign firm to buy a Chinese drug distributor, Wanwei Pharmaceutical Co. in Beijing. On January 16, 2007, the company announced it was the winning bidder in a sale of shares representing a majority interest in the Shanghai Rongheng Pharmaceutical Co., Ltd., a distributor in China's largest city. The company is currently looking to buy a distributor in Guangzhou, near Hong Kong. By owning key distributors in Beijing, Shanghai and Guangzhou, the company will be able to reach 60 percent of Chinese customers who buy prescription medicines, in populated cities on the east coast.
Drug Sector Focus
Beijing Med-Pharm is building a proprietary portfolio of branded western pharmaceuticals that the company is marketing and distributing in China. At this time, the company focuses on drugs in the Women’s Health, Pediatrics, and Oncology sectors. These drugs are usually marketed under 10 year exclusive licenses with volume minimums. Currently, this portfolio includes:
Currently being marketed and distributed:
1. Fem 7: a hormone replacement therapy (Merck (MRK))
2. Propess®: a vaginal insert used for cervical dilation when labor is induced (Cytokine (CYTK))
3. Anpo (ritodrine hydrochloride): a muscle relaxant, available in both injectable and oral forms, used for managing pre-term labor (Taiwan Biotech)
4. Septocoll E – collagen fleece that additionally contains gentamicin is suited for both septic and aseptic surgery and can be used for bone and soft tissue interventions in all surgical disciplines (Biomet (BMET))
To be introduced after clinical trials:
5. Fentora - management of breakthrough pain in patients with cancer (Cephalon (CEPH))
6. Misopess - labor induction agent (Cytokine)
7. BrachySil - treatment for primary liver cancer (pSivida (PSDV))
In China, drug companies cannot sell directly to hospitals and are required to be sold via distributors. Beijing Med-Pharm is unique in China. The company provides drug registration, demand creation (sales and marketing) and demand fulfillment (distribution). The company does not know of any other competitor that offers a comprehensive one-stop solution for western drug companies to sell their products in China.
Beijing Med-Pharm has a strong management team. David Gao has been the CEO of Beijing Med-Pharm since 2004. Previously, Mr. Gao was the GM of Motorola China and VP of Motorola Asia Pacific from 1989 to 2002, where he was responsible for building Motorola’s China business to $6 billion.
Mr. Gao is the former Deputy Minister of Electronics and Machinery in the Chinese government. Martyn Greenacre is the Chairman of Beijing Med-Pharm. Previously, Mr. Greenacre was the Chairman Europe of SmithKline Beecham Pharmaceutical Company.
Recent Events and Financials
Beijing Med-Pharm raised $15M on December 20, 2006 through a private placement. The proceeds of the private placement will be used to license additional drugs from western pharma companies, to fund the Rongheng acquisition and potentially to fund additional distribution deals.
Beijing Med-Pharm reported revenue of $17.0 million for the first nine months of 2006, although it is still not profitable. The recent distribution acquisitions are profitable businesses that carry gross margins of 7 - 9%. Rongheng is estimated to have pro forma 2007 annual revenue of $15million and should be GAAP profitable. Beijing Med-Pharm is on a revenue run-rate of $50 million for 2007. The company will likely have dramatic revenue growth over the next 3 years, both from acquisitions and organic growth. The company has 29.9 million shares outstanding (fully-diluted) and at $7.50 per share has a market capitalization of $224 million.
The most significant business risk is patent protection and threats to intellectual property. Counterfeiting of medicines in China has historically been a problem, although the Chinese government has escalated its antipiracy efforts, and China has agreed to adhere to international trade agreements to protect intellectual property.
Beijing Med-Pharm is an interesting pure-play on China’s emerging middle class and the increasing standards of living and healthcare.
Disclosure: Author manages a hedge fund that is long Beijing Med-Pharm.