SciClone: Novamed Acquisition Helps, But Questions Remain

Late last month, US-based SciClone Pharmaceuticals Inc. (NASDAQ: SCLN) announced it had completed an acquisition of China-based NovaMed Pharmaceuticals for approximately USD 61.8 million. Under the terms of the deal, NovaMed shareholders will receive an upfront payment of about USD 24.7 million in cash and a total of nearly 8.3 million shares of SciClone common stock valued at approximately USD 37.1 million. NovaMed shareholders also will have the possibility to receive additional consideration of up to USD 43 million upon the successful achievement of revenue and earnings targets for the 2011 and 2012 fiscal years.

SciClone Pharmaceuticals has done particularly well in the Chinese market with a single product - Zadaxin (thymalfasin), an immune stimulator which is used in China for treatment of chronic hepatitis B and C and as a cancer adjuvant among other uses (including, in the past, a treatment for SARS).

NovaMed, a privately-held Chinese pharmaceutical company backed by an American venture capital firm, is a provider of outsourced development and commercialization services for pharmaceutical and biotechnology companies, including drug registration and sales and promotion. NovaMed currently has a China portfolio of 18 licensed products (including 6 oncology products of Pfizer (NYSE:PFE), 6 products of Sanofi Aventis (NYSE:SNY), 3 products of Baxter (NYSE:BAX)) offerings across four major therapeutic areas including oncology, cardiovascular disease, central nervous system (CNS) disorders and urology/infection.

Potential upside

SciClone has been cash-rich but product-poor. NovaMed will give SciClone access to a stable of on-market products in China and will expand the company’s salesforce from around 100 to in the neighborhood of 700, with an expanded geographic coverage. Also, SciClone has had a rough go with new product registration in China. Last year, SciCone’s two oncology-related products (DC Bead, and ondansetron RapidFilm) were under review at the SFDA for a long time and have yet to be approved. The combined entity may be able to tap into additional resources for more regulatory success.

Questions remain

With venture investment in the USD 20 million range, the transaction will arguably give NovaMed backers a 3x (potentially 5x) return on investment - a middling performance. (The company was reportedly in play for some time.) That said, it may be a good fit for SciClone, which had accumulated a war chest of funds and local experience, but was unable to bring more product to the China market. Alone, NovaMed did not spin a compelling tale for specialty pharma in China; it will be interesting to see if the combined entity can change the story.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.