Post-IPO Simcere: Biggest American-Listed Chinese Pharma

On April 20, Simcere (SCR) staged a very successful IPO, placing 15.6 million shares at the high end of its range, $14.50. In the open market, Simcere continued to attract attention, rising from the first trade to over $16 before settling back to trade in the mid-$15 dollar range (see our pre-IPO article).

While that is something short of an all-time IPO legend, it is a very respectable showing and gives Simcere a market value of $1.2 billion, enough to make Simcere the undisputed king of Chinese pharmaceutical companies trading in the U.S.

On May 15, Simcere reported extremely solid numbers for the first quarter of 2007. The company reported revenues that increased 32% to $40.4 million, while profits were up 156% at $8.7 million. When it announced its first quarter results, the company also forecast its year-end numbers. For all of 2007, Simcere expects to earn $36 million on sales of $180 million. Again, these numbers show a company that is producing solid growth.

In a Forbes interview, Jinsheng Ren, CEO and Chairman of Simcere, indicated that Simcere will be on the lookout for opportune acquisitions, using some of the cash from the IPO. The goal would be to make a drug powerhouse, consolidating some of China’s highly dispersed pharma/biotech industry. After all, there are some 4,000 biopharmas in China that managed to produce just $26 billion of revenue in 2005.

In the Forbes article, Genentech (DNA) is mentioned as a model, even though Simcere’s focus is in first-to-market, high-end generics, while Genentech’s strength has been in R&D, either in-house or in partnership with smaller biotechs.

It’s true that Simcere is no stranger to buying drugs. In 2006, Simcere purchased the cancer drug Endu, which Simcere expects to be one of the drivers of its growth, as it increases the indications for which the drug is approved as well as the reach of the marketing effort for the drug.

But the numbers mentioned in the Forbes article are a little misleading. According to the article, the IPO raised $261 million. Actually, investors plunked down $227 million to buy shares of the company in the IPO, and $52 million of that (exactly 20% of the total) went to selling shareholders. In its Q1 report, Simcere said that it netted $162 million after expenses and discounts.

The company had made provision for a greenshoe of 2.234 million ADSs, if the syndicate wished to place additional shares. So far, no announcement has been made that the selling syndicate took advantage of that provision, but assuming that it does, it would increase the total raised in the IPO by $32.4 million, and bring it very close to the $261 million mentioned in the Forbes article. However, the entire underwriters option will come from the selling shareholders, meaning that it does not increase the $162 million netted by Simcere itself.

As we mentioned in our earlier article on Simcere, the company has announced plans for the proceeds along the following schedule:

$52 million for R&D;

includes $35 million for tests of other companies’ drugs in China

includes $13 million for tests of Endu and a new delivery system

includes $4 million for research equipment

$30 million to repay short-term debt;
$14 million for GMP-certified production facilities;

includes $9 million to build new facilities to produce Endu

includes $5 million to maintain compliance with GMP rules

$13 million for marketing.

This totals $109 million, which probably will get switched around considerably by the time the money is actually spent. But the point remains that the plan leaves Simcere with $53 million from the IPO to buy new products, which is less than one might suppose from an offering that Forbes put at $261 million.

Simcere was founded by Ren in 1995 as a drug distributor. In addition to Endu, the cancer drug that produced just 3% of its revenue last year (it was on the market for only 3 months), Simcere manufactures and sells 35 pharmaceutical products. A full 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 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 in 2006. In its Q1 announcement, Simcere said that it expects approval in China of Biapenem in Q4 of 2007 and Palonosetron during the first half of 2008.

Even though the amount of cash available for transactions may be less than implied by the Forbes article, the fact remains that Simcere is 1) serious about accumulating heft in the growing Chinese biopharma marketplace, and 2) will probably continue to seek deals on Western drugs that it can shepherd through the Chinese approval process. Both of these initiatives will serve Simcere as potent drivers of growth.

Disclosure: none.

Comments

[penggao10:]

SCR is a cash cow producing solid revenue and profit along with 30% revenue growing. As long as its gross margin remain upward over, then it will bring a good investment return over time. It needs some patience as its IPO place a price a bit higher than one thought.

2007 Jun 05 02:43 PM