Beijing Med-Pharm Hopes To Grow Quickly Through Acquisitions

Aug.23.07 | About: BMP Sunstone (BJGP)

Beijing Med-Pharm (BJGP) raised $30.6 million (after fees) by placing 3.5 million units, each one consisting of one share and two-tenths of a warrant, at a price of $9.40. Beijing Med-Pharm closed the session Tuesday at $9.29, a loss of 24 cents on the session.

Beijing Med-Pharm knows exactly what it is going to do with the money.  Before the end of September, the company intends to complete its purchase of Sunstone Pharma, which manufactures over-the-counter pharmaceuticals.  Beijing Med-Pharm signed a letter of intent to purchase a 49% stake in the company in April for a total of $32 million.

When Beijing Med-Pharm signed a binding agreement in July, it made a down payment of $4.8 million, and it must pay the remaining $27.2 million to complete the purchase. In 2006, Sunstone reported a profit (although Beijing Med-Pharm won’t say how big that profit was) on sales that exceeded $50 million.

All by itself, Beijing Med-Pharm has been a flurry of M&A activity this year. In addition to the Sunstone Pharma acquisition, Beijing Med-Pharm has two deals working, both in the distribution business, which was the focus of Beijing Med-Pharm before the Sunstone purchase.

In January, Beijing Med-Pharma and Alliance Boots of the UK entered a complicated deal to buy a 50% interest in Guangzhou Pharmaceutical Limited Company, a distribution firm (see story).  The two companies will purchase a 9.91% stake in Guangzhou, then they will inject $69 million into the company to increase their interest to 50%.  The numbers imply a value of $173 million for Guangzhou. That transaction is expected to close in the second half of 2007.

In March, Beijing Med-Pharm announced it was the winning bidder for a 63% stake in Shanghai Rongheng Pharmaceutical Co., which distributes pharmaceuticals to the 17 million inhabitants of Shanghai (see story).  This transaction is also scheduled to be completed in the second half of 2007.

Although Beijing Med-Pharm is headquartered in Pennsylvania, its operations are in Beijing. It positions itself as a marketer for western drugs in China, offering pre-market entry analysis, clinical trial management, product registration, market research, and distribution to hospitals and physicians.

Financials

A quick look at Beijing Med-Pharm’s second quarter financial report shows that the distribution business is not as profitable as the pharmaceutical business in China.  The company had revenues of $7.2 million in Q2, but the cost of goods ate up $6.6 million of that. Sales and marketing expenses consumed a lot of the margin between those two, and when the G&A expense of $1.9 million is subtracted, the company ended with a net loss of $1.6 million for the quarter.

No doubt, Beijing Med-Pharm would claim that its infrastructure will support a much larger organization with only minimally increased costs, and the Sunstone subsidiary will help build those revenues.  Sales for Sunstone run about twice the level of Beijing Med-Pharm’s, so the 49% of those revenues that will belong to Beijing Med-Pharm will double its inflows.  If the acquisition has the effect of increasing its distribution revenues as well, so much the better.

At the end of the second quarter (which was before Beijing Med-Pharm made its $4.8 million down payment to Sunstone), the company had $10.4 million of cash.  At today’s price of $9.58, and giving effect to the additional 3.5 million shares, Beijing Med-Pharma has a market cap of $292 million.

Products

From the SEC filings for Beijing Med-Pharm, the following is a list of products that the company is currently distributing or for which it is seeking approval in China.  After approval, Beijing Med-Pharm will be responsible for distribution:

  • Propess. Propess vaginal insert, or Propess, is a vaginal insert used to ripen the cervix in preparation for childbirth when labor is induced. The manufacturer of Propess is Cytokine PharmaSciences, Inc., or Cytokine. Beijing Med-Pharm entered into an agreement with Cytokine in August 2005 to market and distribute Propess in China, and began marketing Propess and recording revenues with respect to this product during the first six months of 2006.
  • Anpo. Anpo, or ritodrine hydrochloride, is a muscle relaxant available in both injectable and oral forms, and is used for managing pre-term labor. In July 2006, Beijing Med-Pharm entered into an agreement with Taiwan Biotech Co. Ltd. to serve as the exclusive distributor of Anpo in mainland China. The company began marketing Anpo and recording revenues with respect to this product during the last six months of 2006.
  • Misopess. Misopess vaginal insert, or Misopess, is a vaginal insert under investigation in several countries for cervical ripening and induction of labor. The manufacturer of Misopess is Cytokine. Beijing Med-Pharm entered into an agreement with Cytokine in November 2006 to conduct late-stage clinical development, registration, sales, marketing and distribution in China. Under terms of the agreement, the company will initiate a Chinese registration trial of Misopess, with the expectation that, once Mispoess receives US FDA approval, data from this single trial will permit a regulatory application with the SFDA in late 2008 or 2009.
  • Fentora. Fentora, or fentanyl buccal tablet, received US FDA approval in September 2006 for the management of breakthrough pain in patients with cancer. The manufacturer of Fentora is Cephalon, Inc. (NASDAQ:CEPH), or Cephalon, which signed a service agreement with Beijing Med-Pharm in December 2006 under which the company will complete the clinical development and registration process for Fentora in China.
  • Clindesse. Clindesse, or clindamycin phosphate vaginal cream, is indicated for the treatment of bacterial vaginosis in non-pregnant women. The manufacturer of Clindesse is KV Pharmaceutical Company (KV.A). Under the terms of the agreement Beijing Med-Pharm entered into with KV in July 2007, the company will complete late stage clinical development and registration of Clindesse with the SFDA prior to assuming responsibilities for sales, marketing and distribution in China.
  • Ondansetron. Ondansetron Flashtab , is a generic form of Zofran, a 5-HT(3) antagonist used to reduce nausea and vomiting induced by cytotoxic chemotherapy and radiotherapy and to prevent post-operative nausea and vomiting. The manufacturer of Orndestron is Shanghai Ethypharm (Ethypharm). Under the terms of the agreement Beijing Med-Pharm entered into with Ethypharm in July 2007, Ethypharm will pursue registration of Orndansetron and Beijing Med-Pharm will then be responsible for sales, marketing, distribution and supply in China.
  • Galake. Galake is currently approved for marketing in China and is indicated for the relief of pain associated with conditions including trauma, surgery, cancer, lower back pain, arthritis and headache. The manufacturer of Galake is Lotus Healthcare, Inc. (Lotus). Beijing Med-Pharm will promote and sell Galake in China.
  • The Future

     
    Because the acquisitions will bring huge changes to Beijing Med-Pharm in the next six months, its future condition will be much different than its present situation.  And that’s why investors are willing to place a $292 market cap on a company that seems to be heading (absent acquisitions) towards a loss on revenues of just about $30 million in 2007.  Its list of products - those already on the market and those awaiting approval, is impressive - and its desire to grow quickly through acquisitions attracts investor interest. 
     
    Beijing Med-Pharm does not provide a lot of detail about its purchases, so we won’t know their effect on the company until the expanded operations are included in the financial reports for a quarter or two.  But we do know it will be a much different company.

    Disclosure: none.