China Biologic to Buy Majority Interest in Plasma Competitor

| About: China Biologic (CBPO)

China Biologic Products (NASDAQ:CBPO) will pay $28.5 million to gain control of one of its competitors in the business of plasma-based pharmaceuticals. China Biologic will buy a 90% stake in Chongqing Dalin Biologic Technologies Co., Ltd. Dalin, in turn, owns a 54% equity interest in Qianfeng Biological Products Co., Ltd., which makes plasma-based products.

China Biologic will pay off the $28.5 million in four installments. Although the company ended its June quarter with only $8.8 million in cash, it believes it can raise the money via a bank loan. At the end of the second quarter, China Biologic had no debt.

Qianfeng is a bigger business that China Biologic. It has a 9.5% market share of China’s plasma-based biopharma business, while China Biologic can claim only 6.1%. Together, they will become the largest non-state-owned company in the sector, with a total 15.6% of China’s plasma-based business. The plasma business in China remains largely unconsolidated: the six largest China companies in the sector (including Qianfeng) have a total market share of approximately 50%.

Plasma collection has become tightly regulated in China, following safety problems. China Biologic is the only approved plasma-based products manufacturer in Shandong Province, which has a population of 93 million. China Biologic, which is currently producing 200 tons of plasma-based products per year, has 700 tons of annual capacity. China Biologic had revenues of $32.4 million and net income of $8.2 million in 2007. During the first half of 2008, the company’s revenues ran about 20% ahead of its 2007 results.

Qianfeng is the only operating manufacturer in Guizhou Province, with its population of 39 million. Qianfeng produces about 250 tons of products per year and boasts an annual production capacity of 400 tons. China Biologic did not disclose Qianfeng’s financials, but because Qianfeng is about 70% larger than China Biologic, Qianfeng’s 2007 revenues must have been about $55 million. Because China Biologic is buying 90% of 54% of those revenues, approximately half will appear in China Biologic’s top line.

China Biologic says the combined company will have 1100 tons of capacity per year, though given the large discrepancy between capacity and actual production, overall capacity does not seem to be a key issue. China Biologic does expect synergies from consolidating sales and administration forces. It will also use its technology to increase the plasma supply from Qianfeng. China Biologic also thinks it can raise prices on Qianfeng’s product line by putting its well-respected brand name on Qianfeng’s product line. Meanwhile, China Biologic will take advantage of Qianfeng’s technology to achieve higher product yields per unit of plasma.

Qianfeng, whose facilities are in compliance with GMP standards, produces six types of plasma-based products: Human Albumin, Human Immunoglobulin, Human Intravenous Immunoglobulin, Human Hepatitis B Immunoglobulin, Human Tetanus Immunoglobulin and Human Rabies Immune Globulin. The company owns 7 plasma collection stations in Guizhou Province, though only 6 are currently in operation. China Biologic plans to re-open the additional collection station in 2009

According to China Biologic, Guizhou Province has a history of producing the highest volumes of plasma collection in China. The province has a total of 19 plasma collection stations in operation, which collect some 1200 tons of plasma supply every year.

Disclosure: none.

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