Caixin
Oct 16, 2020 07:33 PM
BUSINESS & TECH

Generic Drugmaker Seeks New Shot in the Arm With Hong Kong IPO

Drugmaker Simcere Pharmaceutical Group Ltd. has become China’s latest company to abandon a New York listing in favor of one closer to home, filing plans to raise HK$3.6 billion ($535 million) through an IPO in Hong Kong.

Unlike many of the drugmakers to recently list in Hong Kong, Simcere has been profitable for years after finding a comfortable niche making generic drugs. But taking a cue from many of its younger peers, the company is moving aggressively into the higher-margin business of self-developed drugs — a process that has charged up profits in recent years but has also seen the company’s debt balloon.

Simcere was the first Chinese drug maker to list in New York when it made an IPO in 2007. But just six years later it also became one of the earliest to privatize due to lack of interest from U.S. investors. Many other Chinese companies have made similar moves after making New York IPOs with similar results, most returning to list in Hong Kong and on the Chinese mainland.

SIMCERE chart -1

Simcere said it has set a price range of HK$12.10 to HK$13.70, and will set the final price next Monday. Trading is set to begin on Oct. 27. Some 10% of shares being offered will go to local buyers, and the other 90% will go to international investors.

Simcere focuses on three areas: drugs for treatment of cancer, diseases of the central nervous system, and autoimmune diseases. Those three areas collectively accounted for about a quarter of China’s pharmaceutical market in 2019, according to research cited in Simcere’s prospectus filed this week with the Hong Kong Stock Exchange.

Its traditional reliance on generic drugs means the company differs from many of its peers to recently list in Hong Kong, which are developing new drugs that have yet to hit the market. That means Simcere has a mature line of products that are generating steady revenue, including several in the catalog of products that are subsidized for patients under China’s national health plan.

But such generic drugs are typically more competitive than self-developed ones because any company can make them, and thus they carry lower margins. That has led Simcere to move toward more development of its own drugs that typically carry both higher margins and higher product development costs. The net result has been accelerating profits for the company, but also accelerating debt with the concurrent rise in product development spending.

SIMCERE chart -2

The company’s revenue from generic drug sales dropped from 60.7% to 46.5% between 2017 and 2019. As it increased focus on self-developed drugs, its research and development costs more than tripled over that period to reach 716 million yuan last year. At the same time, the company’s profit nearly tripled from 350 million yuan in 2017 to about 1 billion yuan last year. Revenue grew more slowly, from 3.87 billion yuan in 2017 to 5.04 billion yuan last year.

As spending has grown, the company’s gearing ratio has also sharply increased, rising from 74% in 2017 to about 200% last year.

Contact reporter Yang Ge (geyang@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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