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Pharmacist Simcere Pharmaceutical Group Ltd. It has become the latest Chinese company to abandon a New York listing in favor of one closer to home, putting forward plans to raise HK $ 3.6 billion ($ 535 million) through an IPO in Hong Kong.
Unlike many of the recently listed drug makers in Hong Kong, Simcere has been profitable for years after finding a comfortable niche in the manufacture of generic drugs. But following the lead of many of its younger peers, the company is aggressively moving into the higher-margin business of self-developed drugs, a process that has turned a profit in recent years but has also seen the rise of the company’s debt.
Simcere was the first Chinese drugmaker to go public in New York when it made an initial public offering in 2007. But just six years later it also became one of the first to go privatized due to a lack of interest from American investors. Many other Chinese companies have made similar moves after IPOs in New York with similar results, most going back to trading in Hong Kong and mainland China.
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Simcere said it has set a price range of HK $ 12.10 to HK $ 13.70, and will set the final price next Monday. The negotiation is scheduled to begin on October 27. Approximately 10% of the shares offered will go to local buyers and the other 90% to international investors.
Simcere focuses on three areas: drugs for the 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. archived this week with the Hong Kong Stock Exchange.
Its traditional reliance on generic drugs means the company differs from many of its recently listed Hong Kong peers, who are developing new drugs that have yet to hit the market. That means Simcere has a mature line of products that generate constant revenue, including several in the catalog of products that are subsidized for patients under China’s national health plan.
But these generic drugs are often more competitive than self-developed ones because any company can make them, and therefore have lower margins. That has led Simcere to move toward further development of its own drugs that typically carry higher margins and higher product development costs. The net result has been an acceleration of earnings for the company, but also an acceleration of debt with the simultaneous increase in spending on product development.
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The company’s revenue from the sale of generic drugs fell from 60.7% to 46.5% between 2017 and 2019. As it increased its focus on self-developed drugs, its research and development costs tripled during that period. period to reach 716 million yuan last year. At the same time, the company’s profits nearly tripled from 350 million yuan in 2017 to around 1 billion yuan last year. Revenues grew more slowly, from 3.87 billion yuan in 2017 to 5.04 billion yuan last year.
As spending has grown, the company’s leverage ratio has also increased significantly, from 74% in 2017 to about 200% last year.
Contact reporter Yang Ge ([email protected]) and editor Gavin Cross ([email protected])
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