Respiratory disease is a killer. Globally about 5% of all deaths are attributed to some form of lung-related illness.
In China, it is estimated 55 million people (equating to the entire population of England) have asthma, according to the Chinese Preventive Medicine Association, while government statistics calculate 13.6% of people over 40 have some form of chronic respiratory disease, around 100 million people (the population of the Philippines).
Fighting respiratory disease has become a top priority for the Chinese government. As it is for a handful of Chinese private equity investors too, it seems.
Last week, CF PharmTech, a China-based pharmaceutical company with a vision to “provide quality and affordable respiratory drug products globally”, locked in $90 million of Series E pre-IPO funding. The company, which reportedly has its sights on listing on the STAR Market within 24 months, was originally hoping to raise $72 million when it sparked conversations with investors in June last year.
Alongside New Alliance Capital, six funds joined the round as new investors, including CR-CP Life Science Fund, Finnova Capital, GT Capital, Co-stone Asset Management, Xiangcheng Financial Holdings and Everest Venture Capital. Existing investors also participated and topped up their investment, including Oriza Holdings, Longmen Venture Capital, GTJA Investment and CMB International.
UNIQUE GENERIC PROPERTIES
Abeit a modest funding total, the company occupies an interesting space in China. CF PharmTech has been able to develop a complete technical platform and produce metered-dose inhalers, dry powder inhalers, nebulisers and nasal sprays. “Very few Chinese companies are able to make them,” Le Cai, executive director at New Alliance Capital, told FinanceAsia.
At the same time, CF PharmTech, along with two other Chinese companies, is waiting for the approval from the National Medical Products Administration for the production and distribution of a generic version of AstraZeneca’ Pulmicort Respules’ generic drugs. Pulmicort Respules, is a budesonide used to control and prevent symptoms caused by asthma.
Beijing recently raised the importance of making affordable drugs as a national strategy. “It is important for Chinese companies to produce generic drugs with the same effect using a much cheaper approach,” Daniel Zhang, senior associate of CEC Capital, told FinanceAsia in a phone interview.
“In China, there is an only single-digit number of companies who applied for the approval of generic drug of Pulmicort Respules. And the cost of these generic drugs, including CF PharmTech, are significantly lower than AstraZeneca’s.”
The Chinese inhalation drug market has been dominated by European’s AstraZeneca for years. Pulmicort Respules is its best selling product in China having sold about Rmb 6.5 billion ($933 million) in 2017 and Rmb 7.2 billion ($1 billion) in 2018, according to Huatai Securities research.
EXIT STRATEGY
CF PharmTech’s $90 million injection comes at a time when investment growth in the healthcare industry is slowing. According to data from healthcare research firm VCBeat, Chinese healthcare investment volume in the third quarter of 2019 fell 28% year-on-year, while the number of deals completed fell 50% over the same period.
“We believe there is no downsizing risk for CF PharmTech and that is why we led this funding round,” added Cai, who believes the STAR Market in Shanghai is the most likely option for CF PharmTech to go public. According to Cai, the pharma company already “meets the requirement of listing on STAR Market”.
“We are not going to push for the IPO but we are expecting it in one to two years time,” said Cai.
The performance of the STAR Market is presently attractive for investors and companies. Stocks on the new bourse on average made a 188% price increase in 2019, according to data analysis website Wind. Over half of the companies listed on STAR Market in 2019 raised between Rmb500 million and Rmb1 billion ($72 million to $144 million) in their IPO, while 34% managed to secure between Rmb1 billion and Rmb2 billion.
REGULATORY ARBITRAGE
Investment in medicine is typically capital intensive, and, in China US-dollar funds have recently had the investing edge on Renminbi equivalents on opportunities that arise. This is down to where the target companies are domiciled. With many Chinese healthcare companies historically looking to list abroad, they would need to register their companies offshore. This technically makes them foreign entities and renminbi fund managers such as Cai require an overseas direct investment approval to invest; by that point the opportunity may have come and gone.
With the launch of the STAR Market in China, this regulatory arbitrage may become less pronounced. “I think the STAR Market is really attracting biotech companies,” Cai said. “With the registration-based IPO system to be pushed in Chinese A stock, there will be more biotech companies to list domestically and it encourages the whole environment.”
However, investors are waiting for people’s reaction when the STAR Market stocks finish its IPO lock-up period. The first batch of companies listed on STAR Market will finish their lock-up period in July 2020 and institutional investors will be able to sell their stock by then. How these stocks perform will definitely affect the sentiment on the private market.
