However, people involved with the offering argue that the companyÆs fast growth rate, its focus on the elderly as its primary patient group (its flagship drug is used to treat osteoporosis), and the inclusion two years ago of that drug into ChinaÆs national insurance programme should make this an interesting stock for international investors keen to participate in the development of ChinaÆs healthcare industry.
ôThe company has a strong brand in a growing sector and is benefiting from an ageing population. It could see annual growth rates in the range of 30, 40 or even 50%,ö says one observer.
In the prospectus, the company argues that the rapid increase in disposable income of ChinaÆs urban residents and the increase in the number of elderly people in China in recent years have resulted in increased spending on prescription and over-the-counter medicines. According to the China Industry Development Report for the Pharmaceutical Industry, each urban resident over the age of 60 spent on average $126.1 million on medicines in 2000, five times the average spent by urban residents under the age of 60.
By 2010, the number of people above the age of 60 is expected to reach 171 million, or 12.6% of the population, up from 144 million, or 11% of the population, in 2005. The rate of osteoporosis in Chinese people over the age of 60 is estimated at 22.6%, rising to more than 50% in people over the age of 80.
Tongjitang describes itself as a vertically integrated specialty pharmaceutical company focusing on the development, marketing and sales of modernised traditional Chinese medicine û both prescription and OTC. The term ômodernisedö refers to the fact that it comes in ready-made doses such as pills, tables, capsules etcetera.
The company is offering 9.87 million American Depositary shares û each representing four ordinary shares û or 29.5% of the company at a price between $15 and $17 apiece. This gives a total deal size of $148.0 million to $167.7 million, or a maximum of $192.9 million if the 15% overallotment option is exercised in full.
The total deal is made up of 84.6% new shares, while the remainder is existing shares sold by directors and executives of the company, including chairman Xiaochun Wang. Merrill Lynch is a pre-IPO investor in the company with a 9.9% stake before the offering held through a private equity fund. It wonÆt sell any shares in the IPO, but will see its holdings diluted to 7.4%.
Merrill is also joint bookrunner for the offering together with UBS.
The price range values the company at 18 to 20.5 times based on consensus 2007 earnings forecasts. At the top end of the range this is actually 10% to 12% below the top-end valuation calculated by syndicate analysts as sources say the company believes a conservative valuation initially will benefit it in the long run.
The valuation also compares favourably to the 2007 P/E multiple of about 28 times for American Oriental Bioengineering û a fellow Chinese drug maker that is also listed on the New York Stock Exchange.
In 2004 to 2006, the company achieved a bottom line compound annual growth rate of 243%, reaching a net profit of Rmb134.3 million ($17.2 million) last year. Revenues grew at a CAGR of 43.8% in the same period, reaching Rmb485 million ($62.1 million) in 2006.
And with Xianling Gubao û its traditional Chinese medicine for the treatment of osteoporosis û having been added to the national medicine catalogue of the National Medical Insurance Program in 2004 there is every reason to believe that the high growth rates will continue, one source said, pointing at other drugs that have seen extensive sales growth once included in the program.
At the end of 2006, 157.4 million people in China were enrolled in the insurance program and the government intends to expand this to 300 million by the end of 2010.
In addition Xianling Gubao, the company manufactures 10 other modernised traditional Chinese medicines approved by the China State Food and Drug Administration for the treatment of a variety of illnesses, including insomnia, inflammatory skin conditions and dizziness. It also manufactures 37 Western drugs although their contribution to net revenues are insignificant, to use the companyÆs own words.
Xianling Gubao is by far the most important contributor to top line growth, accounting for 77.2% of net revenues last year, and the company projects that it will continue to comprise a ôsubstantial majorityö of its revenues in the near future.
Such strong dependence on one single drug could make the company vulnerable to declines in volumes or selling prices and Tongjitang does warn that if its marketing efforts arenÆt effective hospital administrators and physicians may not accept Xianling Gubao as the preferred medicine for the treatment of osteoporosis.
At present, though, the drug is the leading traditional Chinese medicine for the treatment of this disease as measure by sales value, according to a 2006 report by a research insititute affiliated with the SFDA. Since May 2004, the company has also been marketing Xianling Gubao as an OTC medicine to retail pharmacies.
Another potential concern may be the fact that the company doesnÆt have a clear plan for how it will spend the majority of the $118.9 million of net IPO proceeds, saying only that $40 million will go towards marketing of Xianling Gubao and other products, while 10 million will be used to strengthen its R&D platform and to broaden its product pipeline.
According to the prospectus, the management will have ôsignificant flexibilityö on how to apply the rest of the money.
The company kicked off the roadshow yesterday (February 28) and expects to price the offering around March 15-16 following eight days of marketing in the US, three days in Asia and two in Europe.
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