Celltrion Healthcare IPO finally lifts off

The sales arm of drug maker Celltrion kicks off Korea's largest share sale this year hoping to match the success of other recent biopharma deals.
Celltrion Healthcare counts Remsima sales as its main revenue source.
Celltrion Healthcare counts Remsima sales as its main revenue source.

South Korea's Celltrion launched the domestic investor roadshow for a delayed W1 trillion ($881 million) initial public offering of its sales and distribution division on Monday, hoping to capitalise on robust investor sentiment towards biopharmaceutical IPOs.

Sources familiar with the situation said Celltrion Healthcare, which is headquartered in Incheon, has also begun to gauge interest from international investors ahead of an international roadshow starting July 3. Drugs group Celltrion aims to list the business on Kosdaq by August-end.

The start of the domestic investor roadshow marks an end to the recent saga surrounding Celltrion Healthcare's accounting practices. Celltrion Healthcare had intended to kick off its listing process in March but the plan stalled after short seller Ghost Raven Research said the company was overestimating its sales by 90% because of the way it treated revenues generated from its parent.

Banking sources said the Korea exchange reaffirmed its preliminary approval for the IPO last week after an investigation by the Korean Institute of Certified Public Accountants found minimal irregularities, warranting a warning but no more.

Having cleared that regulatory hurdle again, Celltrion Healthcare is now looking to benefit from bullish investor sentiment towards the Asian biopharma scene. That dates back to November last year when Samsung BioLogics completed Korea’s largest-ever pharma IPO, drawing over $10 billion of demand, according to sources familiar with the situation at the time. Samsung BioLogics's share price has since soared by 93%, underscoring the large demand for quality healthcare assets.

China’s Wuxi Biologics, similarly, completed its Hong Kong IPO on a high note earlier this month, with its shares popping up 37% on their debut.

Celltrion Healthcare will no doubt hope to receive the same market reception despite significant differences in each group's business and revenue models.

Different models

If the successes of Samsung BioLogics and Wuxi Biologics prove huge investor demand for quality companies in the upper stream of the biopharmaceutical value chain, the upcoming IPO of Celltrion Healthcare will be a test of interest for those in the downstream business.

Celltrion Healthcare is a drug distributor that generates most of its revenue from selling medical products in 120 countries across the world. Most of its revenue comes from selling products developed by Celltrion, while a small portion comes from its sales partnership with US pharmaceutical giant Pfizer.

That provides it with a different equity story to pitch to prospective investors against pure-play contract manufacturing organisations like Samsung BioLogics and Wuxi Biologics, which generate revenue by providing drug manufacturing and clinical trial support to drug developers. 

One key difference is in  their product offerings. For Samsung BioLogics and Wuxi Biologics, most of their products are categorised as biologic drugs, an advanced form of medication manufactured through living organisms such as plant or animal cells.

Celltrion Healthcare distributes mainly biosimilar drugs, a substitute for biologic medical products that cost less to develop and are hence more affordable.

Another major difference is the way in which they achieve revenue growth. Contract manufacturing organisations expand by increasing production capacity, but drug distributors mainly count on new drug approvals to increase revenue. They also seek to expand their partnerships to help boost sales.

Celltrion Healthcare’s revenue growth has been supported by new product launches of late. In November last year, the company launched Remsima in the US and entered the world’s largest biosimilar market. Remsima is used to treat a number of inflammatory autoimmune diseases.

In April, the company started selling blood cancer drug Truxima in Europe after receiving approvals from the European Medicines Agency and Korea’s Ministry of Food and Drug Safety.

Inventory questions 

Celltrion Healthcare said its first-quarter net profit soared by 469% year-on-year to $67 million, with revenue improving by 81% to $173 million. Last year, the company reported a net profit of $108 million on the back of $667 million of sales.

But it has a large inventory of unsold drugs -- how it plans to clear it is something it will need to explain during investor meetings.

According to its latest financial statement, Celltrion Healthcare's unsold inventory is valued at $1.4 billion, or nearly twice its revenue last year, which suggests it could take almost two years to clear. 

Since the average life expectancy of biosimilar drugs is two years, that means the company may yet have to declare a loss for products above two years of age, according to some industry experts. However, senior managers at Celltrion Healthcare claim that their products generally have a lifespan of more than five years and they are confident about cleaning up the inventory as new markets open in Europe and the US.

Initial terms show Celltrion Healthcare will issue 24.6 million new shares at an indicative price range of W32,500 to W41,000 per share. So it appears at this stage that pre-IPO investors including Temasek, One Equity Partners, and IMM Investment will not be selling any existing shares.

Celltrion founder Jung-jin Seo is currently Celltrion Healthcare's largest shareholder with a 44% stake. One Equity Partners is the second-largest shareholder owing 22% of the company, while Temasek has 15% and IMM Investment has around 8%.

The company will conduct international roadshows in New York, San Francisco, Hong Kong, and Singapore between July 3 and July 14.

Mirae Asset Daewoo Securities and UBS are joint lead managers of Celltrion Healthcare’s IPO.

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