Konruns Pharma's IPO plan aligned with policy

In line with Beijing's push for domestic innovation, the pharmaceutical firm aims to quintuple its product portfolio through in-house R&D and strategic acquisitions.

Beijing Konruns Pharmaceutical is looking to capitalise on China's domestic innovation push by preparing an initial public offering to secure funding to develop new product lines for the country’s expanding drugs market.

A source familiar with the situation told FinanceAsia the proprietary drug maker is seeking to raise between $200 million to $300 million from the Hong Kong IPO primarily to finance research and development of new drugs.

Be fruitful and multiply

And indeed, industry experts believe it is essential for small- and mid-sized drugmakers to maintain a healthy pipeline of new products. The absence of new product launches would be a drag on the company’s sales growth, according to a JP Morgan research report.

Konruns Pharma is clearly in urgent need to expand its product portfolio given that it currently generates all of its revenue through the sale of one medication -- SuLing, a blood coagulent.

Sales of SuLing increased 21.3% year-on-year to Rmb304 million ($47.3 million) last year, while net profit increased 28.4% to Rmb160 million. Despite achieving a relatively high profit margin of 52.8%, Konruns Pharma is clearly positioning itself for the commercial launch of its second product to sustain growth.

According to the company’s preliminary prospectus, part of the IPO proceeds will be earmarked for Phase IV clinical trials of DiAo, an anti-tumor drug currently pending regulatory approvals. The company expects regulatory clearance next year.

Support system

China’s State Council has unveiled measures that would expedite the approval process for proprietary and innovative drugs. The measures are part of the wider healthcare reform agenda aimed at expanding medical insurance coverage and bringing quality and affordable healthcare services to the nation’s nearly 1.4 billion people.

Given that Konruns Pharma has the majority of its products - six oncology and two hemotology drugs - in the development stage, it is said to be one of the beneficiaries of a fast-track approval process because it will require less time to commercialise drugs in the future.

The successful research, development and commercialisation of all eight new products will allow the company to quintuple its current portfolio, which comprises only SuLing and the pending DiAo.

One of the key themes of China’s healthcare reform is the liberalisation of drug prices, which is likely to trigger a decline in prices of genetic drugs through restructuring the drug tender system and distribution channels.

Oh the contrary, the removal of government price controls on innovative patented drugs could potentially lift prices and encourage production of quality medicines. Pricing is controlled by the National Development and Reform Commission, the powerful state economic planning agency. 

Uncertain prognosis

Beijing is also reportedly planning to gradually remove some of the over-the-counter drugs on the national reimbursement list, a roster of commonly prescribed drugs. Should that happen, it is likely that more patients would switch to prescription or proprietary drugs because they will no longer be reimbursed for the purchase of OTC medicines, according to JP Morgan analysts.

Konruns Pharma's closest comparable is Hong Kong-listed CSPC Pharmaceutical Group, which currently has four oncology drugs in its portfolio. The HK$39 billion market cap company is currently trading at 25.6 times historical earnings and 22.8 times earnings on a trailing twelve-month basis.

Shares of CSPC Pharma fell 3.6% year-to-date but still outperformed the benchmark Hang Seng Index’s 10.2% loss.

Konruns Pharma said it plans to use the IPO proceeds for research and development, expand production capacity, improve sales and marketing, as well as for potential acquisitions and working capital.  

Credit Suisse and Goldman Sachs are joint sponsors of Konruns Pharma’s IPO.

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