Korean biopharma looks for the perfect IPO formula

Expect a slew of biopharmaceutical IPOs from Korea, as companies capitalise on Seoul’s ambition to develop a biotechnology hub. That's if politics doesn't get in the way.

A clutch of South Korean biopharmaceutical companies plan to go public this year, raising capital to expand production capacity as the country strives to become a global powerhouse for the manufacture of biopharmaceutical products.

The batch of newcomers could reshape the pharmaceuticals sector – they are bigger than most existing listed players and will potentially add liquidity and attract more foreign investment to one of the hottest sectors in the Korean market.

The moves reflect a strong demand for quality healthcare assets and favourable IPO rules. Yet the political scandal gripping the country could yet impact this promising growth story.

First out of the blocks is likely to be Celltrion Healthcare, the sales and distribution unit of Celltrion, which manufactures so-called "biosimilars" — drugs based on more expensive biologic products. According to sources familiar with the situation, the company will target a market capitalisation of about W5 trillion ($4.4 billion), which would make it the third largest pharmaceutical company on the local stock exchange.

Bankers familiar with the situation say Celltrion Healthcare could make it to the market by the end of June, depending on the market situation and response from prospective investors.

CJ Healthcare, the pharmaceutical unit of food maker CJ CheilJedang, is expected to follow in the latter half of this year. It specialises in ethical and biological drugs to tackle cancer and circulatory diseases.

Another likely listing candidate is SK Biopharmaceuticals, the flagship biomedical arm of SK Group, which develops drugs to treat conditions of the central nervous system (CNS). Sources say SK Biopharmaceuticals is in the middle of finalising a pre-IPO funding round that could value the company at about W2 trillion.

Should they list, these companies will become the leading names in Korea's pharmaceutical sector, which has long been dominated by small-cap companies. Last year, there were 13 initial public offerings in the pharmaceutical sector, but only one commanded a market value of over W500 billion.

Besides the likely flood of domestic listings, Samsung Bioepis is also mulling an IPO on Nasdaq, though if it's uncertain whether the company — the biosimilar unit of Samsung Group — will pursue that plan this year.

Samsung success

The rush to go public doesn't appear to be based on an imminent need to boost funding. Indeed, CJ Healthcare and SK Biopharmaceuticals are backed by two of the most powerful chaebols, as family-led conglomerates are known in Korea. CJ Healthcare, in particular, has made clear that it does not need to raise money urgently.

So why the rush to go public? The answer may well be last year's highly successful listing of Samsung Biologics, the country’s largest manufacturer of biologic drugs.

The whopping $2 billion raised by Samsung Biologics through its IPO, and the subsequent solid share price performance, have underlined the huge demand for quality healthcare assets. Other companies must be tempted to conduct an IPO in order to capitalise on such favourable market sentiment.

Shares in Samsung Biologics, which won FinanceAsia’s best IPO of the year, have never fallen below its offer price and are currently trading 26% higher.

Such investor interest specifically applies to manufacturers of biologic and biosimilar drugs, because their products are much more complex and hence command a much higher profit margin than generic drugs.

"The Switzerland of Asia"

These companies are going public at a time when South Korea is investing heavily in biopharmaceutical development, which it sees as a future driver of growth that can help replicate the glory of the nation’s information technology boom.

South Korea’s government took the lead in investing in the biopharmaceutical sector in the last decade, hoping to become a forerunner in global biotechnology development and develop itself as the Switzerland of Asia — referring to the European nation that nurtured some of the world's largest healthcare companies, such as Novartis and Roche.

In 2006, the Korean administration launched Bio-Vision 2016, a programme that laid out the direction and guidelines for biotech development in the next 10 years. According to Bio-Vision 2016, the value of the biotechnology market was expected to grow by a factor of 22 to W60 trillion from W2.7 trillion in 2006.

With government support, investment from the private sector has been increasing in recent years. According to the Ministry of Health and Welfare, the number of bio-venture companies grew by 180% in the past ten years.

Seeing the potential behind biopharmaceutical development, some of the country’s biggest chaebols have ventured into the industry over the past few years, spearheading drug discovery and research and development that were once dominated by smaller players.

Park & Samsung's Jay Lee
in December 2015

The most notable newcomer was Samsung, which started Samsung Biologics in 2011 and is now in the process of building the world’s largest biologics manufacturing plant in Songdo.

SK began manufacturing biologic CNS drugs through SK Biopharmaceuticals in the same year, while LG merged its subsidiaries LG Chemical and LG Life Sciences earlier this year to bolster its biochemical manufacturing capabilities.

Seoul has a unique strategy of expanding into the biomedical sector. Instead of going head to head against leading biotechnology research giants like Lonza, Boehringer Ingelheim and Bristol-Myers Squibb, the country has invested in drug manufacturing on top of its R&D capabilities.

This strategy allows Korean firms to partner with foreign pharmaceutical companies as drug manufacturers and suppliers, known as contract manufacturing organisations (CMO) in the healthcare industry.

For instance, Samsung Biologics, South Korea’s largest CMO, counts Bristol-Myers Squibb as one of its biggest clients. Celltrion is also in partnership with Pfizer to sell its biosimilar products in the US, and also entered into cooperation with Israel’s Teva Pharmaceutical late last year.

Favourable listing requirements

Since these biopharmaceutical companies have a short corporate history, most are still in their development stage or have yet to commercialise their products. As such, they make little if any profit at this stage, which would traditionally have made it challenging for them to list.

But this may not be a big problem now, given that the Financial Services Commission has relaxed regulations to facilitate listing of unprofitable firms.

The FSC announced in late 2015 the exemptions would be given to companies that possessed state-of-the-art technology or those in a high-value-added industry. Such companies are instead required to achieve a future market value and shareholders’ equity of W600 billion and W200 billion respectively.

However, the political scandal that looms large over the country means it is unclear how long these exemptions can continue.

This is because the FSC has been accused of giving preferential treatment to Samsung over the floatation of Samsung Biologics. These exemptions were announced just a year before the company's IPO, drawing accusations that they are implemented in favour of Samsung Group.

Last month, an independent counsel raided FSC’s office and summoned a FSC vice president and the head of Korea Exchange for questioning on the issue.

The independent counsel was also involved in the investigation of the scandal that toppled president Park Geun-hye and bribery allegations involving Jay Lee, heir apparent to Samsung Group, over the controversial merger of Samsung C&T and Cheil Industries in 2015.

¬ Haymarket Media Limited. All rights reserved.
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