Sinovac Biotech revamps controversial take-private

Beset by long-running activist investor concerns and legal issues – not least bribery concerns – the biopharmaceutical products manufacturer has upped its de-listing offer.

Sinovac Biotech has upped its offer to de-list from Nasdaq almost 17 months after it first tried to go private, in a deal that values the firm at around $401.8 million. But it could still have its work cut out to get the deal done given ongoing pricing disputes and bribery concerns. 

According to a filing to the US Securities and Exchange Commission (SEC) on Monday, parent entity Sinovac (Cayman) Limited will acquire the biopharmaceutical products provider for a cash consideration of $7 per common share. A consortium comprising Yin Weidong, chairman, president and chief executive officer of Sinovac Biotech, SAIF (Softbank Asia Infrastructure Fund) Partners, C-Bridge Capital, Advantech Capital, and Vivo Capital will then become the beneficial owners of Sinovac (Cayman) Limited.

Sinovac Biotech said it expected to close the buyout in the second half of this year, which will need approval from at least two thirds of shareholders. Bloomberg data shows SAIF Partners held an 18.94% stake and Yin a 10.63% stake in Sinovac Biotech as of June 27.

The $7 per share offer represents an approximate 13.3% increase on the $6.18 per share take-private proposal made by Yin and SAIF Partners on February 1, 2016. The price also equals a premium of 32.1% and 30%, respectively, over the company's 30- and 60-trading day volume-weighted average price prior to the first privatisation proposal.

But it is still far less than the “$10.84 intrinsic value” demanded by Sinovac Biotech’s activist investors. In an August statement last year, Boston-based Heng Ren Investments LP, a shareholder in Sinovac Biotech, called the firm’s $6.18 per share offer an “epic failure of corporate governance”.

And in an earlier letter to Sinovac Biotech and SAIF Partners, Heng Ren’s managing partner Peter Halesworth wrote that the two insiders “have essentially cut out shareholders’ critical support in financing Sinovac’s transformational vaccine EV71 (Enterovirus 71)”, the first-of-its-kind vaccine for hand, foot and mouth disease, a contagious disease that has affected China and Southeast Asia over a decade and killed thousands of children.

Halesworth said EV71 was likely to be a $400 million blockbuster in annual sales. He also cited the fact Sinovac turned to investors in 2010 for a $66.1 million follow-on equity offering to fund the development of new vaccines – EV71 in particular – and that Yin and SAIF Partners announced the proposal to take the firm private just one business day after receiving commercial clearance from China for EV71.

“Without the financial support of shareholders who bought equity offerings from Sinovac over the years, Sinovac would have been unable to bring EV71 to market – which the insiders are now trying to monopolize and reward only themselves,” Halesworth said in the letter.

He calculated that a fairer valuation for Sinovac Biotech was $10.84 per share – some 75% higher than the insiders’ $6.18 bid – citing analysis including the enterprise value-to-sales ratios of its peers as well as discounted cash flow and leveraged buyout valuations.

Halesworth declined to comment on the new price offer by Sinovac.

Securities litigation firms Brower Piven and Levi & Korshinsky, LLP are now investigating into possible breaches of fiduciary duty by the Sinovac Biotech board of directors relating to the proposed buyout, the two firms announced on June 26. The investigations target issues including whether the sale is fair to shareholders, they said,

Bribery investigations

Perhaps representing a greater obstacle to the proposed take-private deal are investigations now underway against Sinovac Biotech over drug approvals from China Food and Drug Administration (CFDA).

At least nine securities litigation firms acting on behalf of Sinovac Biotech’s investors – FinanceAsia calculated based on their public announcements as of June 27 – are now investigating claims of possible violations of the US federal securities laws regarding foreign corrupt practices that may have resulted in losses for investors.

On December 21, investor website SeekingAlpha.com published an article and alleged that Sinovac Biotech’s Yin paid bribes to the deputy director-general of the CFDA, Yin Hongzhang, and his wife in order to advance the drug applications and evaluations.

The CFDA in mid-2015 removed Yin two months after he was detained for investigations on bribery charges. Details of the investigation surfaced in the end of 2016 and early 2017 after Chinese language government newspapers (here and here) reported that Yin and his family had been found guilty of receiving more than Rmb3.5 million ($512,000) in bribes from pharmaceutical companies, citing court documents. 

On May 16, 2017, Sinovac Biotech disclosed that the US SEC was conducting an enforcement inquiry related to the bribery case discussed in the SeekAlpha.com article and that it would not be able to file its annual financial results in time.

Its stock price dropped by more than 7% after the SeekingAlpha.com release and reached a 52-week low of $4.6 on May 22. On June 26, it traded at a 52-week high of $6.5.

Sinovac Biotech focuses on the research, development, manufacturing and commercialisation of vaccines against human infectious diseases. It primarily sells the vaccines in China, while exporting selected vaccines to more than 10 countries in Asia and South America.

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