Sinovac Take-Private Deal Facing Challenges

Sinovac’s lengthy take-private process could be further delayed by the cloudy outlook for a potential relisting in China due to regulatory uncertainty and a tougher domestic environment, although the Chinese company’s rising competitiveness in the domestic vaccines market should help increase its valuation.

Volatility in Chinese stock markets could have an impact on the completion of US Nasdaq-listed vaccine developer Sinovac Biotech Ltd.’s pending privatization, as an upcoming China regulation on capping valuations for overseas traded companies might delay a possible domestic relisting, industry experts say.

A recent complaint filed by Heng Ren, a Boston, Massachusetts-based investment firm, has brought the pending transaction into the spotlight. Heng Ren, a long-time shareholder in Sinovac, has questioned whether the company’s privatization offer is undervalued, saying that the intrinsic value of Sinovac stock should be $10.84 per share, 75% higher than that in the management buyout offer.

“Sinovac’s board received two [take-private] proposals in the first quarter of this year. Immediately following the receipt of the proposals, the board formed a special committee to evaluate the proposals,” Helen Yang, director, investor relations and international business development at Sinovac, told Scrip.

“Until now, there is no decision made by the special committee. When the special committee concludes their review and makes a decision, we will issue a press release to announce their final decision,” Yang noted.

Sinovac adopted a shareholder rights plan at the end of March after receiving two takeover offers, one from management for $6.18 per share (valued at $345m) and another from an outside group of Chinese pharma firms and investors for $7 per share ($390m).

The competing buyer group comprised three associated companies: Beijing Sinobioway Group is the controlling shareholder of both Shenzhen-listed Shandong Sinobioway Biomedicine and PKU V-Ming (Shanghai) Investment. Sinovac is also Shandong Sinobioway’s joint stock sub-subsidiary.

Scrip previously reported that the competing offer made by Sinovac’s shareholder Sinobioway, which is also developing vaccines, could help the group integrate their biopharmaceutical business, citing a financing expert (Also see "Sinovac Evaluating Competing Take-Private Offers" - Scrip, 4 Feb, 2016.).

China Attractions, Challenges

In the last few years, the lure of much richer valuations on the Shanghai or Shenzhen stock markets compared to those overseas has attracted a wave of Chinese firms to go private and then relist on domestic bourses, often via a backdoor listing or reverse mergers that involve injecting assets into an already listed entity, thus skipping the long approval queue for initial public offerings.

As local media speculation over Sinovac mounted, the firm was expected to follow other China companies leaving the US market for what many investors expected would be an eventual relisting on China’s A-Share exchange, an investment banking source with knowledge of the matter told Scrip.

However, there is still no clear path yet for Sinovac’s relisting, as the China Securities Regulatory Commission (CSRC) is still analyzing the potential impact of overseas-listed Chinese companies coming home to relist through IPOs, mergers and acquisitions, the source said.

In May this year, the CSRC said at a weekly briefing that attention should be paid to the valuation gap between the domestic and overseas markets, and to speculation surrounding shell companies.

“The CSRC is conservative about the recent market arbitrage for companies trying to come home and cash in on high valuations,” the source said. “Before the CSRC releases guidance and regulation on this type of relisting, it seems that Sinovac cannot file the IPO, thus the recent equity market volatility and government-led intervention could affect pending buyouts.”

The CSRC is also likely to limit the valuation of companies formerly listed on a foreign exchange seeking IPOs in China, the source added.

EV71 Prospects

Sinovac received approval on Jan. 28 to start the commercial production of its EV71 (Enterovirus 71) breakthrough vaccine to treat human hand, foot, and mouth disease. Heng Ren claimed that the potential annual sales of EV71 could reach $400m, far exceeding Sinovac’s revenue of $67m in 2015.

In a previous interview with Scrip, Sinovac’s Yang disclosed that the target population at the launch of the vaccine would be around 40 million patients, with a regular target population of 17 million annually thereafter. Sinovac also plans to propose that the Chinese government incorporate the EV71 vaccine into its Expanded Program on Immunization (Also see "Sinovac’s Pioneering EV71 Vaccine Set To Reach First Market" - Scrip, 12 Jan, 2016.).

“EV71 sales are now contributing to our quarterly financial performance, and meeting our expectations. To date, we have prepared more than one million doses, released and published by the National Laboratory, and they are ready for sales, and we expect there will be additional vaccines to be released to the market in the following months,” Yang said at the company’s second quarter earning call.

In April however, China’s State Council passed an amendment to vaccine regulations to strictly supervise the circulation and inoculation of such products, which had an impact on the country’s private-pay vaccine market.

The China FDA and the Ministry of Health then in June jointly issued an interpretation of the new policy and execution plan during the transitional period before the infrastructure in each province is set up to satisfy the new requirements.

“Following this joint government announcement, vaccine sales and delivery in the private-pay market resumed and we have experienced a rebound in sales activity,” Yang said. “When the private-pay vaccine market was reactivated, our sales and marketing team launched marketing activities to promote our newly approved EV71 vaccine.”

Competition

A number of other companies are developing EV71 vaccines in China, including the Kunming Institute of Medical Biology, Beijing Vigoo Biotechnology of China National Biotech Group, Jiangxi Boya Bio-Pharmaceutical, Hualan Biological Engineering and Shanghai Zerun Biotechnology.

Kunming Institute launched its EV71 vaccine in March, and Vigoo’s application for a new drug certificate is pending approval from CFDA. Boya’s clinical trial application for its EV71 vaccine, as a new specific human immunoglobulin product, was disallowed by the China FDA in April, but the company said it will continue its efforts to develop the product.

Sinovac has also won tenders in Beijing and Shanghai to supply its hepatitis A vaccine to the public-pay market.

The firm has so far commercialized five vaccines in China: Healive (hepatitis A), Bilive (combined hepatitis A and B), Anflu (seasonal influenza), Panflu (pandemic influenza H5N1), and Panflu.1 (pandemic influenza A H1N1).

From the editors of PharmAsia News.