AVCJ Awards 2021: Deal of the Year – Large Cap: China Biologic
For Centurium Capital, China Biologic was no ordinary take-private. It was the culmination of a multi-year effort to tighten the company’s shareholding structure and root out management inefficiencies
The second half of China Biologic Products’ six-year stint on NASDAQ was punctuated by competing buyout offers, a PIPE to relieve the pressure, and finally a protracted USD 4.76bn privatisation. Following the latter deal in April 2021, China Biologic is expected to re-emerge on a bourse nearer to home.
“It’s better to return to Asian capital markets than to stay in the US, both from a regulatory perspective and from the investor base,” said Zhixing Chen, a managing director at Centurium Capital, which led the privatisation.
China Biologic specialises in blood plasma-based pharmaceuticals, a highly regulated area in China. With strict limits on imports and exports, companies operating in the space are entirely domestic – sourcing from local suppliers and selling to local customers. Seldom has the mantra that a business should list where it is best known and best understood seemed more appropriate.
Now rebranded as Taibang Biologic Group, China Biologic’s logical next step is a Hong Kong IPO, potentially followed by an A-share listing. The likes of Boya Bio-Pharmaceutical Group, Hualan Biological Engineering, and Shanghai RAAS Blood Products already trade solidly in Shenzhen.
“This is the best and most convenient way, without any structural adjustments. From an investor perspective, future liquidity and exits may be easier in Hong Kong. The current shareholders are all US dollar-denominated funds.” Chen said. “But we do not rule out an A-share listing in the future.”
Origin story
Centurium teamed up with Trustar Capital, Hillhouse Capital, Temasek Holdings, and the company management on the take-private, submitting a bid of USD 120 per share in September 2019.
Hong Kong-listed medical device manufacturer PW Medtech Group was slated to join in but dropped out and ended up selling to them instead. This meant the consortium went into the process with more than two-thirds of the voting rights – the threshold required for board approval. An agreement was signed in November 2020.
Ping An Bank and Shanghai Pudong Development Bank provided a USD 1.1bn seven-year term loan in support of the deal. From a shortlist of 10 lenders, these two offered the most favourable terms. Moreover, they were able to match the speed of the deal.
Many Chinese banks – less experienced in leveraged financing than their foreign peers – were wary of structures under which borrowers repay interest and then settle the principal on maturity. They wanted more risk controls in return, asking China Biologic to open bank accounts in their branches. It wasn’t feasible because they didn't have a presence in some of the tier-three and tier-four cities where the company does business.
Such obstacles were negotiated in time, which Chen believes speaks to the maturity of Centurium’s approach. “Although we are a relatively new private equity firm, this deal reflects our ability to source and execute complex transactions,” he said.
Centurium also embarked on the privatisation with a clear idea of China Biologic’s needs on the operational side. David Li, the firm's founder, was involved in several growth investments in China Biologic during his time at Warburg Pincus. It helped resolve some shareholding structure issues – owning as much as 40% at one point – and exited in 2016, having generated USD 1.2bn in proceeds.
Up until 2018, China Biologic operated in a seller’s market: underpenetrated, undersupplied, and with a stable client base. The dynamics then changed, and the company required improvements in sales and marketing and operational efficiencies to ease pressure on the bottom line.
This set the scene for two competing take-private offers submitted in mid-2018: one from Trustar (then known as CITIC Capital) and another from a consortium including CDH Investments, GL Capital, and former China Biologic CEO David Gao. Several weeks later, CITIC withdrew its bid, the other was rejected – and Centurium helped fashion an arrangement to protect the company.
The private equity firm featured prominently in a USD 590m private placement alongside CITIC, Hillhouse, and PW Medtech in August 2018. Altogether, it pumped about USD 500m into China Biologic, approximately one-quarter of its debut fund. Meanwhile, Joseph Chow, a founding partner at Centurium and chairman of China Biologic, became acting CEO. Later, he quit the private equity firm to take on the job full-time.
Driving change
Reforms followed swiftly. China Biologic had two major subsidiaries, one in Shandong and the other in Guizhou, that operated independently. Plasma collection was cash-based and poorly documented. Chow placed them under a unified management structure and established standardised financial management and IT systems to track all activity at plasma collection stations. This facilitated proper business analysis and financial auditing.
Sales operations were also unified and improved. For example, terminal purchase volume replaced general sales volume as a key performance indicator. By tracking transactions to end-users – hospitals – rather than dealers, China Biologic was able to eliminate fraudulent sales to dealers that were used to inflate headline numbers.
At the same time, steps were taken to properly incentivise the workforce. On completion of the privatisation, a 3% equity interest was reserved for management. This replaced an existing employee stock ownership plan (ESOP), which had a high bar for qualification and no ongoing assessment, Chen added. China Biologic also promoted a younger generation of staff to manage plasma stations.
China Biologic generated USD 524.4m in revenue for 2020, up from USD 503.7m the previous year, while net profit rose from USD 163.4m to USD 178.3m. Behind the scenes, a portfolio rebalancing was taking place.
Human albumin, used in standard infusions to increase blood flow, remained the largest revenue contributor in 2020. However, the main revenue growth drivers were intravenous immune globulin (IVIG), a form of blood plasma full of antibodies for fighting disease, and coagulation products, which address bleeding disorders. The IVIG revenue share is nearing that of human albumin.
“IVIG accounts for most blood plasma products sales in foreign markets. In China, the biggest contributor is human albumin,” said Chen. “China bans IVIG imports, so there are no overseas brands to educate doctors. On the other hand, just selling albumin would make good money, but manufacturers have no incentives to develop and promote new products.”
China Biologic currently manufactures 20 different dosage forms and distributes to 1,000 hospitals and clinics in China. According to Chen, blood plasma collection volume reached 1,450 tons last year, up 30% year-on-year. The company’s operating profit margin in the first three quarters of 2021 improved three percentage points on the same period in 2020.
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