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Chinese Biopharmas Depart U.S. Markets to Escape Scandal

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By Larry Schuster
Contributing Writer

SHANGHAI – As the S&P 500, the Dow Jones Industrial Average and the Nasdaq Biotechnology Index close at record highs, one might think that respectable Chinese biopharmas on the New York Stock Exchange or Nasdaq would be well positioned to enjoy the benefits of such a robust stock market. In fact, many are cutting their ties.

In the middle of this record-setting market behavior:

3SBio Inc., of Shenyang, China, announced that it will hold an extraordinary general meeting of shareholders on April 25 to consider the board of directors' recommendation to delist the company from the Nasdaq Global Market. Among other things, in a deal with Isotechnika Pharma Inc., of Edmonton, Alberta, 3SBio holds rights to voclosporin in China and is currently conducting a Phase III study of voclosporin in kidney transplant patients in China. (See BioWorld Today, Dec. 28, 2012.)

Simcere Pharmaceutical Group, of Nanjing, China, on April 3 said it has engaged financial advisors to consider a proposal to delist from the NYSE. It's website, though, still prominently notes, "We are the first Chinese chemical and biological drug company to list on the New York Stock Exchange with IPO proceeds reaching $261 million." Simcere last fall got an SFDA nod to begin first-in-human trials of APX003 (BD0801) for cancer. The compound was developed using antibody technology from partner Apexigen Inc., of Burlingame, Calif.

ShangPharma Corp., of Shanghai, on March 28 completed its delisting from the NYSE. ShangPharma is partnered with Harbour Antibodies RV, of Rotterdam, the Netherlands, in a licensing deal to develop therapeutic antibody candidates using Harbour's transgenic mouse-based fully human antibody technology.

China Nuokang Bio-Pharmaceutical Inc., of Beijing, completed its delisting from Nasdaq in February. Nuokang focuses on hematological and cardiovascular products. Last year it acquired Chinese rights to manufacture and market Alpha Lipoic Acid Capsules for diabetic neuropathy from Shandong Qidu Pharmaceutical Co. Ltd., of Shandong, China.

This phenomenon has attracted such attention that it was a topic for panelists of leading investment firms at the China Healthcare Investment Conference in Shanghai last month. Since about 2010, there has been a trend of Chinese companies going private, said Brian Gu, head of China Corporate Finance and M&A at J.P. Morgan.

A summary of major U.S.-listed Chinese healthcare companies – a total of 12 – by J.P. Morgan and Orbimed Advisors showed, six were either taken private or in the process. (See the list in this story.)

Gu said one reason driving this is companies seeking better valuations. Of the nine that were still listed by the time of the summary, March 11, only one was trading above its initial public offering (IPO) price, medical device company Mindray Medical International, of Shenzhen, China.

Skepticism Prevails

Lawrence Wang, managing director of Primavera Capital, Hong Kong, one of the panelists at the meeting, told BioWorld Today the underlying reason for the wave of delisting was the market's heightened sense of skepticism of Chinese companies.

Chinese companies used to be favored in the U.S. markets. "But in the recent two or three years, there have been a lot of accounting scandals," Wang said. "A good number of Chinese companies have had scandals."

In recent years, there was widely reported news of several Chinese companies caught up in scandals, which had an impact on the market. None were health care companies.

One involved a financial software company (Longtop Financial Technologies Ltd.) that was delisted by the New York Stock Exchange in August 2011. A second case involved a large timber company (Sino-Forest Corp.), ordered delisted by the Toronto Stock Exchange in April 2012. Both delistings occurred because the stock exchanges said the two Chinese companies no longer met their financial reporting requirements.

Further eroding confidence in the Chinese segment of the market, the U.S. SEC in December 2012 charged the Chinese units of five accounting firms for refusing to provide auditing data on China-based companies.

The scandals have tainted all Chinese companies, regardless of their record, Wang said, noting that companies such as 3SBio, Nuokong, Simcere and ShangPharma are "respectable companies. They all have marketable products."

"The whole Chinese sector has been dragged down, health care and everything else," Wang told BioWorld Today. "Most of the companies that are doing delistings are in a wide range of industries. This phenomenon is not specific to health care companies." 

While valuations are depressed, company founders seek to buy back all outstanding shares while share prices are relatively low, to consolidate their ownership of the companies. And that's also what's driving this wave of delistings, he said.

What may be less understood is the actual process of seeking shareholder approval and arranging to buy back the shares from the investors as part of delisting.

Companies will need to begin planning for those details early in the delisting process. For companies incorporated in China or the U.S., regulatory and tax regimens may be significant barriers to success.

"Companies don't always think through the details," Wang said. For example, he said, the company may think it's cash rich, but only 70 percent of that may be available to move offshore to buy back the shares from foreign investors, due to currency controls. Those controls are not specific to delisting.

Tropical Islands = 'Favorable' Jurisdictions

Founders may use their own off-shore funds to finance the transaction. Or they may seek off-shore investors, though that would dilute their ownership, contrary to the typical aims of the founders.

And where the company is incorporated also has an impact, Wang said. If they are incorporated in the U.S., it's more difficult to delist due to a greater exposure to litigation, compared to the Cayman Islands.

For example, a U.S.-incorporated company seeking to delist would often need approval from a majority of the minority shareholders. In the Cayman Islands, regulations require a simple two-thirds approval of the shareholders, and no special requirement for minority shareholders.

In the Cayman Islands, "It's simpler to meet the voting threshold," Wang said.

Of the 12 companies on the Orbimed-J.P. Morgan summary of major U.S.-listed Chinese health care companies, nine were incorporated in the Cayman Islands, one in Nevada, one in Antigua and Barbuda and one in Delaware. Simcere, Nuokang, ShangPharma and 3SBio are all incorporated in the Cayman Islands. The Cayman Islands, British Virgin Islands and Bermuda are the more commonly used "favorable" jurisdictions, Wang said.

Despite the record-setting S&P and Dow, Wang said the fundamental environment that triggered this wave of delisting has not changed.

Chinese companies on the American stock exchanges are still "closer to the trough," despite the U.S. markets being back at their peaks.

However, a lot of those that were considering have pulled the trigger" and already delisted or have begun the process. Still, Wang said, "most of the driving factors are still present."