Deal Mechanic: Warburg Pincus improves liquidity in blood company

When biopharmaceuticals became a common conversation topic across Warburg Pincus's global healthcare team in 2009, Min Fang, a Beijing-based managing director at the firm, started research on the China market. 

At the time, the production of drugs using biotechnology was becoming a highly attractive sector globally and the Chinese government was backing it in its 12th Five Year Plan. The minister of health pledged an additional $11.8 billion for biotech innovation.

“For China Biologic Products, it was similar to all deals we do – we started from bottom-up research and found it a solid business,” Fang says.  “In terms of scale, it was one of the top two biopharma companies in China and one of the largest privately-owned players before we invested in it. Through our channel checks we also found that its products had a good reputation among local hospitals, physicians and customers. Chinese regulators also found its manufacturing process had very good standards.”

Beijing-headquartered China Biologic Products collects human blood or plasma from stations across China. It then manufactures products such as IVIG, which is used to treat immune system conditions, albumin for low protein levels due to surgery or liver failure and Factor VIII, an essential blood-clotting protein. 

Warburg Pincus, which spends about 20 percent of its more than $44 billion private equity portfolio on healthcare, made an initial investment of $170 million in the company in 2009 from its $15 billion global buyout fund, Warburg Pincus Private Equity X. 

$170m Initial investment 
$66.5m  Entry EBITDA 
$141.6m Exit EBITDA 
7x Return 

60% IRR

China Biologic listed on NASDAQ in 2009 through a backdoor listing instead of a typical IPO process, which Fang says meant the valuation was lower than some of its peers. 

From a less than 5 percent stake in 2010, the firm took majority control of the company, investing in multiple tranches until 2016. At its height, Warburg Pincus owned nearly 45 percent of the company.

“We found this a great opportunity to invest in an attractive business at a very attractive valuation,” Fang says.
  
1 ENHANCING MANAGEMENT 

Its initial investment gave the firm a seat on the board, where it  had discussions with other shareholders. They found there was room for improvement in terms of running and operating the business.

Fang tells Private Equity International it was important for the firm that the chief executive had a strong healthcare background. The company's board replaced China Biologic's CEO at that time and hired David Gao, which was recommended by Warburg, to run the business in 2011. Gao is a serial entrepreneur who has been in the sector for 10 years and has experience running US-listed pharma company BMP Sunstone Corporation, from 2004 until its acquisition by Sanofi in 2011.

Gao had already worked with China Biologic in a variety of roles, including as director chairman of its compensation committee.

2 FOCUSING ON SUPPLY 

Because blood is a scarce resource, ensuring the steady supply and quality of its raw material is key. 

Fang pointed out that one of the key value drivers of the business is to open more plasma collection centres, which gather raw material for producing plasma products.

The company increased its focused on the supply-side of the business, but this also entailed gaining government approval for plasma collection licences, which are difficult to obtain in China.

Fang said local governments were concerned about the quality and safety standards of purely Chinese companies opening collection centres.

With Warburg as a major shareholder, the company built trust with the local authorities and was granted a number of new licences, which significantly increased its raw material supply. 

This helped China Biologic become the second-largest plasma-based pharma company in the country based on 2014 sales, commanding 17 percent of the domestic IVIG market. Its supply chain also expanded to 12 plasma collection centres and two manufacturing centres across four provinces, with more than 130 sales representatives selling directly to more than 600 hospitals. 

In addition to opening more collection centres, the firm also engaged technical experts from China and the US to audit and improve the collection and manufacturing processes.
   
3 TRANSFORMING THROUGH M&A

Warburg also supported China Biologic with acquisitions, such as buying out minority shareholders in one of China Biologic's subsidiaries, Guizhou Taibang.  “It's a very tough negotiation process because these businesses are doing well and it took us a lot of effort to convince the minority shareholders to cash out. But those deals are really accretive to the listed company and helped incentivise the local management teams.”

4 IMPROVING LIQUIDITY 

Warburg did a re-IPO – a recapitalisation through the placement of new and existing shares – for China Biologic in 2015, raising more than $200 million.

Fang said the firm introduced the opportunity to institutional investors in the US and attracted big names such as Capital World Investors and Fidelity Investments. “These companies came in as very important investors and further diversified the investor base of the China Biologic, making it a truly public company.”

He added: “Previously the company had no research coverage, no liquidity, but after the re-IPO in 2015, it got research coverage by all the major banks such as Morgan Stanley, Merrill Lynch and Credit Suisse, thus improving its liquidity from almost zero to nearly 10 million a day.”

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By the end of 2015, the company had a market value of more than $3.7 billion.

Warburg sold down its stake over time and fully exited the company in August 2016, generating cash proceeds of about $1.2 billion, a 7x return multiple and an internal rate of return of up to 60 percent for its investors, Fang said.

Over a holding period of around seven years, China Biologic delivered 25 percent to 30 percent gross earnings per share year-on-year. The company grew by almost eight times, with revenues growing from $37 million in 2009 to $296 million in 2015 when  Warburg began selling down its stake. 

The company continues to explore new regions to expand its plasma collection coverage and introduce new products to the market, Gao said in a recent earnings call.