Shanghai Fosun Pharmaceutical

Fosun comes in at low end of range

Its shares were priced at HK$11.80 each as investors were sceptical of its M&A model

PUBLISHED : Thursday, 25 October, 2012, 12:00am
UPDATED : Thursday, 25 October, 2012, 4:53am

Shanghai Fosun Pharmaceutical, controlled by billionaire Guo Guangchang, has raised US$512 million (HK$3.9 billion) from its initial public offering in Hong Kong.

The shares were priced at HK$11.8 each - at the bottom end of the HK$11.8 to HK$13.68 range - because of low earnings expectations. The stock, now priced at 12.1 times its forecast earnings next year, will begin trading on October 30.

According to two people familiar with the deal, instutional investors were sceptical of the generic drugmaker's aggressive merger-and-acquisition growth model.

This is because the drug manufacturing business depends as much on capital as on technology and hands-on industry knowledge to integrate assets in the highly fragmented Chinese market.

"Being a manufacturer without some branded and patent-protected drugs, established sales channels and a convincing expansion strategy, Fosun Pharma's shares are likely to be priced at the low end of the range," a Hong Kong-based fund manager familiar with the situation had said before the company officially priced the stock.

However, the Shanghai-based drug maker's 32 per cent holdings of China's largest drug distributor, Sinopharm - a stake worth US$2.6 billion - provides a level of confidence to new investors. The stake accounts for 76 per cent of Fosun Pharma's total market capitalisation of US$3.41 billion.

Fosun, which has been listed in Shanghai for 14 years, plans to use half of the fresh capital for acquisitions.

But it failed to win investors' confidence as mainland managements are not known to be particularly skilled at carrying out inorganic growth plans.

"The M&A growth model doesn't fit well with China's domestic market as it lacks companies that have the requisite technology and innovation capacity to drive efficiency and growth," said another fund manager, who also declined to be identified.

Insiders said the deal at one point seemed to be falling through, after which the underwriters appealed to big investors Prudential Financial of the United States and International Financial Corp, the investment arm of the World bank, to raise their purchases to US$75 million from the original US$50 million pledged during book building.