October 19, 2010, 6:54 am

SHP - ShangPharma

2010-10-17
SHP - ShangPharma

SHP - ShangPharma plans on offering 6.6 million ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 3.4 million ADS in the offering. Citi and JP Morgan are leading the deal, William Blair and Oppenheimer co-managing. Post-ipo SHP will have 18.65 million shares outstanding for a market cap of $289 million on a pricing of $15.50. Ipo proceeds will be used to expand services.

Chairman of the Board and CEO Michael Xin Hui will own 55% of SHP post-ipo.

From the prospectus:

'We are a leading China-based pharmaceutical and biotechnology research and development, or R&D, outsourcing company.'

Competitor to WX, an ipo from a few years back.

Discovery, pre-clinical and clinical pharmaceutical trials for drug candidates. The pattern in recent years has been for biotech and pharmaceutical companies to outsource their early stage discovery and pre-clinical work to cheaper labor countries such as China while keeping clinical stage trials closer to home.

100+ customers including all of the top 10 worldwide pharmaceuticals and biotechs.

Top 10 customers in 2008 and 2009 have remained as customers in 2010. Good sign.

Ipo monies will be used to essentially double lab space to nearly 1 million total square feet.

Draw here is low cost labor and large amount of lab space with proven company.

Sector - The worldwide CRO space had been a swift growth area for much of the decade. However the credit crisis left available discovery/clinical trial dollars in short supply due to credit tightening. The China CRO market continued to expand however due to the cheaper costs of doing business. If anything, the global credit crisis helped the shorter and longer term outlook for China outsourcing. In a difficult clinical discovery and trial worldwide environment, the China CRO market grew 27% from 2007-2009.

Financials

Approximately $2 per share in cash post-ipo. Bulk of cash will be used to expand lab space.

SHP has been operationally profitable since at least 2006.

15% tax rate.

2009 - $72 million in revenues, 33% gross margins. 14% operating margins. Net margins of 12.5^]% when currency hedges factored in. EPS of $0.53.

2010 - Good first two quarters to 2010. $88 million in revenues, a 22% increase over 2009. Gross margins slight improvement to 34.5%. Operating margins of 15%. Net margins of 14.5%. EPS of $0.70. On a pricing of $15.50, SHP would trade 22 X's 2010 estimates.

Comparison between SHP and WX.

WX - $1.16 billion market cap. WX currently trades 17 X's 2010 estimates with a 20% revenues growth rate in 2010. WX ipo'd just near the top of the last worldwide CRO growth story and slid with the sector through most of 2008 and into 2009. Stock is pretty much flat in 2010, in what has been a pretty tough sector for the group of stocks.

SHP - $289 million market cap on a $15.50 pricing. At $15.50 would trade 22 X's 2010 estimates with a 22% growth rate. Due to smaller revenue base on ipo, SHP should be able to outgrow WX top/bottom line over the next few years.

Conclusion - We've seen some massive China outsourcing IT ipo success stories from VIT to CIS to HSFT. The CRO sector has been a bit tougher due to the costs involved in conducted new drug discovery and trials. The sector still has not completely recovered from the credit crisis. This has effected SHP/WX. While each will be able to show nice growth in 2010, that growth is a bit muted still due to the slower discovery/trial plans of the large pharmas/biotechs. I like the sector longer term, shorter term SHP appears priced about right. I like this deal over time, would not expect too much short term here.

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