Hutchinson China Meditech Is A Monster

HCM priced their IPO on the US market (Nasdaq:HCM) at $13.50. The shares already trade in London (AIM:HCM).

Investors can find plenty of details in the HCM IPO roadshow slide deck but there are some major takeaways here:

China will be a huge market for healthcare – per capita spending today is $322 versus over $8K in the US. End markets there are growing between 15% and 20% per year.

HCM uses a hybrid strategy – they are a major drug seller and distributor and they use that growing profitable cash flow to fund new drug development.

They have over 2,900 people in distribution and seven important compounds coming through various trials with many in Phase II or III. The company has close to 300 people in R&D.

Three major partnerships are in place – with AstraZeneca (AZN), Eli Lilly (LLY) and Nestle Health Science. Besides providing funding and de-risking some of the drug development process these agreements provide royalty opportunities on world-wide sales for HCM. The partnerships also help in validating the science and process used at HCM.

Revenue growth has been robust – $36M in 2013, $87M in 2014 and $178M in 2015. HCM is also very profitable.

The valuation of $1.6B might look high but it’s not given the potential for the seven drugs already in the pipeline. HCM also represents a platform for drug development and monetization that is appears to be much more effective than more developed markets like the US or Europe. More drugs may be developed there and then licensed and brought to the US by big pharma companies with royalties back to HCM. At the same time HCM can grow revenues and profits substantially in their home market for the next decade without restraint.

Clinical risks are lower given the company structure and number of drugs in the pipeline. However HCM does have a complicated corporate structure, dual listings and a “China risk” which some factor in and some don’t.

With multiple positives were not surprised the deal was completed in this tough market – albeit at a lower price than when the company filed. At the time of the IPO filing the ADS-equivalent share price was just over $16. I wouldn’t be surprised to see the stock trend up toward the original price post the IPO.