As many seasoned investors will tell you, if a company is doing most of its business with a major shareholder, minority owners can often expect to lose out.
But in Ganli Pharma’s case, just the opposite seems to have happened. The minority shareholders are the ones buying out the firm’s largest backer.
At first glance, insulin powerhouse Tonghua Dongbao’s decision to sell its stake in key R&D outfit Ganli doesn’t make much sense. Diabetes is on the rise in China as diets and lifestyles change (see WiC26). Moreover, Ganli was behind the development of Dongbao’s most popular product and holds patents on a number of potential therapies.
So why sell the goose that lays golden eggs (especially when you already own the largest chunk of its equity)?
The reason: Dongbao appears to have calculated that it won’t be able to acquire 100% of Ganli, and that sometime soon the pair will find themselves in increasingly direct competition.
Ganli’s boss, Gan Zhongru, was a classmate of Li Yikui, Dongbao’s chairman, at Peking University (the company name Ganli is derived from a composite of the two mens’ surnames). On the basis of that friendship he secured funding for Ganli in 1998. Their deal was that Dongbao would be the largest shareholder (with 41.5%) but Gan would run the company.
The partnership soon paid dividends. Ganli sold Dongbao its patent on Gansulin, China’s first domestically developed second-generation insulin drug. That helped Dongbao become China’s largest domestic insulin maker.
The financial upside for Gan, on the other hand, was more limited. So when Ganli came up with its next generation of insulin products (Prandilin and Basalin) he was more circumspect about letting go of the patents.
Holding onto the intellectual property turned out to be a wise move. Ganli started marketing insulin for itself in 2005, and sales have surged. Profits were up 146% last year, to around $5.5 million. That wasn’t too far off Dongbao’s own profits on insulin, of $6.5 million for the first nine months of 2010. “At present, only Ganli and [French firm] Sanofi-Aventis have developed third-generation insulin,” industry analyst Guo Fanli told the China Economic Weekly, “Ganli is expected to dominate the industry.”
Ganli’s next step was critical. “Gan Zhongru and his team were very determined to achieve an independent listing,” Li Cong, Dongbao’s general manager explained to the magazine. In May last year he brought in private equity outfit Qiming Ventures, which paid $15 million for a stake in the firm. The move diluted Dongbao’s holding to just over 29%.
Now Dongbao is selling its remaining stake too. The price of freedom is that Gan and his backers at Qiming Ventures will have to pay roughly $60 million for Dongbao’s shares.
On top of that, Ganli has agreed to give Dongbao its patents for third-generation insulin, and to receive ownership rights to the second-generation patents in return (with the exchange to take place 42 months after the deal is completed).
Both sides will hope they have a bargain. From Dongbao’s point of view, it makes sense to exchange an older product with falling margins for the latest technology. Plus the deal’s cash proceeds: “The $60 million received from selling the Ganli stake can be used to grow the company’s sales network over the next few years,” an industry observer told China Economic Weekly. “[In 42 months] it can then sell third-generation insulin.”
But Ganli regains a patent for a product with wide distribution, and it keeps full control of the internal know-how needed to come up with a new third-generation drug.
“Core technology is always the most important thing for a pharmaceutical company, and the fourth and fifth-generations of insulin are likely to be born in Ganli Pharma”, says pharma analyst Wang Benli.
“Tonghua Dongbao is still following paths made by others.”
Time will tell which side has it right.
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