Warburg Pincus Reaps $1 Billion on Chinese Blood Market Bets

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Warburg Pincus’s bet on an obscure Chinese blood company has turned into an almost $1 billion windfall for the private equity firm.

That’s because a government crackdown on plasma collection facilities was a boon for the company, China Biologic Products Inc., and others that have been able to meet Beijing’s strict standards. Its shares, which trade on the Nasdaq Stock Market, have surged more than seven-fold since Warburg Pincus first began scooping them up in 2010. The buyout firm’s more than 40 percent stake in China Biologic, accumulated over the past five years for about $165 million, is now valued at $1.03 billion.

The wager is part of a bigger bet on China for the $35 billion private equity firm. Sixteen of 88 investments in its Private Equity X fund, where the China Biologic investment is held, are in Chinese companies ranging from education service providers to online retailers, data compiled by Bloomberg show. The eight-year-old portfolio is valued at 1.4 times cost and has produced a 9 percent annualized return.

The private equity firm is “very strong in the health-care industry overseas as well as in China,” Milo Liu, a Bocom International Holdings Co. analyst in Hong Kong who has a buy rating on the stock, said by e-mail. “Warburg Pincus made a very wise decision to invest in China Biologic.”

Blood Collection

Mary Zimmerman, a spokeswoman at New York-based Warburg Pincus, declined to comment on the firm’s China Biologic investment.

The buyout firm, which last year hired former Treasury Secretary Tim Geithner as its president, has invested more than $8.5 billion in 145 health-care companies since its 1966 inception, according to the company’s website.

Beijing’s crackdown on the collection of blood products, part of an effort to ensure the safety of the country’s blood supply, has turned out to be the key to China Biologic’s success. Stricter measures from the government led to the closure of as many as 22 percent of donor facilities at the end of 2006, according to China Biologic’s 2007 shareholder prospectus. The company was one of the few private firms that received approval to operate collection centers over the next decade, putting it in a position to fill in the gaps left by closures.

During this period of industry consolidation, China Biologic “aggressively pursued” opportunities to expand its capacity in plasma supply, Yu Yun Tristan Kuo, the company’s then-Chief Financial Officer, said in a March 2010 earnings call.

A few months after that call, Warburg Pincus took a 6.9 percent stake in China Biologic and would boost it to almost 20 percent by the end of the year.

Growth Potential

Sales of albumin, the main protein of human blood and one of the company’s core products, have more than doubled in China since 2009 to $1.3 billion annually, according to Marketing Research Bureau Inc., an Orange, Connecticut-based independent research firm.

Per capita consumption of albumin, which is used to counter shock-causing blood loss, is still lower in China than in developed nations. The Chinese market should expand by about 25 percent in the next 3 to 5 years, Bocom’s Liu said.

Given the Chinese health-care industry’s infancy, there is “strong growth potential” in the market, Jeff Papp, a senior analyst at Oberweis Asset Management Inc. which holds China Biologic stock, said by e-mail from Lisle, Illinois on Monday.

Government’s Whim

The government, which allowed China Biologic to thrive, remains one of the company’s biggest threats, according to Liu at Bocom. The company could be significantly affected if government policy toward plasma products changes, the analyst said.

The Guizhou Provincial government unexpectedly closed four of China Biologic’s stations in 2011, unnerving investors as the company lost over a third of its collection capacity.

China Biologic’s success has sent its valuation multiple surging to 26 times projected 12-month earnings, more than double the ratio a year ago. The average for companies on the Bloomberg China-US Equity Index is 31. All of the five analysts covering the stock recommend buying it.

American depositary receipts of China Biologic have surged 38 percent this year, compared with the Bloomberg China-US Equity Index which has climbed 16 percent. The ADRs rose to $93.51 on Thursday as of 9:46 a.m. Shanghai RAAD Blood Products Co., which is listed in Shenzhen, has risen 27 percent in 2015.

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