May 2, 2013

$PVCT & Hisun-Pfizer Pharmaceuticals Co., Ltd.

The release of Pfizer's Q1 earnings earlier this week reminded me of the Big Pharma's joint venture with Chinese pharmaceutical company Zhejiang Hisun Pharmaceuticals, Hisun-Pfizer Pharmaceuticals Co., Ltd. ("Hisun-Pfizer" or "HPP").

From Pfizer's September 30, 2012 10-Q, "On September 6, 2012, Pfizer and Zhejiang Hisun Pharmaceuticals (Hisun"), a leading Chinese pharmaceutical company, created a new company, Hisun-Pfizer Pharmaceuticals Co., Ltd. (HPP), to develop, manufacture and commercialize off-patent pharmaceutical products in China and global markets. In accordance with our international reporting periods, this transaction will be accounted for in the fourth quarter of 2012. HPP was established with registered capital of $250 million. Zhejiang Hisun Pharmaceuticals holds a 51% equity interest and Pfizer holds a 49% equity interest in HPP. The parties will contribute select existing products to HPP, which will have a broad portfolio covering cardiovascular disease, infectious disease, oncology, mental health, and other therapeutic areas. The parties will also contribute manufacturing sites, cash and other relevant assets. Our investment in HPP will be accounted for under the equity method."

The equity method of accounting, "...the process of treating equity investments, usually 20–50%, in associate companies...," means Pfizer's "...proportional share of the associate company's net income increases the investment (and a net loss decreases the investment), and proportional payment of dividends decreases it." Source here.

As Pfizer characterized the HPP in its 2012 annual report: "During 2012, we continued to pursue “bolt-on” business development opportunities to supplement our research efforts and product offerings. These are acquisitions or collaborative arrangements that we can readily integrate and that expand our reach or capabilities...Together with Zhejiang Hisun Pharmaceuticals, we launched Hisun Pfizer Pharmaceuticals Company Limited, a joint venture to develop, manufacture and commercialize off-patent pharmaceutical products in China and global markets."

The stated goal of "[T]he joint venture between Hisun and Pfizer aims to strengthen the  ability of both companies to address health care needs in China and reach more patients with high quality and low cost  medicines in the branded generics arena."

HPP is an investment vehicle, with a limited staff, the senior leadership of whom (e.g., the CFO) appears to be resident in New York City. In many respects, one might view Hisun-Pfizer as, perhaps, a tax-efficient or effective, China-focused and effective operations, pass-through entity of sorts, allowing business in China to be conducted by Pfizer and Hisun but without comparable overhead of either a Hisun or a Pfizer.

The $490 million gain Pfizer registered in Q1 2013 from the transfer of some product rights to HPP puts a finer point on this.

A blog reader wrote to me that it's one or the other, a regional license deal in China or a global license deal but not both. I disagree. There is a legitimate discussion about China influencing global and global influencing China, per my China vs. The World post. The key to a decision, I think, ultimately lies in the answer to this math equation:

d(China) + d(Global) < > d(China, Global), where d(x) is the value of a deal for geography x

China pharmaceutical companies, local players, are interested in PV-10. Global pharmaceutical companies are interested in PV-10 in China. Global players have relationships with local players that include ownership, joint ventures and strategic relationships.

Path A: A deal with a Chinese company could pay Provectus and, thus, its endgame global/Big Pharma acquirer 20%+ in annual royalties.

Path B: A deal with a Big Pharma-related Chinese company would pay 20%+ and {20%+ times the Big Pharma's ownership percentage of the Chinese company}, a number greater than 20%+.

Path C: A deal with a JV like Hisun-Pfizer would pay Pfizer 49% (the outcome could be different for another Big Pharma's China JV).

(The above is a theoretical or academic exercise, and not necessarily overly precise).

A deal for China between Provectus and HPP, rather than a local player or Hisun, is more valuable in the long-term for Pfizer or another Big Pharma with a comparable JV set-up than acquiring Provectus after a deal was done with a local Chinese player.

As such, a deal with Hisun-Pfizer tells much more about the end-game and Pfizer's potential or likely intentions and future action.

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