AVT Plasma sets its sights on China

Producing products from human blood plasma is a lucrative business and the Chinese market provides a significant long-term opportunity, AVT Plasma's CEO tells Ruth Beran.

Stuart Nettleton, the CEO of AVT Plasma (ASX:AVT), is quick to acknowledge that his company's history is based on the development of a blood fractionation process -- the separation of protein from human plasma.

Based in Sydney, registered in Hong Kong and publicly listed in Australia, AVT Plasma is currently focusing on purchasing a blood fractionating plant in Shenzhen, China.

Rather than "license everyone like biotechs do" and introduce technology into various plants, says Nettleton, the company has migrated its "strategy over to owning and operating a plant in China". With this approach, Nettleton expects the company won't "have to do anything else for another decade because the growth in the Chinese market [is] so significant that we don't really need to think about plants in other locations."

According to Nettleton, the growth in pharmaceutical products in China in real in terms is about 10 per cent per annum. Although the market segment for blood products is relatively small, in the order of a few US$100 million, Nettleton expects that this will grow substantially as China moves towards the per capita usage rates of other countries. "We believe that it's quite possible [with] the market in specialised blood products in China, for us to achieve sales of US$100-200 million," he says.

China has more than 30 plants at the moment, Nettleton says. "Many of them are very old and running at break even or below break even," he says. "We actually see the market in China coalescing into around six very large producers and we want to be one of those six very large producers."

In Australia, the Red Cross collects blood donations and then sends the plasma to CSL to process. CSL is paid for this service, returns the blood to the Red Cross who then distributes the products to hospitals and is paid accordingly.

In China, the government collects all of the blood plasma. Fractionating companies then purchase the blood from collection points and sell the products.

"This is the way that CSL operates in other countries of the world," Nettleton says. "That means that you can't just enter the industry, you need to work with an existing company to get into the industry.

"We have a lot of respect for CSL, but we're not attempting to clone ourselves."

Hong Kong listing

AVT Plasma's main shareholder is Zhang Simin, a shareholder of the company for the last 10 years, who listed AVT in Australia. Nettleton describes him as a "captain of the pharmaceutical industry in China". Simin's pharmaceutical company, Neptunus Bioengineering, established in 1989, has a market capitalisation of around AUD$400 million and, the company's brand Neptunus was rated by the World Economic Forum and Brand Labs as China's number one pharmaceutical brand, says Nettleton.

AVT Plasma signed a memorandum of understanding with Neptunus in April that sets out how the Wei Wu Guangming Biological Product laboratory in Shenzhen, China will be purchased.

"An Australian company wouldn't be able to do what we're doing," Nettleton says. "When you purchase something from the government in China you have to put down a cheque at the time you sign the contract. It's cash on the nail otherwise you don't sign the contract."

Simin has agreed to purchase the plant and then sell it to AVT Plasma. Negotiations are currently underway to determine the price of the plant but Nettleton said that it will be in the range of AUD$10 to $30 million.

"[The price] is subject to many things. It subject to what land is or is not in the deal, redundancy payments of the staff, the remaining liabilities that come with it or not," says Nettleton.

While negotiations are "moving at a glacial pace," he says, with the redundancy payments and security of the current 200 government employees being the major sticking point, he expects Simin to purchase the plant in September, at which time AVT Plasma will parallel list on the Hong Kong stock exchange, and purchase the plant from Simin.

Asked why AVT Plasma plans to raise capital on the Hong Kong exchange rather than in Australia, Nettleton replies: "We think that a lot of the people who will finance what we're doing, because it's in China, will be very interested to see us list in Hong Kong. We also feel that we can get perhaps much higher price earnings ratios on the Hong Kong exchange and because of that reason it obviously makes sense for us to look at that as a place to raise capital."

Timelines and agreements

The slow-moving machinations surrounding the purchase of the Chinese plant have had its impact on AVT Plasma.

AVT Plasma intended to take the fractionating technology developed with Danish company Upfront into the Chinese plant. However, the timelines in the agreements with Upfront were based on AVT Plasma purchasing the plant last December -- possible arbitration with the Danish company is now looming. "In the last six months we approached them with a need to readjust timing in the deal we were doing and they responded with the court case," Nettleton explains.

Under the agreement, AVT Plasma had two options, says Nettleton. The first was an option to license UpFront's EBA expanded bed absorption technology for human plasma, and in December AVT Plasma decided not to license it.

"We also had the right to license the recombinant-synthetic production of proteins... and last week we decided not to exercise it for that right either," says Nettleton.

Upfront now has a reasonable time in which to purchase the technology itself, for the cost of developing the technology as paid to it by AVT Plasma plus 25 per cent.

"The reason Upfront has been running this Danish arbitration, was to try and force the license to expire, just based on the fact that we didn't exercise the first option, human plasma, back in December," says Nettleton. "But last week we decided that we would terminate that agreement. As a result of that, they no longer need to take us to court to try and prove that that agreement has expired."

However, Nettleton admits that Upfront may still continue with the arbitration to seek damages but said that his advisors can see no cause for damages.

In the meantime, AVT Plasma is looking for other technologies for fractionating blood to take into its China plant as well as eagerly awaiting an injection of US$550,000 cash from Zhang's US company, Neptunus USA. "We've raised some capital in Australia but for us to continue the whole program and for us to ensure that the company remains solvent we need to receive that money."