Research on the scale undertaken by Hutchison MediPharma (HMP), with revenues from the new drugs still in the future, requires substantial investment and HMP relies on regular injections of funding from outside the People’s Republic of China (PRC) to ensure stable development for various projects onshore. These could take the form of shareholder loans, capital injections and fundraising in offshore capital markets.
The key challenge is how to make the most suitable funding arrangement and get it in a sustainable manner to support HMP’s ongoing development plan.
HMP’s parent company, Hutchison China MediTech Limited (HCM), has been working closely with Bank of America to examine the best strategic way of planning for its ongoing China investment.
The bank had previously acted as joint global coordinator and joint bookrunner for HCM’s US public offering.
By leveraging Bank of America’s expertise in the pharmaceutical sector, HMP adopted a phased funding approach to cater for its liquidity needs at different stages.
Considering the ease of implementation, funding cost and timeline to start the new drugs development, HCM chose to use capital injection as the initial funding and established the manufacturing site in China. A shareholder’s loan was the most suitable choice for HCM to support its working capital needs in the local market. HCM eventually chose the funding option of a USD shareholder’s loan for US$36m, arranged through Bank of America’s Shanghai branch, to support its China entity’s operations. Further shareholder’s loans were to follow, including another US$24.5m funding, which was successfully completed by November 2018.
As China is highly-regulated when using overseas funding onshore, the means of converting USD shareholder loans to RMB still relies on much paperwork and supporting documentation.
Initially, HMP opened a RMB pending payment account to facilitate the FX conversion. Then, in early 2019 when The State Administration of Foreign Exchange (SAFE) introduced a new policy to simplify the FX conversion process, HMP launched a pilot programme and its latest US$40m shareholder loan was processed under this new regime, delivering substantial efficiency gains.
Best practice and innovation
This is an excellent example of making sustainable funding of a pharmaceutical company in terms of: fully leveraged the expertise of its partner banks to work out the optimal funding plan; a scalable financing solution to achieve maximum efficiency in both financing cost and operational process and quick response to the changing regulations to further simplify the daily operations and reduce paper.
Bank of America and HMP worked together to embrace the regulatory changes and successfully launched the pilot programme of simplified FX conversion and payments for its ongoing shareholder loan funds. The speed with which HMP was able to push through its first pilot transaction in SAFE’s new foreign currency regulatory environment demonstrates flexibility in both planning and process.
- Stable funding platform.
- Administrative process reduced.
- Flexibility on FX conversion.
- Customised reporting.
“The close working relationship between our treasury team and our banking provider has given us a stable funding source with a well-planned arrangement to support the various development stages. The implementation success and integrated solutions we have adopted also ensure our research work can continue uninterrupted. In particular, our willingness to be part of the pilot for the new ‘light touch’ SAFE regulations around foreign currency provide a model for other companies to follow, with an 80% reduction in administrative overhead for each transaction,” says Qi Kui, Senior Finance Director.