CFM Holdings fields slew of SGXRegCo queries over its acquisition of pharma startup

SHARES of 5EB have soared over the past two days, following its announcement on Thursday that it would acquire a 51 per cent stake in SING-SWE MM Biotechnology, which distributes and sells pharmaceutical products, for up to S$6.1 million.

When asked by the Singapore Exchange Regulation (SGX RegCo) who introduced this deal, CFM said a mutual business associate had introduced Fang Huasheng and Gao Hong to its chief executive officer, Janet Lim, for the purposes of distribution and sale of viral test kits in Singapore.

CFM had further commenced discussions and negotiations with the vendors for a potential collaboration, which led to the agreement of a proposed acquisition of SING-SWE MM Biotechnology, said the group in a bourse filing on Friday.

Mr Fang is an 83 per cent shareholder of New Energy Industry Sweden (NEIS), a firm originally appointed as the exclusive international distributor for the test kits. He is also a director of SING-SWE MM Biotechnology. Mr Gao is a vendor and director of SING-SWE MM Biotechnology.

CFM said no introducer or finders fees will be paid by the company for the proposed acquisition.

When asked whether an independent valuation had been done before the proposed acquisition, the group told SGX RegCo that SING-SWE MM Biotechnology had commenced business only recently; it was "more of a startup" although it is operating in an industry that is currently well-established.

The proposed acquisition was therefore structured to be on an earn-out basis in order to reduce the risk to CFM and its shareholders, said the group.

No formal due diligence has been conducted on SING-SWE MM Biotechnology. That said, CFM noted that it had started reviewing preliminary information, including information related to the test kits and the distribution arrangements in place; searches on shareholding and company information have also been conducted on SING-SWE MM Biotechnology and NEIS.

However, CFM stressed that such review is at a preliminary stage and formal due diligence is uncomplete.

Following the deal announcement on Thursday, CFM shares jumped 80.3 per cent to end at 11.9 Singapore cents amid heavy trading, up from when it last traded on May 28. Some growth momentum carried into Friday, with the counter closing up 32.8 per cent to 15.8 cents.

CFM had proposed to acquire 51 ordinary shares from vendors Mr Gao, Wang Xinmeng and NEIS. As at Thursday, SING-SWE MM Biotechnology has an issued and paid-up share capital of S$100 comprising 100 ordinary shares. NEIS will own the remaining 49 per cent of its issued share capital, down from 70 per cent before the proposed acquisition.

In consideration for the sale shares, CFM will allot and issue an aggregate of up to 120 million new fully-paid up ordinary shares in its capital at an issue price of 5.1 cents each to the vendors. This issue price represents a 25.8 per cent discount to the current traded price, and the maximum number of consideration shares to be issued represent some 59.5 per cent of CFM's existing share capital.

SGX RegCo had asked what the group considered before agreeing to such terms. CFM said negotiations with the vendors had commenced prior to May 28, when the counter had a daily trading range of around 3 cents.

CFM had also considered that the issue price of 5.1 cents represented only a "small discount" of 2.3 per cent to the group's net asset value per share.

It further said that, as per the deal agreement, the maximum number of consideration shares will be issued only if SING-SWE MM Biotechnology earned a net profit after tax of at least S$2 million, which represents a "significant turnaround" from its loss-making position for the half-year ended Dec 31, 2020.

SGX RegCo further asked how CFM arrived at the purchase consideration of S$6.1 million, given that SING-SWE MM Biotechnology is still a new firm.

The group said businesses that generated income from activities related to the Covid-19 pandemic have "generally done well" since early 2020, including the manufacture and sale of personal protective equipment such as masks and gloves, and the manufacture and sale of biopharmaceutical products for use against Covid-19, such as testing kits and vaccines.

SING-SWE MM Biotechnology owns exclusive distribution rights to certain viral test kits in Europe, Africa, South Asia, South-east Asia and the Middle East, and intends to invest in and develop its own products in related fields.

While there are no SGX-listed companies directly comparable to SING-SWE MM Biotechnology, CFM noted that the share price of Top Glove has more than tripled in value since January 2020, and continues to trade at a trailing price-earnings (PE) ratio of more than six times; Hyphens Pharma International Limited trades at a trailing PE ratio of almost 15 times.

In a separate query, SGX RegCo asked whether CFM has the experience and resources to run the new business. The group said its intention is for SING-SWE MM Biotechnology to continue running the business, with board management and control from CFM.

It further said it has been in the business of distribution and sales of personal protective equipment in Singapore, including in the pharmaceutical and healthcare industries, via its subsidiary since January 2015. It therefore believes it has the right experience and network to provide "strategic input" for SING-SWE MM Biotechnology, particularly in Singapore and the region.