What is going on at Global Cord Blood Corp?

Global Cord Blood Corp. (GCBC), formerly known as China Cord Blood Corp., is a network of public/private (hybrid) cord blood banks in China that has the world’s largest inventory of stored cord blood units. The government of the People’s Republic of China (PRC) established a licensing system whereby only a single cord blood bank can operate in each province of China. (In theory, a subsequent ruling in 2019 allows for expanded licensing, but in practice additional licenses have not been granted). GCBC holds exclusive licenses for the provinces of Beijing (since 2002), Guangdong (since 2006), and Zhejiang (since 2010). Collectively, these three provinces had 1.8 million births during 2020. According to their 2022 annual report issued in August 2022, GCBC had a cash reserve of over USD one billion dollars, has a sales force of over 700 employees and has relationships with over 400 hospitals. During the three fiscal years from 2020 to 2022, GCBC averaged over 75 thousand new family bank subscribers per year despite the Coronavirus pandemic. Cumulatively, between their family bank subscribers and their public bank donors, the inventory of GCBC was 1,060,516 cord blood units by March 2022. This is the largest cord blood inventory of any bank in the world. Most of the income to GCBC comes from the annual fees of family bank subscribers. In addition, GCBC also has a 24% stake in the cord blood bank of Shandong province, which had 0.8 million births in 2021. In fact, GCBC also owns a 10% equity stake in the Asia-Pacific banking network Cordlife Group.

Despite their success at banking cord blood, for most of the past year GCBC has been in “Joint Provisional Liquidation.” Trading in the stock of GCBC has been halted on the New York stock exchange (NYSE ticker symbol CO) since 23 Sept. 2022. How this situation came about and continues to drag on is the type of story that Americans would call a “soap opera.”

Tracing the ownership of and within GCBC has always been complicated. Each of their cord blood banks in Beijing, Guangdong, and Zhejiang are operated by wholly owned subsidiaries of GCBC, and several other companies are directly or indirectly wholly owned by GCBC. The shares of GCBC itself are owned primarily by companies which are subsidiaries of other companies, and one can easily spend hours trying to trace the lineage of ownership. The board of directors of GCBC consists of eight people, five of those eight have been executives of the company since at least 2009, two directors are a married couple, and two directors also worked for the GCBC investor Golden Meditech.

Over the past twenty years, several companies have attempted to take over a majority or the entirety of GCBC. A key player in these transactions has been the company Golden Meditech (GM) and its subsidiaries, which is listed on the Hong Kong stock exchange but registered in the British Virgin Islands (BVI). The founder and major shareholder of GM is Mr. Yuen Kam. The connection between GCBC and GM began in 2003, when GM acquired a 51% stake in the Beijing cord blood bank of GCBC. Mr. Yuan Kam eventually became the Chair of the GCBC board of directors. Then, in 2015 GM offered a proposal to acquire all the outstanding shares of GCBC, but this was not consummated. Instead, at the end of 2016 GM sold their 65% equity stake in GCBC to a company which is now known as Blue Ocean, an investment company incorporated in the BVI but controlled by the PRC company Nanjing Ying Peng Hui Kang Medical Industry Investment, which itself is operated by the multinational conglomerate Sanpower Group. That deal was completed in January 2018. At that time, Mr. Yuen Kam stepped down from the board of GCBC and was replaced by Ms. Ting Zheng.

The ongoing crisis began on 29 April 2022. That day, GCBC offered to acquire the company Cellenkos in exchange for issuing 125 million new shares of GCBC valued at USD 11 per share, plus a cash payment of USD 664 million. Cellenkos is an early-stage biotech company in Texas, USA, that specializes in developing therapies with T-regulatory cells derived from cord blood. It was formed as a technology spin-off from M.D. Anderson Cancer Center, with start-up funding provided by Golden Meditech.

Just days later, on 3 May 2022, Blue Ocean petitioned the Grand Court of Cayman to stop the Cellenkos acquisition. Their challenge goes beyond the debate of whether a start-up biotech is worth over USD 2 billion. The petitioner Blue Ocean alleged that the Cellenkos acquisition was a “sham transaction designed to disguise, after the fact, payments totaling … US$606 million from a subsidiary of GCBC were made to entities controlled by Yuen Kam over the past seven years.” An injunction was issued by the Cayman Court on 12 May 2022 that stopped the Cellenkos acquisition.

Next, on 8 June 2022 Blue Ocean appealed to the Cayman Court to remove the board of directors of GCBC, appoint a new board of directors, and to wind up the company. A trial lasting three days was held in the Cayman Islands in July 2022. At that trial, the chief financial officer of GCBC, Mr. Albert Chen, presented bank statements showing that the cash transfer for the acquisition of Cellenkos had already been completed. But subsequently, representatives for Blue Ocean were able to convince the court that those bank statements were forged and the cash had not been transferred. Additional revelations came forward that questioned the independence of the parties operating GCBC and GM. For example, it came to light that Mr. Yuen Kam, who controls GM, and Ms. Ting Zheng, the chairperson of GCBC, have two children together. The court concluded that “it is difficult to imagine a stronger case for appointing provisional liquidators than the present situation.” Hence, on 22 Sept. 2022 the court appointed three people affiliated with Grant Thornton, a Cayman company which specializes in corporate recovery and reorganization, to oversee the Joint Provisional Liquidation (JPL) of GCBC. Grant Thornton has set up a web page with information for creditors and shareholders of GCBC.

However, liquidating a company in mainland China from a courthouse in the Caribbean has proven to be more easily said than done. The JPL has faced an almost universal lack of cooperation from employees and business partners of GCBC and their subsidiaries inside China and Hong Kong. For example, the JPL team has repeatedly been refused access to the building that houses the headquarters of GCBC. They were denied access to the books and records of Hong Kong subsidiaries. They have not been able to access the enterprise resource planning software that tracks sales and billing of the cord blood banks. The website of GCBC was disconnected and had to be moved from the domain name www.globalcordbloodcorp.com to globalcordbloodcorporation.com.

The biggest questions in the JPL action against GCBC concern efforts to follow the money. The JPL was able to confirm from bank statements that between Sept. 2015 and May 2022, 74 transactions totaling USD 606 million were made to Golden Meditech via an indirect Hong Kong subsidiary of GCBC named Chen Hong. These payments were not included in the GCBC financial reports and are 14 times larger than the sum of all related party payments that were reported during that time period. But the JPL has not been able to find the USD one billion cash reserve claimed by the 2022 annual report of GCBC. As of June 2023, the JPL has located about USD 444 thousand in bank accounts of GCBC and its Hong Kong subsidiaries, and has been informed that GCBC owes payments to creditors totaling USD 985 thousand. The claim that GCBC ever had a huge cash reserve has been called into doubt. It seems that either the former directors of GCBC have transferred substantial assets out of the company, or those assets never existed.

It is believed by the JPL as well as other observers that the three cord blood banks in China that are wholly owned by GCBC are continuing their day-to-day operations as usual. It is believed that the cord blood inventory claimed by GCBC is valid. But due to the ongoing JPL, the company failed to file interim financials in April 2023, and on 7 June 2023 the NYSE commenced proceedings to delist GCBC. The JPL itself carries a considerable cost, amounting to USD 16.3 million as of 31 March 2023, and the continuation of the JPL is threatened by the lack of cash to support it.

What is next for GCBC? For sure the company will not go out of business. Their fundamental business activity of banking cord blood in China is alive and well. The family bank subscribers pay an initial processing fee followed by a yearly storage fee. Since 2008, the annual storage fees have risen from RMB500 to RMB860 per year, which is currently about USD70 to USD120. If you multiply these storage fees times a private customer base that is probably over one million by now, we conclude that GCBC should be generating annual revenue from storage fees that is close to USD 100 million per year. There is great value in this company. Perhaps that is why it took seven years for business partners to realize that hundreds of millions were being skimmed off. Despite the trading halt on the New York Stock Exchange, shares of GCBC continue to be traded elsewhere, and the market activity indicates that some investors consider the company a “strong buy.”

The current stand-off between GCBC employees in PRC and the JPL appointed in the Cayman Islands cannot continue indefinitely. Let us bear in mind that the petitioner against GCBC is ultimately a subsidiary of Sanpower Group, which is one of China’s top 500 enterprises, with annual gross sales of RMB 130 billion (18 billion in US dollars). The Chairman of Sanpower, Mr. Yuan Yafei, likes to emphasize that the conglomerate is “born and raised” in China. They are positioned to bring any wrong doers to justice within the PRC legal system. It should also be noted that Sanpower Group controls the other 76% of the Shandong cord blood bank where GCBC has a 24% stake. This demonstrates that Sanpower has the know-how to operate GCBC effectively once they get control of the corporation in their hands.

This type of story begs for a final paragraph on lessons learned. One lesson is that being publicly traded is not a guarantee that a cord blood banking company is a safe investment. We saw that in 2019 when Cryo-Save, the most extensive banking network in Europe at that time, went bankrupt, and this past year we see it with the trading halt on GCBC, the largest banking network in PRC. We have also learned that cord blood banks should be wary of putting too much money into investments with partner companies that will enable them to offer cell therapies. There might even be a lesson about the trend to consolidate family cord blood banks into ever larger national and international networks. At this moment, there are several countries in Europe where all the competing family cord blood banks are directly or indirectly owned by the same entity. The crisis at GCBC is a caution that the race to combine banks and make bigger profits must not get ahead of the pace of proper supervision of the enterprise.