Bottom line: Two biotech firms’ abandonment of New York IPOs for Hong Kong is part of a broader trend to make Hong Kong and China more competitive for high-growth startups, and could ultimately boost valuations in all three markets.
We’ll take a break from all the trade war talk as we close out the week and instead turn to another major development taking place in Hong Kong, where the local stock exchange has just rolled out some reforms with major implications for high-growth startups. Those reforms have reportedly netted a couple of biotech firms that were originally planning to list in New York, reflecting a potential new rivalry between these two markets.
Before the reforms, Hong Kong’s stock exchange was quite traditional and also strict about a few things, including dual-class partnership structures and profitability. The former British colony refused to allow dual-class partnerships that gave disproportionate power to holders of a special class of preferential shares. At the same time, it also had strict rules saying all companies must show three consecutive years of profitability before listing.
Those rules might have been good for small shareholders, but they were bad for the exchange at another level because they scared off a number of firms with strong growth potential that failed to meet those requirements. The classic one of those was Alibaba (NYSE: BABA), which ultimately listed in New York after Hong Kong declined to allow it to list using the dual-class structure that Alibaba wanted.
The new rules that are now taking effect will allow listings for both dual-class share structures, and also for certain companies that are still loss-making, most notably biotech firms that may have promising drugs but have yet to commercialize them. That second factor appears to have tipped the scales for a couple of biotech firms that were previously eyeing New York listings.
According to the latest reports, Innovent Biologics and Ascentage Pharma are both making a U-turn back to Asia, scrapping plans to head to New York in favor of the new-and-improved environment in Hong Kong. (English article) Both firms are backed by US powerhouse Fidelity, which appears to be the source of this particular report, even though no specific person is named.
The pair are eyeing listings in the second half of this year, and could collectively raise up to $800 million, according to the report. Ascentage is looking at around $300 million, while Innovent could raise between $300 million and $500 million. Both companies have yet to log any revenue because they are still developing their drugs, and thus each is losing money, which is quite common in this space.
Frankly speaking, New York was never really all that nice to China pharma companies, so this turn to Hong Kong isn’t that surprising. The two major firms that I know of that tried New York listings, WuXi Pharmatech and Simcere Pharmaceutical, both privatized in the big privatization wave a few years back. From what I can tell, both have fared much better back in China. WuXi Pharma is actually in the process of re-listing its WuXi AppTech unit here in China, and has become one of the year’s hottest listings that could debut as early as next week.
That takes us to another point, which is that China is also aggressively courting these high-growth startups from the high-tech and biotech sectors. WuXi AppTech made headlines a few weeks ago when it got to skip the big queue of companies waiting to list and got approved for an IPO to raise nearly $1 billion in Shanghai. China is also getting ready to roll out a China Depositary Receipt (CDR) plan that is similar to the American Depositary Receipts (ADRs), and would let companies like Alibaba and Baidu (Nasdaq: BIDU), now listed in the US, making second concurrent listings in China.
The bottom line is that Chinese high-tech and biotech startups are suddenly being strongly courted by both Hong Kong and mainland China’s stock markets, after being neglected for years by both and only really welcome in New York. That could ultimately be good for everyone, investors and companies alike, as a more competitive marketplace for these firms could drive up valuations across the board, boosting prices and multiples in all three markets.