China to lift IPO ban; slow-queuing pharma may prefer Hong Kong

HONG KONG – The China Securities Regulatory Commission (CSRC) said Friday it plans to lift the four-month ban on IPOs that started during a bout of extreme volatility in the financial markets in Mainland China throughout June and July.

At the time of the halt, there were 28 companies queued to go public. Of those, 10 plan to restart the process and will continue along their pre-existing offering procedures, most likely after laying the groundwork for two weeks. The other 18 companies will be given the go-ahead to go public sometime this year.

Among the companies waiting to go public is a Jiangxi-based pharmaceutical company, Jiangxi Fushine Pharmaceutical Co., which planned to issue its IPO in July. The company received listing approval from the CSRC in June and plans to sell as many as 18 million shares on the bourse in Shenzhen.

Fushine was founded in 2002 and engages in research, development and manufacture of active pharmaceutical ingredients and pharmaceutical intermediates. It is currently the biggest manufacturer of beta-lactamase inhibitors in China and the leading supplier of carbapenem intermediates. According to its listing prospectus, the company recorded revenue of ¥510.72 million (US$80.1 million) last year, up by 15.3 percent compared to 2013 and 41 percent compared to 2012.

"We are glad that the IPO procedure has restarted," Peng Yun, an investor relations officer at Fushine, toldBioworld Today. "We are not among the first batch, though. At the current stage, we are still preparing further documents to hand them in to the related authorities."

The company aims to raise as much as ¥240 million (US$37.6 million) for its R&D projects through the listing. A major project in the company's pipeline is the development of high-quality tazobacam, an antibiotic that, when combined with piperacillin, is used to treat different infections caused by bacteria, including urinary tract infections and bone and joint infections.

Fushine appears to be the only health care company on the IPO list at the moment, but analysts expect more companies in the space to go public going forward.

"The suspension of IPOs did not impact the [pharmaceutical] industry much. We still see more health care companies seeking to be listed in both Mainland China and Hong Kong," said David Li, assistant vice president for health care research at Bocom International Holdings Co. Ltd.

The temporary halt of new issues in Mainland China is not likely to have stemmed any aspirations that pharmaceutical or other health care companies might have to go public, but many of them are now considering the Hong Kong Stock Exchange rather than Shanghai or Shenzhen.

"We definitely see more mainland health care companies coming to Hong Kong for listing this year and this would be the trend as they see many advantages here," said Li. "The IPO procedure is more standard and the pending time is rather short than the one in Mainland China. Companies can draw more international investors on the platform in Hong Kong, which is a good start for them to gain a strong international presence."

The potential interest among investors in China in life science companies could lure new issues. Chinese medical device company Mindray Medical International Ltd. (NYSE:MR), for example, has plans to privatize in the U.S. Some suspect the move could be the beginning of a move to list again in the home market.

"Mindray's share price has consistently underperformed over the last five years, prompting its management to consider whether a U.S. listing reflects the company's fair value," Dougal Adamson, a pharmaceutical and medical devices analyst at BMI Research, wrote in a note.

A RETURN TO ASIAN MARKETS?

This year, many U.S.-listed companies have been hit by declining investor confidence in the U.S. market and their shares are now undervalued, which is encouraging many to delist. According to data provider Dealogic, 11 U.S.-listed Chinese companies have announced privatization plans in deals totaling $13.4 billion. Most of them are considering relisting in the domestic market where investors are also increasingly open to pharma and medtech issues.

"There was a generation of life science companies that went to the U.S. for listing such as Mindray and 3SBio," said Helen Chen, director and partner at L.E.K. Consulting. "At that time, it was more of a statement of confidence and aspiration to tell the world, 'We are here.'"

But along the way, Chinese companies found it overwhelming to follow all the regulations and filing rules of the U.S. stock market and they started to feel a sense of restriction. At the same time, the excitement about the Chinese stocks lessened in the U.S., partially because of negative reporting and the pressure coming from short-sellers.

"As a result, the market environment is less welcoming and more challenging," Chen said. "At the same time, Asian markets, especially the Hong Kong Stock Market, was doing incredibly well for life science companies... so it's a combination of reasons for companies to rush out earlier and then come back now."

The aim of the initial halt in offers in Mainland China (which did not impact Hong Kong) was to stem a sharp decline in stock markets in Shanghai and Shenzhen through June and July. By stopping the issuing of new IPOs, regulators and the government hoped to prevent further stock market losses that could be caused by investors selling existing shares –and driving down their value – to buy into new issues.

The market started to stabilize in August and an increase of as much as 23 percent in the Shanghai Composite Index between the bottom in August and last week has led to analysts calling for another bull market and the resumptions of IPOs.

There are some who worry that restarting IPOs will weaken stocks in an already-volatile market but Felix Luo, an analyst at GF Securities, said such issues would not be a decisive factor for the market, noting that China has stopped IPOs in the past and the move to restart had little impact on how the market moved.

"There is divergence between the market movements that followed the previous five IPO resumptions," said Luo.

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