Chinese biopharmaceutical firm Wuxi AppTec has taken the first step to relist its assets in Asia, launching a HK$3.6 billion to HK$4 billion ($461m to $511 million) initial public offering for its biologics division in Hong Kong on Wednesday.
The Wuxi Biologics IPO comes 18 months after its parent was delisted from the New York stock exchange in December 2015. The parent, then known as Wuxi PharmaTech, was taken private through a $3.3 billion management buyout supported by Chinese private equity funds Boyu, Hillhouse and Ally Bridge, as well as Singapore sovereign fund Temasek Holdings and Ping An Insurance.
The deal is another test of investor appetite for the burgeoning biologics sector — and the fact Wuxi is not relying on the cornerstone investors, which often dominate Chinese IPOs in Hong Kong, hints at confidence in its appeal.
It will be the second time a former US-listed company has relisted in Hong Kong, following in the footsteps of 3Sbio, a Shenyang-headquartered drug distributor taken private in May 2013 and relisted in Hong Kong in June 2015.
Indicative terms show the IPO will comprise 193 million shares, 88% of which are new shares and 12% existing shares offered by company directors and employees. They are being offered at between HK$18.6 and HK$20.6 each and account for 17% of the company’s enlarged share capital.
The deal has a standard structure, including a 15% greenshoe option and a 90/10 split between institutional and retail investors, subject to clawback.
Global healthcare specialists showed intense interest in biologic drug discovery and manufacturing companies last year. That appetite was clear in the case of Samsung BioLogics, which completed a $2 billion Korea IPO on a high note despite a brief corporate history and an unimpressive track record of profitability.
Wuxi Biologics seems to believe investor appetite remains strong and can help it raise funds without cornerstone investors, which are often brought in to IPOs in Hong Kong get done.
Major Hong Kong IPOs without a cornerstone have been scarce in recent years. This will be the first since fast-food retailer Zhou Hei Ya’s $322 million listing in November last year.
Apart from the biologics business, Wuxi AppTec has also applied to list its research and development platform on the Shanghai or Shenzhen stock exchange. The company announced in March it has appointed Huatai Securities to advise on the mainland IPO.
Valuation surge
Details of Wuxi Biologics’ floatation reveals just how a successful delisting and relisting can help increase a company’s value.
According to sources familiar with the situation, Wuxi Biologics is aiming for a post-money valuation of $2.7 billion to $3 billion, suggesting the biologics division alone is already worth close to the parent’s equity value 18 months ago. That's despite the fact it accounted for just 5% of the group’s net profit as of the end of 2014.
The impressive valuation could also be a result of the strong growth in the biologics business. Between 2014 and 2016, Wuxi Biologics’ post-tax profit grew at a stunning compound annual growth rate (CAGR) of 83.3% to Rmb141 million ($20.5 million), while its revenue increased by a CAGR of 72.6% to Rmb989 million.
Syndicate analysts expect strong earnings growth to persist over the next few years. In their valuation models, analysts are generally pricing in bottom-line growth of over 50% through 2020.
Those estimates are supported by the fact Wuxi Biologics is close to completing new manufacturing facilities in Jiangsu province by the end of the year, which could increase its production capacity by a factor of six, from 5,000 litres to 35,000 litres.
Methodology
On a syndicate consensus basis, Wuxi Biologics’ implied equity value equates to 27.4 to 30.4 times estimated 2018 earnings pre-greenshoe, and 28.1 times to 31.2 times post-greenshoe, according to sources familiar with the situation.
These official valuation figures suggest Wuxi Biologics will be valued at a significant discount to Samsung BioLogics, which is trading at 47 times forecast earnings for 2019.
However, they admitted the figures were for reference only because investors would likely use different valuation models and assumptions for the two biologic companies, which are in the early stages of development and are yet to fully realise their revenue growth and profitability potential.
When Samsung BioLogics conducted its IPO process, investors were told to use cash flow and earnings assumptions through 2020 because it is the year when the company is expected to start realising profits in scale.
“Healthcare specialists are looking at the growth potential rather than the short-term figures,” one of the sources said. “Deal advisors are forbidden to provide long-term earnings forecasts under Hong Kong listing regulations, but investors will certainly apply their own valuation models for their internal assessment of the business’s fair value.”
In any case, Wuxi Biologics is set to enjoy rarity value since it will be the only listed non-Korean biologics contract manufacturer in Asia. The floatation is also coming ahead of those by several large Korean biologics firms such as Celltrion Healthcare and SK Biopharmaceuticals, which are in the process of finalising their listings on the local stock exchange.
Wuxi Biologics provides drug discovery and pre-clinical development support to international drug developers including AstraZeneca and Johnson & Johnson, as well as domestic players such as Harbin Gloria Pharmaceuticals and Zhejiang Medicine.
Based on its current timetable, Wuxi Biologics will conduct a management roadshow between May 25 and June 5, with a scheduled pricing date of June 6 and listing on June 13.
The sponsors of the IPO are Bank of America Merrill Lynch, Morgan Stanley and China Merchants Securities.
