A macro view
Charles Li’s vision that HKEX can be the largest biotech IPO venue in the next five to ten years may sound ambitious, but when we look at the numbers and the context it is in fact quite achievable! My view is that two macro forces – continuous new company creation and global asset allocation demand – will serve as the main propellant to this quest.
The U.S. market is currently the largest biotech IPO venue with an average of ~45 biotech IPOs each year over the past five years and ~US$5 billion in IPO capital raised annually. Translating to HKEX terms – US$5 billion raise equates to ~US$20 billion in market cap at IPO (assuming an average of 25% float.) Can HKEX achieve such amount of biotech value creation?
Broadly speaking, market cap reflects the underlying sales/ net income potential of a company. For healthcare companies that ultimately means the health needs of individuals. Most investors understand healthcare is defensive, i.e. human health is independent of economic situation. However, healthcare sector in emerging markets (“EM”) has an additional growth dimension – as countries build/ modernize their hospital and treatment infrastructure, it leads to increased consumption of health services and products across all ages. There is often a fundamental under diagnosis and treatment in many EM countries. The shortage in services and products will continuously drive company creation. EM healthcare sector presents a unique and highly attractive investment profile of defensive growth that differentiates it from its developed market peers.
One can debate whether China still falls under EM but its healthcare sector exhibits very much a defensive growth profile as the government undertakes to improve health outcome for its citizens. The total U.S. healthcare market cap is ~US$5.5 trillion (i.e. all biotech, major pharma, specialty pharma, medtech, and services) while the total China healthcare market cap is ~US$1.5 trillion (~US$450 billion of HKEX listings plus ~US$1 trillion of China domestic listings.) While market cap is not the perfect reflection of sector value and part of the U.S. healthcare market cap represents global consumption, it is not hard to imagine we are still relatively early in the growth process given China has over 4x the U.S.’s population. Indeed, HKEX healthcare market cap was only ~US$5 billion in 2009 when the first large scale healthcare IPO took place – over US$400 billion of healthcare market cap has been created since then with most companies from China.
Separately, there is a shortage of investible defensive growth market cap for global investors. Technically only the HKEX listings and Stock Connect names are freely available to international investors. This translates to ~US$500 billion in investible market cap for China healthcare sector, which is less than Johnson & Johnson + GSK. The rest of Emerging Asia, LatAm, and CEEMEA healthcare companies have ~US$600 billion in total market cap but many are listed on less liquid exchanges with currency risks.
Global asset allocation need has and will continue to drive strong investor demand for high quality China healthcare names. Unlike tech companies, most China healthcare companies do not list in the U.S., hence this is not a competition between the U.S. and HKEX. HKEX has created a new avenue that effectively serves the funding needs of China healthcare companies. It is a platform for global investors to capture the attractive investment profile China healthcare sector presents. This dedicated healthcare capital pool will in turn engender more China (or even global) healthcare companies to list on HKEX. And Charles may indeed realize his vision!
* Numbers in the article are rounded for ease of discussion. HKEX’s 18A listing pathway is open to all R&D focused pre-revenue companies within all subsectors of healthcare (i.e. drug, medtech and services.) While in the U.S. “biotech” refers to R&D focused high-growth drug companies, which historically is the most active IPO issuer group. Special thanks to J.P. Morgan capital markets team who always helps with data requests enthusiastically.
This write up was originally published in the 4th issue of HKEX’s Biotech Newsletter on October 2020. Credits for content and diagrams go to HKEX.
Vanessa Huang is currently a General Partner at BVCF Management. Prior to joining BVCF, she was Head of Emerging Asia Healthcare Investment Banking at J.P. Morgan. Ms. Huang gained biotech industry experience at Amgen.
Ms. Huang is a member of the HKEX Biotech Advisory Panel and an independent non-executive director of Alibaba Health Information Technology Limited (Stock code: 00241).