So Where to List?

Part of our work involves meeting with and monitoring private healthcare companies that may list in the next few years. Some of the discussions touch on where to go public. Most companies list in their domestic markets by default because of name recognition among potential investors; familiarity with the markets/exchanges; and convenience (overseas roadshows are optional, not required). There are is a subset of companies that chooses to list overseas. A broad range of considerations drives these decisions and we have noticed several patterns behind these exceptions. The following discussion focuses on the highlights and is not intended to be comprehensive. 

Liquidity/Foreign Ownership Limits

Many emerging markets impose limits on foreign ownership. For example, several GCC-based healthcare companies have listed in London rather than their home markets (where a 49% foreign ownership cap is common) in order to attract a broader range of investors. In addition, the differences in liquidity and audience size are staggering. London’s market capitalization of roughly US$3.5 trillion is 9x that of Saudi Arabia’s (US$0.4 trillion).

Exchange Rules

China’s three main stock exchanges (Hong Kong, Shanghai, and Shenzhen) require companies to be profitable prior to listing. As a result, “pre-commercial” biopharmaceutical and medical device companies based in China must list elsewhere. The US is a popular alternative for those companies that can meet investors’ standards for governance, scientific credibility, and other criteria. Taiwan has an active “pre-commercial” healthcare sector, but the audience is predominately retail and short-term oriented. That said, there is a growing list of companies with brand-name venture investors, globally-oriented (and located) management teams, and credible R&D strategies listing there. China started the National Equities Exchange and Quotations (NEEQ), an over-the-counter board for small and early-stage companies, in 2012. The NEEQ’s main disadvantages are very limited liquidity and optimistic valuations. That said, several healthcare companies have listed minority stakes in subsidiaries as a financing tool. Foreigners cannot invest in this market. 

Investor Base

As mentioned earlier, the US is the preferred destination for those companies that can meet investors’ standards. The audience is primarily institutional, highly sophisticated, and can take a long-term view (though it can be as short-term as anyone else). In addition, there is a deep reservoir of historical data for valuing early-stage healthcare companies based on public trading comparables, private financings, and M&A activity. Finally, a US listing enhances a company’s stature with potential business partners (and investors).

Breadth of Ambition

Managements with global ambitions have sought foreign listings to raise their companies’ profiles with international audiences. This motivation appears infrequently among the companies that we monitor. For instance, the vast majority of China healthcare ADRs operate domestically.

Length of the Listing Process

Healthcare companies on China’s A-share markets (Shanghai and Shenzhen) generally trade at relatively high multiples relative to developed markets, making them an appealing venue for mainland Chinese companies. That said, the biggest obstacle to a listing is the backlog of applications at the China Securities Regulatory Commission (CSRC), which manages the pace of approvals based on market conditions. IPO windows open and close over time everywhere, but China’s regulatory process adds an element of arbitrariness to the process. In fact, the CSRC suspended IPOs between November 2012 and the end of 2013 in the face of weak markets. 

Final Points

Companies that list overseas in some cases resemble a corporate “mutt” with headquarters in Country A (and possibly elsewhere) and a stock listing in Country B. This dynamic does not matter unless one country is a developed country and the other is a developing country and you’re trying to decide if the company is “emerging market” or “developed market”. Good thing that these are the exceptions. Finally, we should mention that the term “mutt” is tongue-in-cheek because some of these companies are of very high quality. 

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