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'No Exit' on Chinese Markets Despite Relaxing of IPO Ban

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By Shannon Ellis
Contributing Writer

SHANGHAI, China – Chinese biopharmaceutical companies are unlikely to benefit much from a relaxation in an 8-month-old ban on new initial public offerings (IPOs) or from new draft regulations aimed at improving disclosures and governance.

Chinese stock markets are troubled by financial irregularities within listed companies, while new issues have, in the past, been blocked by fraudulent accounts.

While U.S. markets have broken record highs this year, the two markets in mainland China – Shanghai and Shenzhen – are among the worst performers in the world.

At the same time, the number of new IPOs in China declined drastically in 2012 and 2013.

"In biopharma, you want somebody to finance your start-up phase, which is going to be long and risky. China has no way to do that, zero," said Steve Dickinson, a partner at the law firm Harris & Moure and co-writer of the popular China Law Blog.

"There is a scandalous crisis in the China private equity world because all these people came in with private equity over the past seven or eight years, and now they have found that there is no exit," he added. "There is no IPO; there is no exit."

Only 12 life science companies went public in 2012 raising $1.4 billion – pharmaceutical companies accounted for $921 million of that – a 73 percent decline from 2011 when 30 IPOs in the sector raised $5.3 billion, noted industry intelligence provider ChinaBio in a recent white paper.

In its own track of new listings in the biomed or pharmaceutical space, Dealogic said there has been only one new listing in either Hong Kong or mainland China so far this year, and it was worth $90 million.

Last year, there were nine, worth $1.25 billion. In 2011, there were 20 worth a total of $4.33 billion. (See New Listings chart.)

The largest deal since 2009 was the follow-on listing of Shanghai Pharmaceutical Holding Co. Ltd. in Hong Kong in May 2011, which was worth $2 billion. The largest deal in mainland China was the April 2010 listing of Shenzhen Hepaling Pharmaceutical Co. Ltd. in Shenzhen, which was worth $869 million. (See IPO and Follow-on Listings chart.)

The visible reality is that the number and size of IPOs in the pharma and biomed sector in China have dropped significantly. And without the option to go public, other investment channels such as venture capital or private equity may also be held back, although ChinaBio pointed out that the volume of venture capital deals, M&A and partnering deals has risen.

'Just Cosmetic'

For the time being, mainland China stock markets remain fraught with problems. Fraudulent reporting and poor corporate governance are rampant.

As part of an ongoing effort to tackle those problems, the China Securities Regulatory Commission (CSRC) effectively halted all IPO activity in mainland China in October 2012.

The problems with listed companies span all sectors, and biotech companies were hardly exempt. Problems were found with the accounts of companies like Hainan Chuntch Pharmaceutical Co. Ltd. and rice developer Wanfu Biotechnology (Hunan) Agricultural Development Co. Ltd. The regulator also issued a warning to Nanjing Securities, which backed the IPO of tea seed oil developer Guangdong Xindadi Biotechnology Co. for failing to uncover discrepancies with the company's accounts. The proposed listing was eventually withdrawn.

This month, the CSRC issued a consultation paper with new rules for IPOs that aim to protect investors and limit abuses.

Under the new regulations, issued in draft form on June 7, the public and media would have one month to investigate candidates' financials. The draft includes a two-year lock-in period to prevent major investors and executives from selling shares at prices lower than the IPO.

Under the proposed rules, IPO issuers and arrangers will be allowed to decide the price, timing and allocation of their share offerings.

The CSRC currently has absolute control over new issues. Twice in the last year – with the issues of Zhejiang Shibao Co. Ltd. and China Molybdenum Co. Ltd. – the CSRC lowered IPO prices sharply to bring valuations in line with other markets.

"A lot of people are saying, 'Oh, China is maturing; they are finally going to open the IPO market.' If what you are seeing [with the ban] is true, they are closing down even tighter," Dickinson told BioWorld Today. "It's not a source domestically, internationally for substantial financing of Chinese companies. Bank loans are, not listings.

"They're just cosmetic to show China has arrived and does sophisticated things," he added. "It has no meaning in terms of finance."

Justin Chakma, a venture capitalist and commentator on the sources of innovative biopharma funding in China and other emerging economies, said he believes strict currency controls are another significant barrier.

"The most common investors, surprisingly, have been family-owned holding companies and real estate companies, as opposed to more professional private equity outfits, which have a more traditional limited partnership structure," Chakma said.

For the time being, Hong Kong remains a viable option. The most recent example is Beijing Tongrentang Chinese Medicine Co. (HK:8138), an arm of popular Chinese medicine company Tong Ren Tang, which has other listings in Shanghai and Hong Kong. Tongrentang CM issued 200 million shares on the Growth Enterprise Market of Hong Kong at HKD3.04 (US 39 cents) on May 7. The shares more than doubled in value on their debut and closed at HKD11.50 Friday.

The Hong Kong Stock Exchange, which is much better regulated and independent of Beijing authorities, includes about 70 biotech companies. Shanghai has some 30 health care companies listed.