Chinese biotech company WuXi Biologics could raise over $500 million in a hot Hong Kong initial public offering. A value of up to 30 times 2018 earnings, according to International Financial Review, sounds high, especially given a novel business model. But earnings are soaring and the local bourse lacks exciting drug firms.
At the top of the price range, WuXi will be valued at $3 billion. The company helps drugmakers research and manufacture new drug therapies made from living cells. Known as biologics, these are much more expensive and harder to make than traditional, chemical-based pills. As China’s first and only one-stop shop for these outsourcing services, WuXi’s business model and technology is largely untested.
Still, the group is on track for a blockbuster initial public offering when its shares start trading on June 13. Demand is so strong that WuXi has turned down cornerstones, according to IFR, going against a typical practice in Hong Kong where friendly investors lend their backing to an IPO by committing to buy and hold stock for a fixed amount of time. Bankers have also decided to stop taking orders a few days earlier than planned.
One explanation is that growth is strong. In China, where demand for biologics is rising on back of an aging, richer society, the market will hit 327 billion yuan ($48 billion) by 2021, according to research cited by WuXi. And outsourcing services will expand annually by 35 percent to 9.2 billion yuan over the same period. Earnings at WuXi, which counts AstraZeneca and Johnson & Johnson as customers, more than tripled last year to 141 million yuan, and are expected to top 568 million yuan in 2018, according to one estimate cited by IFR. So before too long, WuXi’s valuation could look a lot more reasonable.
It also helps that Hong Kong’s finance and property-heavy bourse only has a handful of sizeable life-science listings. So an exciting newcomer is an easy sell. For Hong Kong investors, that combination of growth and scarcity is a powerful one.