By David Diamond
Life sciences companies, by nature, must perpetually seek capital until they have reached their ultimate endpoint, be it acquisition, licensing or failure. Those companies that are based in the U.S. naturally first look for capital infusion from U.S. sources. However, in a growing market with limited resources, finding sufficient capital to maintain business as usual has become increasingly difficult. More and more we are seeing U.S.-based companies seeking capital from foreign countries with the promise of raising millions.
Over the years, certain trends have emerged, but these trends have their strengths and deficits. For example, in the United Kingdom, going public on the AIM market or the LSE was a popular approach for a time, and there have been some initial successes. However, raising follow-on money has been very difficult. Conversely, U.K. companies, as do those from many ex-U.S. companies, look to the freer flowing market in the U.S. to raise money.
Other foreign markets include Germany via Frankfurt Stock Exchange, which did not work out well as a whole, as well as Taiwan on the Taiwan Exchange, where the bubble burst. How about Canada?
There seems to be an increasing tendency toward listing on the Vancouver and Toronto Exchanges, particularly for companies that are in the cannabinoid space. However, it remains difficult to raise initial money there and once one does, raising follow-on money continues to be a chore. Further, American investors still insist that these types of companies be listed on a U.S. exchange. Since their U.S. listings are usually on the OTC markets, up-listing to a more attractive exchange is also a difficult task that makes one question the wisdom of co-listing in the first place.
The latest country that seems to be courting the U.S. life science public offering market is China, specifically, the Hong Kong Exchange. In particular, U.S.-based life sciences companies with Chinese management teams or some other connections to China seem to be the primary target. The draw is exceptionally high valuations and the promise of raising significant money. While the Hong Kong Exchange is not the Shanghai or Beijing Exchange, it is still based in -- and primarily controlled by -- China, which has a long, questionable history with regard to open markets and respect of intellectual property rights. To date, no biotech companies have gone public on the Hong Kong Stock Exchange. However, I was recently told of a U.S. company that was considering listing there. They related that an insider within the exchange has already mentioned the possibility of a "big bubble," which, in conventional wisdom, translates to: "Proceed with caution."
Ultimately what is unique about the U.S.-based stock exchanges is the relative ease to continue to freely raise capital following the initial offering (provided the company performs). It is a tried and true system that functions very well. While the biotech market unquestionably has its ups and downs, it does work and has an established track record that public companies large and small from around the world can rely on.
While Hong Kong seems to offer the promise of excessive valuations and inordinate amount of money, one must first ask, "What is the catch?" The keen observer will note that if something sounds too good to be true, then perhaps it actually is. Who wants to be the one to risk their company’s future on such promises? Or maybe, go with an established system that, through experience and time, has demonstrated success and results.
David Diamond, CPA, is a managing director of CBIZ MHM, a national accounting and professional services provider, and the national technology & life sciences practice leader for the firm. David’s expertise covers a vast array of public, private and venture funded companies.