Markets

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Chinese companies listed in the U.S. have been bedeviled by corporate governance concerns and a string of accounting scandals.

So one might think that a new breed of companies that often have zero revenue and valuations based on no more than a tale of future promise would be a hard sell. Not so.

A wave of Chinese biotech firms is starting to arrive on global markets -- and investors can't get enough of them.

Shanghai-based Zai Lab Ltd., a maker of biological drugs, has jumped 54 percent on Nasdaq since raising $172 million last week. Meanwhile, WuXi Biologics (Cayman) Inc., the country's largest contract research and manufacturing organization for these pharmaceuticals, has climbed 84 percent in Hong Kong after a $586 million initial public offering in June.

More are queuing up to join them. Xynomic Pharmaceuticals Inc., a startup that's developing cancer drugs, plans to list in the U.S. or Hong Kong later this year. Ascentage Pharma Group Corp., which also specializes in cancer treatments, hopes to raise $100 million.

The latest to go public already exhibit the classic trait of biotech companies -- steep valuations. Zai Lab, a company with no sales, now has a $1.4 billion market capitalization. WuXi Biologics, which had revenue of $181 million last year, trades at 114 times its 2017 estimated earnings.

The two companies' founders aren't exactly strangers to the U.S. They are both hai gui, or "sea turtles,"  as China's returning expats are known. Zai Lab's Samantha Du received her Ph.D. in biochemistry from the University of Cincinnati, worked at Pfizer Inc. and was chief science officer for a decade at Nasdaq-listed Hutchison China MediTech Ltd. before starting the Shanghai drugmaker. WuXi Biologics founder Ge Li has a Ph.D. in organic chemistry from Columbia University. 

WuXi Biologics is an outsourcing arm of WuXi PharmaTech (Cayman Inc.), which was listed on the New York Stock Exchange until a $3.3 billion management-led buyout in December 2015. Thanks to its parent's overseas relationships, WuXi Biologics has grown quickly and counts 12 of the 20 largest pharmaceutical companies as customers.

Growing Fast
WuXi Biologics is China's largest outsourcing firm for these drugs thanks to its parent's relationships with overseas pharma giants
Source: Company filings

Investors' enthusiasm for the latest crop of Chinese biotech companies can be attributed, at least partly, to scarcity. In the U.S., there remains a dearth of biotech IPOs, although follow-on offerings have recovered to late 2015 levels. In the third quarter, only four have been priced, with Zai Lab by far the largest.

Heavily Sedated
There has been a dearth of biotechnology IPOs in the U.S. in the past two years
Source: Bloomberg

As for Hong Kong, there have been no biotech stock offerings since 3SBio Inc.'s $817 million IPO in 2015.

Clinical-stage biotech companies by definition have no product revenue. The surge in demand for these stocks shows that U.S. investors are becoming more confident that their business prospects are for real.

Shares of BeiGene Ltd. have more than tripled since the Chinese developer of oncology drugs went public in February last year, giving it a market value of $3.7 billion. Hong Kong-based Hutchison China MediTech has jumped 97 percent in 18 months. Both companies have improved their drug pipelines since listing, according to Bernstein Research's Laura Nelson Carney.

The Real Deal
BeiGene and Hutchison China MediTech have improved their drug pipelines since listing
Source: Bernsten Research, Bloomberg

BeiGene, in particular, received a stamp of approval from U.S. drugmaker Celgene Corp. this July. Apart from investing $150 million in BeiGene, Celgene promised to develop and commercialize the company's new cancer drugs. 

So far, so good for the Chinese biotech wave. Now they just have to deliver.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net