Chinese biotech valuations likely hit as trailblazer's Hong Kong shares sink

By Julie Zhu and Robin Respaut

HONG KONG/SAN FRANCISCO (Reuters) - Biotech startups can expect more measured valuations should they list in Hong Kong, investors and bankers said, after shares of the first such firm to take advantage of rules allowing listings from pre-profit biotechs dropped 44 percent in the first month.

Hong Kong Exchanges and Clearing Ltd , operator of the city's bourse, revised rules this year for dual-class share structures, secondary listings and early-stage biotech firms to attract so-called new-economy companies from mainland China.

At least 10 more mostly Chinese biotechs plan to go public in the city this year, with some even dropping plans for U.S. share sales in favour of listing closer to home due to new rules for pre-revenue, pre-profit biotechs that took effect in April.

Maiden applicant Ascletis Pharma Inc , a pre-profit biotech developing Hepatitis C and HIV treatments, was valued at $2 billion after its initial public offering (IPO) priced at the middle of an indicative range. Its stock debuted on Aug. 1 at HK$14, but by the end of its fourth week of trade, was at HK$7.88.

Ascletis, in emailed comments, said it noted the share price movement, and that its "fundamentals remain very strong and unchanged since the IPO."

Nevertheless, the stock drop has left Singapore sovereign wealth fund GIC Pte Ltd [GIC.UL], a cornerstone investor with a $75 million stake, nursing losses of $32.8 million, Reuters calculations showed.

"You want the first one to go well, and it's gone terrible," said Chief Executive Brad Loncar of Loncar Investments, whose Chinese biotech-focused exchange-traded fund (ETF) - the Loncar China BioPharma ETF - has risen 8.2 percent since its Aug. 15 launch.

"You have to create value, and right now it (Ascletis) is trading on sentiment in front of a group of investors who don't have experience with companies that don't generate a profit."

Some market participants said Ascletis' share price drop was a wake-up call.

"With a surge in China's biotech industry in recent years, everyone has been a bit overexcited," said Kevin Xie, co-founder of investment bank China Renaissance and head of its healthcare division.

"As market conditions have become more challenging than a year ago and investor sentiment has cooled, many biotech firms will have to adjust valuations in both primary and secondary markets."

People involved in Ascletis' IPO said relatively high pricing contributed to the stock's decline. The listing also coincided with a vaccine scandal in the world's second-biggest drug market, as well as an escalating Sino-U.S. trade dispute which has got investors fretting about any impact on listings.

"It's actually good news to have everyone cooled down after months-long hype and excitement around the industry," said Jonathan Wang, senior managing director and co-founder of the Asia fund at healthcare investor OrbiMed Advisors.

Wang, who sits on the Hong Kong bourse's biotech advisory panel, also pointed to a growing "herd mentality" among investors chasing biotech firms regardless of high valuations.

"That is very dangerous and could either create bubbles in the industry or depress it in the long term," Wang said.

(Reporting by Julie Zhu in HONG KONG and Robin Respaut in SAN FRANCISCO; Editing by Christopher Cushing)