A roughly $300 million GEM listing for the biotech arm of the Cheung Kong empire is already starting to whip up a media frenzy and lead manager Salomon Smith Barney is undoubtedly hoping that retail investors are about to shortly follow suit.
All commentators agree that while the 1.3 billion share deal has the outward appearance of a standard IPO, it is in reality little more than a branding exercise for the Li family name, with a highly subjective valuation and almost no growth forecasts. Few doubt that it will be anything other than a great success.
Cheung Kong group managing director HL Kam will explain the benefits of utilizing yeast in the life sciences over the course of two days of presentations in Singapore before the team move to Hong Kong next Thursday and Friday. The retail offering will open the same Thursday and close the following Tuesday, with pricing late on Thursday July 11 and listing on Tuesday July 16.
There will be a placement tranche and retail tranche with the usual 90%/10% split and clawbacks triggered by oversubscription levels of 15, 50 or 100 times. Within the placement tranche, there is also a preferential tranche to Cheung Kong shareholders, who are entitled to one CK Life share for every 25 Cheung Kong shares. Initially, these shares will represent up to 4.5% of the placement tranche and pending the imposition of the first clawback, about 10%.
CK Life employees will account for a further 2% of the placement tranche.
In the interests of maintaining a sizeable free float, Li Ka-shing himself has waived his right to apply for shares and will be diluted from a 40% stake to about 29.5%, while Cheung Kong will drop from 60% to 44%. CK Life chief scientist Larry Cheung also will own about 6.27% post IPO.
For Salomon Smith Barney, the deal represents the first public equity offering to be executed by the dream team of Francis Leung and Frank Slevin, both poached from BNP Paribas Peregrine. Co-leads include their former firm BNPP alongside Bank of China International, CLSA, HSBC and ICEA. Co-managers number CEF, China Everbright, Core Pacific, FB Gemini, ING Barings, Sun Hung Kai and Worldsec.
CK Life was established in December 1999 with Victor Li installed as chairman and numbers 128 staff of whom 57 are scientists. As a result of the offering, the company will list 22% of its issued share capital (including the greenshoe) giving CK Life a prospective market capitalization of $1.36 billion.
Even by biotech standards, observers say the company is being listed at an early stage of development and its valuation methodology is possibly best described as opaque. In order to come up with a valuation, syndicate bankers have taken CK Life's five product lines and looked at prospective market share and profit margins within each to come up with a discounted cash flow model.
However, none of the five product lines is yet making money as biotech companies typically take years to recoup investors their seed capital. In 2001, for example, CK Life posted a net loss of $7.4 million on revenue of $19 million.
The company is founded on the premise of activating and applying the different properties of yeast for a whole series of environmentally products. These five product lines span: 1) eco agricultural products such as fertilizers and animal feed supplements; 2) bioremediation products, which are used to treat biodegradable pollutants; 3) nutraceuticals such as food supplements; 4)dermatologicals such as anti-ageing creams; and 5) pharmaceuticals for the treatment of preventable diseases such as cancer and HIV.
The company is said to have 100 product patents within various stages of application for a global market valued at $200 billion. Three of these patents have already been approved by the US patent office. To date, one product has begun to contribute revenue (an eco friendly fertilizer called NutriSmart), with a second (WonderTreat animal feed) expected to begin sales later this year and a third (Vitagin health drink) expected to roll out at the beginning of 2003.
Critics say that it is very unusual to have such a long product list and highlight the lack of a modern, well-regulated pharmaceutical industry in Asia. In China, where biotech is booming, there are also problems with rampant patent infringement.
China is, however, one of the key selling points of the deal and supporters say it is important to have a diversified range of products given that the odds of a drug reaching clinical trials are a thousand to one. Pre-clinical trials typically take three to five years and clinical trials up to seven years during which time there is a 20% chance of winning final approval.
Many of CK Life's applications, by contrast take a far shorter timeframe and observers also highlight the strength of the Cheung Kong brand on the Mainland. "Li Ka-shing has far more name recognition in China than both Merck and Pfizer put together, says one expert. "He has hired a lot of Mainland Chinese scientists and spent the last two years building up the intellectual capital of a company and sector he clearly believes in.
"With biotech companies," he adds, "it's always helpful to have deep pockets and in Asia, many view Chairman Li as the next best thing to a government."
As many are often keen to point out, Li Ka-shing companies do not lose investors money either over the short or long-term. "His whole empire is based on the continuing faith of the Hong Kong public in his abilities," one market player concludes. "He's hardly about to blow this for the sake of raising $300 million."