SYDNEY (Reuters) - With a track record of funding junior miners, Australia’s IPO market is now warming up to something that might be just as risky as the diggers - drug makers.
Mining stocks have come under pressure over the past year as Australia’s decade-long mining investment boom fades and top consumer China takes a slower lane to growth.
Investors with an appetite for risk, who may previously have been lured by the promise of riches under Australia’s vast Outback, are now turning their attention to start-up drug makers.
“The early stage (drug) companies are high-risk and it’s akin to a junior mining explorer, so investors that are in that sort of risk profile are quite likely to look at biotech as well,” said James Posnett, manager of listings business development at the Australia Securities Exchange (ASX).
The S&P/ASX 200 health index .AXHJ, which includes the world’s No.2 blood products maker, CSL Ltd (CSL.AX), and hearing implants maker Cochlear Ltd (COH.AX), has soared about 33 percent in the past 12 months, versus a 27 percent fall on the S&P/ASX300 Metals&Mining Capped Index .AS52CMUP.
A National Investor Sentiment Survey in September found that 48 percent of respondents named healthcare as a sector where they were looking for opportunities, more than any other. Mining and energy ranked fourth at 44 percent.
The previous survey results in October 2012 had mining at the top with 51 percent, compared with healthcare at 31 percent.
Healthcare companies are now looking to cash in on Australia’s surging IPO market, which is expected to rebound this year to levels not seen since the global financial crisis.
They will join broadcaster Nine Entertainment Co Pty Ltd IPO-NEL.AX, property investment manager GDI Property Group and Kohlberg Kravis Roberts-owned (KKR.N) mining services company Bis Industries - some of the non-health companies already lining up to list.
Australia’s notoriously shallow pool of venture-capital funds leaves small healthcare firms, some of which have little but clinical trials to show to investors, little option but to tap the stock market to finance their research.
The return of healthcare companies considering IPOs comes after lean years from 2008 to 2012, when Thomson Reuters data shows only seven such firms floated with shares valued at a total of $212 million.
This year has seen two healthcare IPOs already. The biggest, in-vitro fertilization company Virtus Health Ltd (VRT.AX), raised about $333 million at its June debut and the stock has gained more than 30 percent since then.
Down the track there are at least seven more healthcare companies that either have filed listing plans to the ASX or are mulling a float in 2014.
On the mining side, there were 218 listings on the ASX from 2008 to 2012, raising an average $420 million a year. That has slumped to seven listings so far in 2013, raising a total of just $34 million.
“I think the market has been positive in general, so (it)wouldn’t be bad timing (for an IPO),” said Darren McKennay, CEO of Sydney-based medical devices supplier LifeHealthcare, which is considering an IPO valued by local media at A$100 million.
Other potential listers include Melbourne-based animal drug maker Nexvet Biopharma Pty Ltd, which is hoping to raise up to A$30 million next year, and Innate Immunotherapeutics Ltd, which said it is targeting a A$12 million float.
While it might seem counter-intuitive to compare miners with drug makers, for investors the profile is similar.
Drug companies, particularly those at early-stage trials, are much like junior miners with a promising field that has yet to move into production.
“Early-stage biotechs have a high probability of failure,” said Anton Uvarov, a senior healthcare analyst at financial services firm RM Capital.
Balancing the uncertainties over trials and research, Australian drug makers have the advantage of an aging population at home and increasing demand from Asia’s burgeoning middle class.
Australia’s pharmaceutical exports jumped 6.2 percent to A$4.1 billion in 2012, and industry body Medicines Australia says the value of drug exports to Asia could leap fivefold by 2020.
But for every success in the pharmaceutical industry there are many more failures.
“If you happen to get the one or two that have done extremely well then you’ve done OK,” said Don Williams, chief investment officer at Platypus Asset Management.
($1 = 1.0530 Australian dollars)
Additional reporting by Velda Cheng in Hong Kong and Jackie Range in Sydney; Editing by Stephen Coates