In the first of a series from stock exchanges around the region, Josh Collard, listings business development manager at the Australian Securities Exchange, explains why the ASX is attractive to healthcare companies.
The Australian Securities Exchange (ASX) is home to more than 160 healthcare companies with a combined market capitalisation close to A$150 billion (US$112.3 million), and is a highly active market for initial public offerings (IPOs). There have been 36 healthcare IPOs in the past three years, collectively raising A$5 billion.
The ASX healthcare sector is diverse, with around 50% of companies in healthcare (around half of these are involved in med-tech), 30% in biotech, and the remaining 20% split between pharmaceuticals and life sciences. The top 10 stocks account for 85% of the total market capitalisation of the sector, including some well-known names such as CSL, Resmed and Cochlear. Beyond the large caps there is a long tail of smaller companies. That is where the appeal lies for many – viewing the exchange as an attractive capital raising venue for early stage companies to fund both their commercialisation and growth aspirations.
There have been two waves of healthcare listings on ASX since the early 2000s. The first was during the period from 2003 to 2007 when higher-risk capital was looking for growth opportunities outside of the traditional tech sector following the dot-com crash. During this period ASX saw over 70 healthcare listings, before a slowdown following the start of the resources boom in the mid-2000s when a large proportion of higher risk capital was reallocated to mining stocks. As the resources boom began to ease in 2012, higher risk capital initially moved into cash, before rotating into the healthcare and technology sectors from 2013. Since then, ASX has attracted 44 healthcare listings and the IPO window remains open today.
There are several key differences between the first wave of ASX healthcare listings and the current wave. Companies coming to market in the current wave are generally more mature, closer to (or generating) revenue and investors are better educated about the sector. In terms of subsector trends, the first wave saw a larger number of biotechnology companies coming to market, whereas the current wave has seen momentum with medical device and digital health companies. A number of early stage medical marijuana companies have also listed over the past 12 months.
ASX has a long history of supporting early stage companies, and unlike some of its peers, the exchange offers a single main board listing – that is, it does not have a junior board. This has advantages for prospective candidate companies, as many investment mandates exclude junior boards, limiting the capital pool available to them. ASX also has a very active retail investor base that, alongside specialist small cap funds, is supportive of early stage companies seeking to raise capital.
ASX has a unique value proposition that helps it attract companies. It offers the ability to list earlier on a globally recognised market, access an investor base that is active in small and mid-cap stocks and achieve index inclusion at an earlier stage than would be possible on other major markets. For example: entry to the S&P/ASX 300 index starts at a market capitalisation of A$300million, whereas entry to most other global indices starts at US$4-5 billion market capitalisation. Once a company enters the main index, many institutional funds are mandated to invest. Global funds are active in Australia enabling companies to gain access to international investors, with around 45% of total institutional investment in the S&P/ASX 200 coming from offshore.
Over the past four years there has been significant growth in the number of cross border listings that ASX has attracted. A combination of factors has helped this. Australia has one of the world’s largest pools of investable funds, the largest in Asia, with most funds allocated to equities mandated to invest in ASX listed companies. There is also increasing demand for foreign companies from Australian investors in an effort to diversify the menu. ASX has been particularly active marketing to companies that have limited access to capital in their domestic markets, or companies that originate in large home markets that view a public listing as preferable to other sources of funding, such as private equity or venture capital investments. Foreign companies in the sector are also attracted to Australia to take advantage of the competitive r&d tax concessions that are available.
Healthcare companies have found their way to ASX from countries such as New Zealand, Singapore, Ireland and the US. Despite the US having the world’s largest capital markets, many companies in the small and mid-cap world struggle to attract attention, and seek to explore external options until they are of a scale sufficient for the US public markets. An example is HeartWare International, which listed on ASX in 2005 with a market capitalisation of A$80 million, before dual listing onto NASDAQ in 2009. It was subsequently acquired by Medtronic last year for US$1.1 billion. Other recent US success stories include Osprey Medical, which is based in Minnesota, and AirXpanders, which is based in California. Both companies have raised several rounds of capital via an ASX listing to fund their operations.
ASX continues to promote the market for healthcare companies, both at home in Australia and abroad. This trend of foreign companies utilising the ASX as a capital raising venue is set to continue, and investors can expect to see an expanding menu of healthcare companies across various geographies and sectors.
