MicroTech Medical Hong Kong IPO Greeted With Yawns

Key Takeaways:

• Diabetes device maker MicroTech Medical’s shares have gone largely unchanged in their first four trading days after the company raised $250 million in its Hong Kong IPO
• Despite attracting U.S. giant Invesco, company is vying for investor attention with a growing field of newly listed China-focused medical device makers

By Doug Young

Another day, another medical IPO.

That’s been a major theme for 2021 in Hong Kong, where a steady stream of drug and medical device makers have been marching to market throughout the year. The latest of those, MicroTech Medical (Hangzhou) Co. Ltd.(2235.HK), has been greeted with a relative yawn by investors, with its shares barely budging since their trading debut last week.

That’s despite the fact that the company’s newly listed shares attracted some relatively big name investors, led by global fund giant Invesco, which disclosed last Tuesday that it now owns about 15% of MicroTech’s stock or more. The bottom line is that quite a few similar Chinese medical device makers have recently come to market, all in Hong Kong and all crying out for investor attention.

With so many voices calling out to “feed me, feed me,” it’s no huge surprise that investors may still be trying to separate the wheat from the chaff. In this case, MicroTech Medical’s shares do look a bit pricey, though not unreasonably so if it can deliver the kind of fast growth that comes with newly developed products with big market potential.

MicroTech’s focus is the diabetes treatment market. It currently has two products approved for sale: a patch insulin delivery system and a continuous glucose monitoring system. The former has been approved for sale in the EU and China, and is expected to get U.S. approval in the first half of next year. The latter has been approved in the EU and is expected to get similar approval for China by the end of this year.

Those two products and others MicroTech is developing are chasing a global market for diabetes management devices expected to grow 8.8% annually from $47.8 billion in 2019 to $111.1 billion in 2030, according to third party data cited in the company’s IPO prospectus first filed back in May. China should grow by an even stronger 14.7% annually over that period to $9.5 billion by 2030 as Chinese live longer and increasingly unhealthy lifestyles lead to growing cases of diabetes like those seen in more affluent nations.

MicroTech and its peers, as well as all the recently listed drug makers, are all trying to sell investors on the huge potential of the China market as a new generation of more affluent patients can afford more expensive treatments for a wide range of illnesses. What the market probably needs is a healthy wave of consolidation, as most of these companies won’t have the depth of resources to remain viable over the longer-term, if and when they ever become profitable.

But for now, at least, investors seem happy to give these companies the cash they need to stay in business and keep growing. MicroTech raised nearly HK$2 billion ($257 million) from its IPO, giving it a market value of about HK$13 billion. After their first four days of trading, the shares finished last week at HK$30.60, just a tad above their offer price of HK$30.50.

Perhaps reflecting the investor fatigue surrounding the near non-stop steam of new medical listings, trading volume for the company’s stock quickly plunged from nearly 7 million shares on the first trading day to just 400,000 last Friday.

Rising Revenue

Despite being founded in 2011, MicroTech has only been getting significant revenues from its current product lineup in the last three years. Its revenue rose 45% last year to a modest 75 million yuan ($11.7 million) compared with 2019, while its loss over that period widened to 121 million yuan from 79 million in 2019.

The rising losses came on the back of sales and R&D expenses that outpaced revenue growth. Sales costs roughly doubled to 55 million yuan, while R&D spending was up 64% for the year to 82 million.

Such rapid increases aren’t necessarily a bad thing since the company needs to keep developing new products and expanding the reach of existing ones, which cost money. And the company is also making a push to sell more of its products directly rather than through distributors, which requires more effort and expense but is typically much more profitable.

In an encouraging sign that it’s moving in the right direction, the company’s revenue growth accelerated strongly in first four months of the year, while its losses also narrowed sharply, according to an updated version of the prospectus filed in September. More precisely, its revenue more than doubled year-on-year to about 39 million yuan in the first four months of 2021, while its net loss fell to 2.6 million yuan from 4.1 million yuan a year earlier.

While those most recent numbers may look encouraging, MicroTech still faces the problem of making itself stand out from the many other similar companies that have recently gone public. Those include Venus Medtech(2500.HK), which listed at the end of 2019, as well as Suzhou Basecare Medical (2170.HK) and Broncus Holding(2216.HK), which listed this year in February and September, respectively.

Since none of these companies are profitable yet, we can only compare them in terms of price-to-sales (P/S) to see how they stack up against one another. In those terms, MicroTech looks a bit pricey, with a P/S of 142. That means that even if its sales double in the next year, it would still command a very high P/S of around 70.

By comparison, Venus Medtech and Suzhou Basecare Medical have much more reasonable P/S ratios of 35 and 27, respectively. And the more mature Mindray Bio-Medical (300760.SZ), which once traded in New York but later de-listed and now trades in Shenzhen, trades at a P/S of just 20. All those figures are actually still quite high compared to more mature companies, reflecting the big growth investors expect from this group.

With MicroTech now publicly traded, investors have yet another option to choose from for medical device makers with a China focus. The company’s early attraction of Invesco and smaller U.S. fund managers Hudson Bay Capital and Matthews International Capital is certainly a good sign. Now it will just need to keep posting strong growth and become profitable in the next two to three years to justify those votes of confidence.