Liquidity? Go west…

Image courtesy Phynova.

The company is not initially using the listing to raise more money, but hopes that it will improve liquidity in the company’s stock. “We believe OTCQX will provide cost-effective access to US investors, who have shown a growing appetite for investing in non-US securities,” said the company’s CEO, Robert Miller.

Phynova, which specialises in developing traditional Chinese medicines as western pharmaceuticals, is retaining its primary listing on the Alternative Investment Market (AIM) in London. It will issue American Depository Receipts (ADRs) in respect of up to 25 per cent of its issued share capital, with each ADR representing 10 ordinary Phynova shares.  

As long as an OTCQX-traded company complies with the regulatory environment of its primary exchange, it is relieved of the burden of registering with the US Securities and Exchange Commission (SEC). Compliance with SEC regulations, including adopting US GAAP accounting and fulfilling the requirements of the Sarbanes–Oxley Act, makes trading in the US prohibitively expensive for many international companies, especially smaller businesses.

The average first-year cost of complying with Sarbanes–Oxley is between $1.5 million and $2.0 million. Not only that, compliance requires management to monitor and audit their financial controls.

Indeed, the cost of maintaining Nasdaq listings has become too burdensome for some European biotechs, with UK vaccines company Acambis plc recently deciding to delist, for example. At the same time US companies such as Amphion Innovations and XL Tech Group have been attracted to list on AIM.

These requirements have deterred even large, established European companies such as BASF, Bayer, Roche, Air France/KLM, BG Group and British Airways, which have delisted from Nasdaq and the New York Stock Exchange and joined the Premier Tier of OTCQX.

The American attraction

Yet at the same time as SEC compliance becomes more onerous, the attraction of having a US listing is growing. As of 30 September 2007, US investments in foreign equities amounted to $4.9 trillion. This is equivalent to 22 per cent of all US equity investments, against less than 9 per cent a decade ago.

US investors could, of course, choose to trade in the foreign companies on their primary market. But private investors and institutions are often deterred by factors such as exchange rates, lack of analyst information on companies and unfamiliarity with overseas exchanges.

The International OTCQX took AIM as it role model when it was set up a year ago to create a listing process that is cost effective for overseas companies. In particular it has adopted AIM’s nominated adviser or Nomad system, in which companies are introduced to the market by a sponsoring investment bank that then has responsibility to ensure they comply with the reporting requirements. The OTCQX equivalent of the Nomad is the PAL (Principal American Liaison).

In less than one year of operation, OTCQX now claims to trade more volume per issue than any of the other major alternative trading markets. In December 2007 overall trading volume was four times that of AIM. While Miller acknowledges that companies listed to date are larger that Phynova, he points out that it would not take much trading activity to radically improve the liquidity of the company’s stock.

It will cost Phynova $100,000 to join OTCQX, and at that price Miller reckons it is a fair experiment. “We expect Phynova’s focus on the fast-growing Chinese pharmaceutical market to be of particular interest to US investors and we are optimistic that US interest will translate into improved liquidity in our shares.”

However, Miller is also realistic enough to realise that listing and liquidity do not necessarily go hand-in-hand. “You really have to work at it: we know it won’t happen by itself.” He is going on a road show and is hopeful that the company’s plan to start of US Phase IIb trial of its lead product a treatment for hepatitis C, in the second half of 2008 will attract attention.

Phynova’s shares went with a bang when it joined AIM in February 2006. After listing at 77 pence, they closed more than 70 per cent up on the first day at £1.32. Two years later they are underwater at 50 pence. But Miller says listing on OTCQX is not an implied criticism of AIM. “I’m a great fan of AIM, and going onto it was a very good thing for Phynova as a company. It’s just that OTCQX does offer a way of accessing another market.”

Other European biotechs are known to be considering the move. To them Miller offers this advice, “For a smaller company like Phynova it makes sense; it’s not costing us a fortune to have a go at this market.”