Business | Opinion
Russian firms favour Hong Kong's soft touch
Hong Kong is well placed to link Russian resource companies with investors from a country clamouring for their output
- Financial Times
- Published: 00:00 February 23, 2010
Things are not going to script. Shares of Rusal, the Russian aluminium giant, closed last week at 30 per cent below their January 27 debut on the Hong Kong stock exchange. That could be a blow to Hong Kong's hopes of attracting further Russian initial public offerings — just as it prepares to host an April investor shindig to drum up interest in Russian opportunities. Oleg Deripaska, Rusal's biggest shareholder, is still considering floating his En+ Power business on the same market. Rusal's woes may also reflect specific concerns over its debt and outlook rather than a lack of Asian appetite for Russian shares. But the idea Russian issuers would desert London and head east en masse was always far-fetched.
Hong Kong is, of course, well placed to link Russian resource companies, in particular, with investors from a country clamouring for their output. Viktor Vekselberg, a Rusal co-investor, calls Hong Kong a natural place to float his Kamchatka Gold venture in Russia's far east. There are geopolitical considerations too. State-owned Russian Railways, keen to develop the Trans-Siberian as a freight artery linking China and Europe, hints it may choose Hong Kong to list a cargo subsidiary. Russian tycoons may see Hong Kong regulators as a soft touch after they tore up their own rulebook by allowing risk-laden Rusal to list, but making the offer institutions-only.
Yet other big resource groups, including Metalloinvest, a mining group, and Suek, a Siberian coal miner, are targeting London. So is Vladimir Potanin's ProfMedia. London has the established investor base, less volatility, and appeals to Russians culturally and geographically. Returning after a two-year break, however, Russian equity issuers will no longer find London a sellers' market. Uralsib estimates heavily indebted Russian companies need to raise a hefty $55 billion (Dh202 billion) in 2010-11 — giving investors substantial bargaining power. To avoid further Rusal-style debacles, they should use it.
Risky outsourcing
Outsourcing usually provides a better service at a lower cost. But for pharmaceuticals companies, farming out their research function is a risky move. Last week, AstraZeneca agreed to pay up to $1.25 billion to Rigel Pharmaceuticals to licence its new rheumatoid arthritis drug.
Last July, Sanofi-Aventis bought its way into emerging market vaccines when it spent 429 million euros (Dh2.14 billion) on a majority stake in Shantha Biotechnics of India. Industry giants such as Pfizer and GlaxoSmithKline have also been busy signing licensing and partnership agreements for a range of new drugs.
These deals, though, do not signal a permanent shift towards outsourcing the costs and risks of research. Morgan Stanley may reckon that an investment in purchased compounds could yield three times the return of that same investment in in-house research. But leading players such as Pfizer and AstraZeneca have maintained a research budget of about 16 per cent of revenue over the past decade.
That is because while early-stage research has a low chance of profitability, it is relatively cheap. Buying developed research, with its higher expected return, is far more expensive. It costs about $1 billion to bring a drug developed in-house to market. AstraZeneca will pay Rigel up to one quarter more.
Furthermore, an outsourcing strategy leaves companies at the mercy of the secondary market as it assumes a ready supply of quality drugs is available from bio-tech companies. The output of these smaller research houses, though, is cyclical and the number of people who can finance them is limited. And large pharmaceuticals companies will be loath to enter into a bidding war for the successful ones, especially when a looming patent cliff makes cash flow uncertain. Outsourcing research can be as appealing as a doctor's visit.
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