A California-based pharmaceutical startup has turned public financing strategy on its ear by closing its first capital markets offering in Japan. Since early February, MediciNova has been trading on the Hercules Market of the Osaka Securities Exchange, which is the successor to NASDAQ Japan geared toward small and midsize companies.
With its successful $107.7 million offering of 30 million shares at $3.88 per share, MediciNova became the first American company to do its IPO in Japan, the first foreign company to trade on the Osaka exchange, and the only IPO to have closed in Japan by press time in early April.
"Whether the MediciNova IPO is a harbinger of a new trend or merely a reflection of current market conditions in Japan remains to be seen," says Richard Holbrook of Washington, D.C., who spent three years practicing in Japan and is currently counsel to Crowell & Moring's corporate law department. "If a U.S. company is going to do its first listing in Japan, however, the MediciNova IPO represents the perfect set of circumstances." Which, ultimately, means strong ties to Japan.
MediciNova was co-founded in 2000 by Japanese native Takashi Kiyoizumi, formerly CEO of San Diego's Tanabe Research Laboratories, a research division of the Japanese pharmaceutical firm Tanabe Seiyaku. Indeed MediciNova's core managers are all natives of Japan. Initially, MediciNova operated as a majority-owned subsidiary of Tanabe, but now it's a separate enterprise that employs 22 people in La Jolla and two in Tokyo.
Unlike traditional pharmaceutical companies, MediciNova doesn't produce its own drugs; rather it buys or licenses them from other companies and tries to develop them through trials. If the trials are successful, the company commercializes products in North America and Europe in partnership with larger drug companies. Most of the drugs it's working on are supplied by Japanese pharmaceutical firms, including Kissei Pharmaceutical Co. and Mitsubishi Pharmaceuticals.
Similarly, 70 percent of the $84 million in venture capital that MediciNova raised came from Japanese investors.
"We have a following in Japan, so doing our IPO in the country enhances our credibility and presence there," says Brian Anderson, MediciNova's executive vice president of corporate development.
Holbrook agrees: "This company has a good story to tell and it can communicate with potential investors in their native language."
At the same time, Japanese investors have developed an appetite for opportunities with a higher rate of return.
"Even in the high-tech bubble years, there were no IPOs in Japan from U.S. companies," explains Dave Snyder, the San Diego-based partner at Pillsbury Winthrop Shaw Pittman who quarterbacked the IPO for MediciNova and acts as the company's general counsel. "Professional investors have tended to focus on large cap domestic companies. But with the difficulties that exist today in the Japanese economy, the markets are much more receptive to exploiting technology and biotech and playing a role in innovation outside Japan."
Snyder also believes that IPO opportunities in Japan are available at a somewhat earlier stage in a company's development than they are in the United States.
"Analyst coverage is not as essential to success in [Japan's] market as it is at home," he says. "U.S. analysts focus on large companies, making it difficult for small companies to get any attention. The absence of analyst research doesn't have the same impact in Japan."
Conversely, however, becoming a public company makes MediciNova more attractive to American capital markets. "At the very least, the IPO puts MediciNova on the map," says Adam Noah, a research analyst with San-Diego-based Granite Financial Inc. "It doesn't mean U.S. analysts will necessarily cover the company, but MediciNova will be on their lists for tracking."
And there's no doubt that trading its shares in the United States is part of the company's long-term strategy. MediciNova even took the precaution of filing a registration statement under the U.S. Securities Act of 1933.
"We registered here because of the potential that shares would flow back into the secondary market in the United States," Snyder says.
The U.S. filing made MediciNova a "public reporting company" in the United States. As such, it became subject to the full range of SOX requirements--a must if it ever intends to attract U.S. financing.
"In the current environment, careful focus on internal controls is a plus, not a burden to be avoided," Snyder says.
But the dual registration made the transaction a little tricky: The company had to file the prospectus in two languages and had to be consistent with the securities regimes of both countries. And that required a fair complement of international legal talent.
Taking A Gamble
To represent MediciNova, Snyder compiled a team consisting of corporate partner Bo Yaghmaie from the firm's New York office, Tokyo partner Hisayo Yasuda, and two corporate associates from San Diego. The team retained Anderson, Mori & Tomotsune, a 200-lawyer Tokyo firm, to deal with the domestic law issues.
MediciNova's attorneys worked with Simpson Thacher & Bartlett and Linklaters' Tokyo office, which represented Daiwa Securities SMCB Co. of Tokyo, the underwriter.
The Daiwa team handled the negotiations with the Osaka exchange, while Snyder and his group managed the U.S. filing. The U.S. prospectus also had to comply with Japanese securities laws and the rules of the Osaka Stock Exchange.
That was easier said than done. Although Japanese securities laws have been evolving toward the American model in recent years, many of the concepts remain closer to the European civil law tradition. For example, interim disclosure rules in Japan are more liberal than those in the United States. On the other hand, Japanese law tends to require greater specificity about the nature of a company's products than do American regulations.
"Overall, the concepts we had to integrate were somewhat different than what Japanese regulators have experienced, " Yasuda says. "And because this was the first time the Osaka exchange had dealt with a U.S. company, we had to explain the differences to them and then arrive at a solution that reconciled the systems in a way that satisfied U.S. regulators."
The process wasn't easy.
"We modified the American filing twice to satisfy the Japanese," Anderson recalls. "We were able to do it efficiently, however, largely because we held a major session in San Diego that everyone attended in person. With all the players in one room, things proceeded more quickly than if we had tried to do the same things over the telephone or by e-mail."
It is clear that MediciNova would do it again. And according to Snyder, other companies should be thinking about it too.
"I would encourage any company with IPO ambitions to think about going to Japan if they don't quite have the critical mass necessary to interest the U.S. capital markets," Snyder says.
According to Noah, MediciNova proves IPO opportunities exist in Japan for the right U.S. companies. "I see this as creating an opening, rather than opening the floodgates," he says.
It also may be a matter of closing the circle. "In Japan, we've had a number of dual listings, a number of Japanese companies doing IPOs in foreign countries, and Japanese subsidiaries of non-Japanese companies doing listings in Japan," Holbrook says. "MediciNova fills in the box with an IPO by a U.S. parent."
Going Public In Japan
While the success of the MediciNova IPO has much to do with the company's Japanese connections, corporations with acquisitive ambitions in that country also may benefit from going public in Japan.
Most American companies are familiar with the dynamics of "triangular" acquisitions. In these transactions, the acquirer uses its own stock to buy the target. The benefit is that the shareholders' targets don't have to pay tax on the exchange of their shares.
Japan, however, doesn't allow triangular acquisitions on a tax-free basis if the stock exchanged is that of a foreign parent.
"It's not possible for a non-Japanese company to set up a Japanese subsidiary and use the parent's stock to acquire other public Japanese companies on a tax-free basis," says Richard Holbrook, counsel at Crowell & Moring. "But setting up a Japanese subsidiary and taking it public would permit the non-Japanese company to do M&As on a tax-free basis with stock swaps through its public subsidiary."
While it's possible to become eligible for tax-free acquisitions by setting up a private company, it's unlikely that shareholders in a public Japanese company would want to swap their public (and liquid) stock for unregistered (and considerably less liquid) shares in a private Japanese subsidiary of a foreign company.