Reward and risk: the two faces of Hong Kong’s new listing rules for biotech firms
Reward and risk: the two faces of HongKong’s new listing rules for biotech firms
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Allowing biotech firms to list in the city before theygenerate revenue is a bonus for the firms, but investors need to be aware ofthe pitfalls
PUBLISHED : Sunday, 25 March, 2018, 2:27pm
UPDATED : Sunday, 25 March, 2018, 11:15pm
Charles Li Xiaojia, chief executive of bourse operatorHong Kong Exchanges and Cleating, at the Biotech summit last week. Photo:Edward Wong
Hong Kong’s impending move to allow biotechnologyfirms to list on the city’s stock market before they generate any revenue is abonus for companies, but for investors new to the sector a healthy dose of riskawareness is needed, according to industry executives.
Bao Jun, the chief business officer and acting chieffinancial officer of Beijing Shenogen Pharma Group, which had consideredlisting on the Nasdaq market in the US, now plans to list in Hong Kong as soonas this year, followed by a listing on a mainland China bourse when it meets requirementsthere.
“Hong Kong can provide a unique opportunity themainland won’t be able to provide [for some time],” Bao said on the sidelinesof a biotech summit organised by exchange operator Hong Kong Exchanges andClearing (HKEX) last week.
“We have a few projects that we want to license to USpartners and build global branding,” Bao said. “Compared to the US, Hong Konghas no time zone difference for communication with investors, yet it alsoprovides good connections with potential partners in the West.”
Greater access to international investors’ funds, thelack of currency flow controls and the fact that the Hong Kong dollar is tiedto the US dollar are advantages sought by some mainland firms to facilitateinvestment deals with overseas investors and partners, he noted.
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Mainland China stock exchange officials have heldinitial talks with major investors and with management of some of China’s topbiotech firms about possibly letting some of them list by exempting them fromcurrent profit track record requirements, in a move seen to be aimed atstemming the flow of domestic firms seeking listings abroad.
HKEX says listing reforms could be in place by lateApril
Shenogen has a liver cancer drug under phase-threeclinical trials, with another three cancer medications expected to enterphase-three trials this year. It expects to close a fifth round of privatefundraising of 500 million yuan (US$79.3 million) next month, after raisingUS$84 million and 300 million yuan in previous rounds.
The chief executive of HKEX, Charles Li Xiaojia, saidlast week that the first listings under the revamped rules could happen asearly as this summer. The bourse operator closed a market consultation exerciseon Friday on changes to its listing rules – which would also allow firms withmultiple classes of shares carrying different voting rights to list for thefirst time – as it seeks to attract more global firms and better compete withother exchanges.
Hong Kong plans to overtake Nasdaq as listing destinationof choice for Chinese biotech firms
Under the planned changes, biotech firms must have aminimum market value of HK$1.5 billion (US$191 million) by the time they list,as well “durable” patents, at least one “sophisticated” investor and at leastone drug that has passed phase-one trials with approval to start phase two.
A survey by Bayhelix, anindustry body whose members are mostly health care and life scienceprofessionals of Chinese heritage, found that 98 of 125 respondents wanted the
HKEX to allow candidates to substitute the“sophisticated investor” requirement for one that accepts licensing of aproduct or technology to a major pharmaceutical firm.
Marietta Wu, managing director of private equity firmQuan Capital and also a co-founder and board director of Shanghai-based drugsdeveloper Zai Lab, which listed on the Nasdaq last year, called the HKEXproposed requirements “a good start”.
“It is a good balance of risk and upside, as companiesthat have been allowed to start phase-two trials would have passed the safetyscrutiny, and investors can focus on the efficacy data to be generated,” shesaid. “For a public market with high retail investor participation, this offersa certain level of safety.”
Asked if Zai Lab would consider a secondary listing inHong Kong, she said that given the city’s investor base has a strongunderstanding of the China market, “it will probably make good sense to lookinto it when Zai’s products gear up for late stage development, approval andcommercialisation.”
Zai Lab's drug development facility in Shanghai.Photo: Reuters
From the point of view of an investor, the new listingrules will offer more choice, but there will be risks, for example in assessinghow successful a drug might be.
Only one in 10 drugs registered for phase-one trialsmade it to commercial success, Washington-based international industry bodyBiotechnology Innovation Organisation’s chief executive, James Greenwood, toldthe summit.
Shenogen’s Bao said less than 50 per cent of drugsmaking it to phase two go on to commercial success, while for oncology drugs,only 50 to 60 per cent succeed even in phase three. That means investors needthe help of analysts, he said, for example in understanding clinical trialsdata and assigning a probability of success.
However market and regulatory forces will provide somesafeguards, according to Charles Chau chi-chung, a partner at law firm JonesDay who is helping biotech clients prepare listings in Hong Kong.
“The listing sponsors are legally liable and subjectto penalties if they fail to fulfil their due diligence duties, whileinvestment banks, for the sake of earning more fees which are tied tocandidates’ listing success and valuations, will focus their efforts on helpingthose with the qualities needed to be well received by investors,” he said.
This article appeared in the South China Morning Postprint edition as: Reward and risk in listing reform for biotech firms