The Rules governing the listing of securities on The Stock Exchange of Hong Kong Limited (listing rules) were modernised on 30 April 2018. As a result, pre-revenue biotech companies, which previously may not have been able to satisfy the required financial eligibility tests for a public listing, have been able to list on the Main Board of the Hong Kong Stock Exchange (SEHK) under Chapter 18A of the listing rules.
The change has triggered an encouraging flow of listing applications from pre-revenue biotech companies. As of 30 April 2020, 16 pre-revenue biotech companies have listed on the SEHK, with nine going public in the course of last year, including Henlius and Venus Medtech. Together the nine companies are valued at around HK$16 billion ($2bn).
Why Hong Kong?
Hong Kong's proximity to mainland China and ease of access to the wider Asian market makes it an attractive place from which to grow a biotech company, with companies in the biotech sector benefiting from strong demand and robust government funding. Hong Kong is also a unique destination for biotech industry professionals with world-class infrastructure and a high density of R&D platforms and talents. These factors contribute to Hong Kong being a global biotech finance centre. According to the SEHK and Dealogic, Hong Kong became the second largest biotech fundraising centre in the world in 2019.
Which companies are eligible?
Biotech companies which are primarily engaged in the research and development (R&D), application and commercialisation of biotech products, processes or technologies are eligible for listing on the SEHK under Chapter 18A of the listing rules. Biotech is defined as the application of science and technology to produce commercial products with a medical or other biological application.
What are the listing criteria for pre-revenue biotech companies?
Biotech companies must satisfy a range of criteria to be able to gain a listing on the SEHK. Those requirements include meeting the general requirement that applies to all businesses which is that the SEHK considers the listing applicant and its business to be suitable for listing on the SEHK.
The remaining requirements are outlined under Chapter 18A of the listing rules, two updated guidance letters – HKEX-GL92-18 and HKEX-GL85-16, and a new guidance letter – HKEX-GL107-20 published by the SEHK. They include the following:
- The expected market capitalisation of the biotech company – that is, the market value of the shares held in the company, irrespective of whether the shares are unlisted or listed on other regulated market(s) is at least HK$1.5 billion ($190m) at the time of listing;
- The company must have been in operation in its current line of business for at least two financial years prior to listing under substantially the same management;
- The SEHK will review any change in ownership of the company in the 12 months prior to the date of the listing application in order to assess the company's suitability for listing;
- The company must have been primarily engaged in R&D for the purposes of developing its core product(s) and have developed at least one core product falling within certain product categories beyond the concept stage. The SEHK considers a core product to have been developed beyond the concept stage if it has met the developmental milestones specified for the relevant types of product. The three categories of products permitted under the new listing rules are pharmaceutical (small molecule drugs), biological drugs, or medical devices and diagnostics, recognised by a competent authority such as the European Medicines Agency, US Food and Drug Administration or National Medical Products Administration in China. Biotech products that fall into other categories may be assessed by the SEHK on a case by case basis;
- The updated guidance letter HKEX-GL92-18 elaborated on the requirement for in-licensed or acquired core product(s): the company should have completed at least one regulated clinical trial on human subjects since the in-licensing or acquisition. If not, the SEHK will evaluate the reasons why no clinical trial has been completed and whether substantive R&D work and processes equivalent to one clinical trial on human subjects have been performed;
- The SEHK will categorise a biotech product as it is categorised by its competent authority. If a product is regulated as a pharmaceutical, biologics or medical device, the company cannot re-classify the product as an "other biotech product" because of failure to fulfil any of the requirements of the relevant category;
- The company must have been engaged in the R&D of its core product(s) for at least 12 months prior to listing. For core product(s) which are in-licensed or acquired from third parties, the company must be able to demonstrate R&D process since the in-licensing or acquisition, which could be: from preclinical to clinical stage; from one phase of clinical trial to another, or; obtaining regulatory approval from the competent authority to market the core product(s). For core product(s) already commercialised in a given market for specified indication(s) and if the company intends to use a portion of the listing proceeds to either expand the indications of the product(s) or launch them in another market, the SEHK would expect further R&D expanded on the core product(s) in connection with the clinical trials required by the competent authority to either bring the core product(s) for a new indication or a new regulated market;
- The primary reason for listing must be the raising of finance for R&D to bring its core product(s) to commercialisation. For companies that develop medical devices with short development cycles, the SEHK may take into account the companies' business plan and development stage of the pipeline products such that a portion of the listing proceeds may be allocated to set up production facilities primarily used for the manufacturing of the core product(s) and establish sales, marketing and medical teams for the commercialisation of the core product(s);
- The company must have registered patent(s), patent application(s) and/or intellectual property in relation to its core product(s);
- If the biotech company is engaged in the R&D of pharmaceutical products or biological products, there must be a pipeline of those potential products;
- The company must pass a sophisticated investor test. This means it must have previously received meaningful third party investment from at least one sophisticated investor at least six months before the date of the proposed listing;
- There are minimum thresholds for public floatation that must be met, which include that at least 25% of shares in the company are made available in an initial public offering (IPO) worth at least HK$375m ($48m) at the time of listing. Modification to the minimum public subscription requirement under the listing rules will be considered on a case-by-case basis and compelling reasons for such modification must be provided to the SEHK;
- Existing shareholders are allowed to participate in the IPO of the biotech company provided that the company satisfies the relevant requirements under the listing rules. The conditions set out in HKEX-GL85-16 do not apply to biotech companies: existing shareholders of the company holding less than 10% shares may subscribe for shares in the IPO as either a cornerstone investor or a placee, whereas existing shareholders holding more than 10% shares may only subscribe for shares in the IPO as a cornerstone investor. Existing shareholders may also exercise any contractual anti-dilution right and subscribe for shares in the IPO in accordance with the existing requirements in relation to special rights of pre-IPO investors;
- Enhanced disclosure obligations apply under the listing rules and the new guidance letter HKEX-GL107-20. The company has to complete a listing document in which it discloses details including its strategic objectives, details of its core product(s), R&D experience, relevant experience of directors and senior management, legal claims/proceedings that may have an influence on R&D for any core product, an estimate of cash operating costs, communication with competent authorities, sophisticated investors, burn rate, valuation of each round of pre-IPO investments, and competitive landscape and addressable market. In addition, biotech companies must submit both interim and annual reports, which must include risks involved, and updates of R&D processes and core products;
- Biotech companies must prominently disclose a warning that the relevant core product(s) may not ultimately be successfully developed and marketed;
- The stock name must end with the marker 'B', which is used to indicate pre-revenue biotech companies on the SEHK.