Key points of the First Biotech Summit held by HKEX
March 22 will be recorded down in history as the day Hong Kong securities market opened doors for enterprises with no income to debut at HKEX. Biotech industry was the first pilot industry.
Initially, HKEX invited 500 guests. However it was oversubscribed and exceeded 600 people, including founders and management personnel of biotech companies, buyers in primary and secondary markets, investment banks, pharmaceutical analysts, industrial associations and media. The summit discussed advantages and disadvantages and risk points of pre-revenue IPO from four aspects of supervisors of biotech industry, buyers and sellers in capital market, companies themselves and exchanges.
The summit aimed at answering three basic questions posed by Charles Li, chairman of HKEX, that is, why now, why us and why HK.
1) Why now? It is an opportune time for HKEX to launch the biotech sector. In China, biotech companies are entering a good development stage in terms of technology development and R&D level, increased consumer purchasing power and increased demand on quality health offerings and declining regulatory barriers.
2) Why us (biotech)? Biotech has the potential of improving living standards while capital can advance the R&D process of medicine. Besides, biotech industry is highly regarded in the capital market and there is an emergence of several companies and different sub-sectors, so this industry is the best option for HKEX to enrich objects.
3) Why HK? In Hong Kong, companies can easily access global funds as well as Chinese funds. Compared with A share market in China, Hong Kong market is more mature, marketized and decentralized to lower levels in supervision. For most biotech companies, globalization may be the best alternative for future development. Collecting overseas capital in Hong Kong can lay the foundation for enterprises’ expansion.
Opportunities and Risks Brought by the Launch of Biotech Sector
1) Opportunities: rallying the stocks status of medicine sector in Hong Kong. Presently, the market value of medicine sector in Hong Kong only accounts for 3.5% of total market value, while A share market accounts for 5.9% and American market for 11%. With the launch of biotech sector, an upswing is expected in the market value of medicine sector in Hong Kong and the funding. High valuation of biotech and its valuation methods may whet investors’ appetite to these companies and probably improve the valuation of other listed R&D enterprises.
2)Risks: whether to release short term mechanism. High professionalism of the bio-pharmaceutical industry may lead to bigger information asymmetry, thus bigger fluctuations in stock prices. How can HKEX effect better supervisory mechanisms? Whether investors are ready or not? Afterall, there is a small number of biotech specialists in Hong Kong market, how much time do investors need to learn how to speculate on a biotech company?
The Attitude of HKEX
1) In choosing biotech as the first pilot industry, on one hand it shows that the development of biotech industry cannot be parallel to capital injection, especially in early-stage funding. On the other hand, investors have existing interests in the industry. It is therefore the best time for Hong Kong to launch the biotech sector. Techno-globalism and joint development of AI and big data is pushing Chinese technology closer to world level. In future, Chinese people will prioritize health. They will invest on longevity, have fewer serious illnesses or reduce suffering during terminal illness. In the past five years, regulatory barriers on domestic medical industry have been flattened. Through years of medical reform, original barriers that hindered growth have disappeared. Besides, the return of entrepreneurs and overseas talents back home lays a firm foundation for a robust industry.
2) HKEX resolvedto be the best listing destination for Chinese biotech and research companies. HKEX is confident of playing a small role while steering clear from majority control that will compound opportunities for rent-seeking behavior. Transparency will boost players confidence about going public. For example the Hong Kong Stock Connect only requires a company to meet necessary indexes and circulation market value, it then qualifies to be an object in Hong Kong Stock Connect. Access index can be decided by index companies. HKEX hopes to offer a platform, not act in a supervisory capacity. A team of 12 experts are in place. To avoid conflict of interests, this committee exclusively offers consultations services on general policies. HKEX will soon disclose further information on these experts and expand the team.
3) Consultation Conclusions: are listing conditions too high or too low? Meanwhile, Charles Li, as the supervisor, raised these concerns.. Biotech industry is a highly professional industry with high threshold. The listed companies may not disclose all the information to the investors. How do you then shield the investors from being cashed out by listed companies? Nonetheless, in a spot questionnaire survey, most people think that current listing environment is reasonable.
Background for the Launch of HKEX’s Biotech New Board
In June 2017, HKEX published New Board Concept Paper, launching a two months’ public consultation forum with market participants. Nearly 91% of respondents supported plans to diversify the Hong Kong market, especially to attract more new economic issuers to go public. In December 2017, HKEX published Consultation Conclusions of New Board Concept Paper, with plans to modify listing rules to provide convenience for three kinds of new economic companies going public. These are biotech companies with no income, companies with different stock prices and overseas-listed emerging companies and innovative industrial companies seeking secondary listing on mainboard.
Application to go public by Biotech companies at mainboard need to satisfy the following conditions:
1)The expected minimum market value should exceed HKD1.5 billion.
2) They should focus on research and development of new or innovative products, and treatment methods or technology.
3) They should boast of unique innovative concepts and IPRs. And derived patents, copyrights and/or business secrets within reasonable expectation.
4) Capital raised through listing can only be used on R&D targeting a certain product, treatment method and technology for the market.
5)At least one product, treatment method or technology has passed conceptual development process (Taking relevant drugs and safety regulatory organizations for example, drugs regulated by FDA, CFDA and EMA has passed first phase of clinical tests and received all necessary regulatory approvals for second phase of tests.)
6)They should have an existing number of long-term patents, registered and/or patent applications, certifying ownership to new technology or innovative concepts.
7) They should have at least one experienced investor which may be a financial institutions. To promote market circulation after listing, the share held by cornerstone investors at listing of biotech companies will not be included into the calculation of minimum free float.
8)They should meet capital requirements threshold for operation (at least 125% of current level in 12 months after listing) and be operational for two years prior to listing.
9) They should disclose extra risks, the development phases of their products and their potential markets, R&D expenditure, granted patents and those under the application process together with experience of management personnel in R&D.
Dividend in Reform of Chinese Medical Regulators
1)Shortened R&D time for drugs . CFDA reforms include the following main measures. Firstly, clinical trial bases are revealed. Secondly, appraisal resources increased. Thirdly, enterprises should deliver high quality materials, developopen communication channels and the mechanism of clinical suspension and clinical recovery. Before filing IND applications, further communication is needed. Fourthly, for urgently needed drugs, surrogate measures are encouraged to shorten listing time from four years to one year through early-stage data forecast. The rest of the procedure can be done later.
2)To learn from America, patent protection policies will be introduced at the end of this year. By then, compensation for patent period will be carried out and the period extended.
3)After joining ICH, Chinese innovative drugs may outstrip foreign competition. Through mutual recognition of global and Chinese clinical data, enterprises can freely choose application pathways. It will be quicker to apply NDA in America first and later in China.
4)Launch of State Medical Insurance Administration. Medical Insurance Departments will oversee price management and speculation of drugs and medical equipment. Clients will be buyers in the real sense and have the bargaining right that is reasonable. Previously, people who fixed prices did not purchase nor utilize the services. They were relegated to be the third party.
Some innovative biotech companies are expected to be listed in Hong Kong, including Henlius, Innovent, Beigene and Livzon Mabpharm. Besides, the launch of biotech sector in Hong Kong stocks and the preparation of CDR channel for A share will benefit listed drug companies, including CSPC, Sino Biopharm, 3SBio, Hengrui Medicine, Livzon Pharmaceutical and Fosun Pharma.