HONG KONG – Biotech companies that have not yet generated any revenue can seek listing on the Main Board of the Hong Kong Stock Exchange (HKEX). The exchange proposed the new policy Friday as part of the effort to lure more firms to go public, bolstering Hong Kong's biotech development.

The new listing regime for emerging and innovative companies comes after the New Board Concept Paper Conclusion published by the exchange on Dec. 15, 2017, which set out the general direction for upcoming policy updates. The new consultation paper brought about three new chapters, with one concerning the listing rules for the biotech companies that do not meet any of the Main Board financial eligibility tests. Consultation will run for a month to seek market feedback.

"Many businesses involved in R&D-intensive sectors have legitimate capital markets needs ahead of having a revenue-generating commercial product or service," an HKEX spokesperson told BioWorld. "In practice, biotech companies make up a majority of pre-revenue listings."

The news is putting Hong Kong on the radar of a lot more biotech companies and investors seeking IPOs in the greater China region.

"[The move] will impact biotech companies in a very positive way – U.S. listing is no longer the only option. This will bring much greater exposure and funding to qualified biotech companies," Danny Yeung, CEO of Hong Kong-based genetics testing startup Prenetics Ltd., told BioWorld. Prenetics is currently funded by China's e-commerce giants Alibaba and insurer Ping An.

"With this new exchange, it will open the doors for such companies with breakthrough innovation to a wider range of investors via the public financial markets. Hopefully, this is only the beginning of a Nasdaq equivalent in the East," Victor Tong, a partner at Chinese health care investor DeCheng Capital, told BioWorld. He also said a few companies have already shown interest.

Though the biotech startups are given a privilege, the HKEX also puts forward some detailed eligibility and suitability criteria, arguably stricter, for determining appropriate biotech applicants, since they could "potentially carry additional risks to investors" without substantial revenue.

"In its proposals, the exchange offers specific guidance on the listing eligibility for pre-profit or pre-revenue biotech issuers that produce pharmaceuticals (small-molecule drugs), biologics and medical devices (including diagnostics). Manufacturers of other biotech products will be considered on a case-by-case basis," said HKEX in the Feb. 23 release.

The criteria include "a higher market capitalization requirement, enhanced disclosure requirements as well as restrictions on fundamental changes of business," according to the HKEX, as the biotech issuers are exempt from meeting the Main Board requirements.

To elaborate, applicants are required to have a market cap of HK$1.5 billion (US$192 million); a proven track record of at least two financial years with substantially the same management; and working capital of 125 percent of the group's costs for at least the next 12 months. Any fundamental change of principal business will require consent from the HKEX; otherwise, the company will face delisting.

The applicants must have at least one core product beyond the concept stage that is approved by competent authorities such as the U.S. FDA and the China FDA and must be primarily engaged in the R&D of the core product for at least 12 months. In addition, the primary reason for listing should be to raise capital to bring that core product to commercialization.

According to the proposed scheme, applicants must have pharmaceutical and biologics products that have completed phase I trials. Medical devices, including diagnostics, must be of class II or above. All products must have at least one trial conducted on human subjects and receive no objection to proceed to further clinical trials. Other biotech products will be considered on a case-by-case basis.

Meaningful investment from at least one sophisticated investor for at least six months is required to provide a level of validation from an experienced third-party investor.

A frame of reference

Though the proposal will extend eligibility for listing to more biotech startups, critics are also concerned about introducing high-risk companies to the market that can hurt investors. But some argued that the HK$1.5 billion market cap can act as a filter, as the company should be sizable and sophisticated enough to meet such a requirement.

HKEX has chosen biotech companies to be the first pre-revenue issuers allowed to seek listing in Hong Kong because the industry has long been regulated by existing standards of established authorities.

"The activities of companies in the biotech sector, which is heavily geared toward R&D, tend to be strictly regulated under a regime that sets external milestones on development progress," said the HKEX spokesperson. "This will provide investors with a frame of reference to judge the value of companies that do not have traditional indicators of performance, for example, revenue and profit."

As HKEX's listing head admitted in a local media report that the biotech ecosystem is not yet well-developed in Hong Kong, the HKEX said the exchange is looking to bring in experienced people both at the listing department level and the listing committee level to enhance its ability to make assessments on issuers in that field.

"Where needed, HKEX will continue to draw on external expertise. HKEX is considering an expert panel that could be consulted regarding policy issues," said the spokesperson.

Under the new listing regime, other proposals by the HKEX include permitting the listings of companies with weighted voting right structures and establishing a new concessionary secondary listing route for greater China and international companies that wish to do secondary listings in Hong Kong.

"The main objective is to help ensure Hong Kong continues to be a leading international financial center," said the HKEX spokesperson.

HKEX is seeking market feedback on the substance of those proposals and the proposed listing rules until March 23.

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