HONG KONG – A wave of bad news, not least of which is a faulty vaccines scandal in China, has hit Hong Kong-listed biotechnology stocks hard in 2018. However, on Oct. 31, Innovent Biologics Inc. debuted on the Hong Kong Stock Exchange with a surprising 19 percent price jump, breaking the curse of sharp price drops when the previous three biotech flotations first began trading.

The Asian financial center revamped its rules earlier this year and is poised to be the biggest market for IPOs in 2018, but so far few stocks have performed well, least of all new biotech listings.

A change to listing rules earlier this year made it possible for pre-profit companies to list in Hong Kong, a category that includes most early stage biotech companies. Affected by the general malaise in a market that has fallen by more than a quarter this year, most new IPOs have quickly headed underwater, with share values often dropping below listing prices.

Biotech stocks like Wuxi Biologics Cayman Inc., 3sbio Inc. and Genscript Biotech Corp. have slumped about 20 percent since the end of May, despite starting the year out on a strong note.

It didn’t help that, in August, major private vaccine maker Changsheng Bio-technology Co. Ltd. was ordered to cease production and recall all its vaccines after the company was found to have violated standards in making rabies vaccine for humans. The vaccine scandal has shaken the industry and scared investors away from health care stocks. (See BioWorld, Aug. 22, 2018.)

Meanwhile, analysts say the slumping prices are a huge wake-up call for traders who have grown overly bullish about the outlook of Chinese biotech companies.

Beijing has heavily invested in the biotech industry in recent years and earlier reports suggested that the biotech sector could exceed 4 percent of the nation’s GDP by 2020.

The sector was booming on news that China was developing 10 to 20 biomedicine life science parks across the country, targeting an output of more than $1.5 billion by 2020, and that the government has dedicated $100 billion of investment to innovation as part of its national innovation strategy.

Such optimism quickly diminished when the Changsheng vaccine scandal and the slump in global markets hit earlier this year.

“The vaccine scandal is obviously a major directional driver,” said Philip Ho, director of Hong Kong-based BCP Investment Ltd. “The news also came at a bad time because market sentiment was dented by multiple factors, including the ongoing U.S.-China trade war and a seemingly slowing Chinese economy.”

China and Hong Kong stocks have lost more than 20 percent of their value since January.

Most analysts believe the escalating trade dispute between the U.S. and China since the beginning of the year was one of the biggest headwinds for global stocks. So far, the U.S. has slapped three rounds of tariffs on Chinese exports ranging from consumer goods to railway equipment worth more than $250 billion. In return, Beijing imposed tariffs on $110 billion worth of American goods and accused the U.S. of starting “the largest trade war in economic history.”

Meanwhile, biotech companies that have issued new listings in Hong Kong under the new listing rules launched by the Hong Kong stock exchange this year have also underperformed.

Inherent risks in biotech sector

Since April, three new chapters have been added to the listing rules of the city’s main board. Chapter 18A allowed Chinese biotech companies to launch IPOs without a need to have made profits or even generate revenues.

The practice is common on Nasdaq but was previously not allowed in Hong Kong, which many said put the Hong Kong bourse at a disadvantage.

Among the newly listed firms is Ascletis Pharma Inc., which has plunged 57 percent from its IPO price. Ascletis shares (HK:1672) were trading at HK$6.08 (US78 cents) as of Nov. 6. It went public on July 26 at HK$14.

Another new listing, Beigene Ltd., went public on Aug. 8 at HK$108 but shares (HK:6160) have slumped 29 percent since then. Shanghai-based Hua Medicine (HK:2552), which started trading in Hong Kong last month, has fallen nearly 12 percent to HK$6.68.

“I have a feeling that traders might be valuing the biotech companies on sentiment. Many of these firms are not making money yet, and it is always difficult to value firms with no earnings or profits,” Ho told BioWorld Asia.

“The HKEX only launched the new listing rules earlier this year so traders are not too familiar with biotech companies. They are new to investors in Hong Kong,” he added.

The slump in newly listed biotech stocks was due to a weak IPO environment and a couple of other risk factors, according to Ronald Chan Keen Lok, vice president at Target Capital Management.

“The whole IPO climate in Hong Kong in general has been very weak this year. For example, big name companies like [electronics company] Xiaomi is now trading 30 percent below its listing prices a couple months ago,” Chan told BioWorld Asia.

“The biotech sector inherits even more risks than other industries for several reasons,” Chan noted. “First, we have the well-known valuation issues for biotech companies in the sense there is always a high degree of uncertainty and speculation element, simply because in many cases those companies do not have profit or even revenues. That means investors have little knowledge nor confidence in these companies. When things don’t look good, these are the first stocks they would sell.

“They are also easy targets for short sellers to make profits, too,” he added.

Chan said another problem for the biotech sector is that it is highly sensitive to China’s policies.

“Recent policies like speeding up cancer drug price cuts and introducing the two-invoice system to further reduce drug price and corruption all adds pressure on the whole health care sector,” he explained.

State-owned media People’s Daily reported in July that officials accelerated price cuts for cancer drugs. In January, China announced the “two-invoice” system to reduce marked-up price and corruption in multitiered distribution chains between manufacturers and the end-use hospitals.

In addition to the valuation difficulties and Beijing’s policies concerns, the CEO of Hong Kong Exchanges and Clearing Ltd., Charles Li, pointed out that insider trading activities are another risk investors have to watch out for. “Biotech, in particular, is one field where companies could become a wild success or flame out into nothing, quickly,” Li said in a May blog post.

The biotech sector is susceptible to insider trading because it has “severe information asymmetry” and any information about regulatory approval processes could cause sharp fluctuation in stock prices, he added.

More listings to come

Looking ahead, more listings are expected before year-end.

KPMG said in its quarterly IPO review for Hong Kong and China that it expects a total of at least 10 pre-revenue biotech companies to list by the end of 2018.

On Oct. 23, Innovent priced an IPO at the top of the indicative range at HK$13.98 to raise $421 million. The listing, backed by Fidelity and Temasek Holdings (Private) Ltd., of Singapore, is the fourth biotech IPO under the new rules. It is being widely watched by analysts and investors to see how it will perform.

The company had revenue of ¥4.43 million (US$635,061) in the first half of 2018 and ¥18.5 million in the full year of 2017, and had no revenue in 2016, according to its prospectus. On its first day of trading, Innovent surprisingly outperformed the previous three biotech flotations in the city, as the stock jumped as much as 21 percent on its debut. Shares (HK:1801) ended the day at HK16.58, up HK2.60.

There are another nine listing candidates in Hong Kong.

One of them is Wuxi Apptec Co. Ltd., which currently has shares trading in Shanghai (603259.SS). Wuxi, which specializes in contract drug manufacturing and gene sequencing, filed a listing application in September. The Shanghai IPO earlier this year raised around $300 million. A Hong Kong listing could help Wuxi to raise more than $1 billion, which would make it double the size of Innovent’s offering.

Even with the slump, Hong Kong has stayed at the top of the IPO rankings globally. The city topped rankings for IPOs in terms of volume for the first half of 2018, according to KPMG. The accounting firm noted that the new listing rules attracted high-growth technology and biotechnology companies and helped drive volume. Hong Kong should finish 2018 as the world’s top market for new listings, KPMG said.

But biotech companies are not the only ones that have struggled. Some big name companies in other sectors are also underwater. Smartphone maker Xiaomi went public in July and sold 2.2 billion shares at HK$17 in the biggest tech float in the world in four years. Its performance has so far disappointed investors. On Tuesday, its shares (HK:1810) closed at HK$13.24.

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