HONG KONG – Hong Kong Exchanges and Clearing (HKEX) has revised its IPO rules to allow not-yet-profitable biotech companies go public in the city. That is likely to revive the biotechnology sector in Hong Kong's stock market, which hasn't attracted much interest in the past decade.
HKEX's new listing rules, to be implemented by mid-2018, will make any biotech firm, including medical device companies engaged in the R&D, application and commercialization of products, processes or technologies in the biotech sphere, worth more than HK$1.5 billion (US$192 million) in valuation eligible for listing in the stock market even when they have zero profit or revenue track record.
Biotech companies applying for a listing under that new chapter must be innovation-oriented companies heavily engaged in R&D activities and have at least one product that has moved beyond the proof-of-concept stage.
In a recent round of market consultation, market participants have made it loud and clear to HKEX that they want a broader listing regime.
"The market has made it clear they want the exchange to take action to broaden Hong Kong's capital markets access and enhance its competitiveness," said HKEX Chief Executive Charles Li, announcing the expansion. "By the second half of next year, we hope that we will see a significant number of innovative companies beginning to choose Hong Kong, making the Hong Kong market a relevant and even more competitive place."
The bourse chose biotech companies as the first step to broaden market access to startups, because it is confident investors will be able to judge the value of biotech companies even if they do not generate any profit, as they are usually subject to strict regulation to report their operation and R&D progress to authorities such as the FDA for milestones such as clinical trial or marketing approvals. That can replace the traditional revenue and profit as indicators of performance.
Biotech companies also make up a majority of companies in the pre-revenue stage of development seeking a listing.
"Another new chapter allowing pre-revenue companies would initially apply only to the biotech sector because it has some particularly unique characteristics. Biotech companies make up a majority of pre-revenue listings globally and the sector is strictly regulated under a regime that sets external milestones on development," said Li in a note. "This provides a bit of a measuring stick for investors, and gives them an idea of how to judge companies that do not have traditional indicators of performance, like revenue or profits, as their products are not yet approved to be sold in the market."
In addition to biotech companies, HKEX also decided that other technology companies with more than HK$10 billion (US$1.3 billion) in market cap, and that are already listed elsewhere, could conduct secondary listings in Hong Kong.
The Hong Kong authorities have discussed multiple alternatives to attract more biotech companies to list in the city for months. In June, the bourse had proposed a "Third Board" for startups, but the proposal is now abandoned in favor of the revamp of existing rules.
Quite a few high-profile China-based biopharmaceutical companies have chosen to list in the U.S. instead of Hong Kong or Mainland China in the past few years. For example, ZTE Pharmaceutical Co. Ltd. has conducted an IPO on Nasdaq in September. That is in addition to companies like Hutchison China Meditech Ltd. and Beigene Ltd., which also chose to list on a U.S. stock market.
Jackie Tsui, founder of Hong Kong-based Life Impact Medical Co. Ltd., said restrictions on drug companies that don't generate profit yet to list in Hong Kong has been the major reason for his company to prefer a U.S. IPO in the past.
"With the new rules that HKEX is launching, there may be more China-based drug companies to consider listing here," Tsui told BioWorld Asia. "HK$1.5 billion is not a very high threshold. . . . The aging population in Mainland China is an advantage to Chinese drug companies."
"We may have missed some big players, but it is not too late," said Li. "After the change in the rules, many of the Chinese companies that are seeking to list in the U.S. may also consider listing in Hong Kong."
Biotech companies applying for a listing under that new regime will also be required to provide enhanced risk disclosures. They will be asked to disclose the phases of development for their products and the potential market of their products, R&D expenditure, patents granted and applied for as well as the R&D experience of the company management.
Hong Kong has been making efforts to keep up with the changing world, one that is increasingly focused on new economy industries such as biotech, med-tech and internet services, among others.
The link between the Hong Kong's stock market and the market of Mainland China is getting stronger with the Hong Kong-Shenzhen and Hong Kong-Shanghai Stock Connect programs. New capital coming from the mainland could provide greater liquidity and valuation for high-tech companies listed in Hong Kong as well.