How Rule Changes Make Hong Kong A Prime IPO-destination for Biotech Listings

Early results from Hong Kong’s rule changes for listing biotech companies, as well as secondary listings for technology companies, indicate a growing appetite for biotech IPOs on both the company and investor side. A little over a year after the new rules took effect, several biotech companies have listed under the new regulatory framework with more companies primed to follow in their footsteps.

However, both companies and investors face a range of challenges, necessitating further development of infrastructure, collaboration and the knowledge base, if the early success is to continue.

The Easier Way to a Rich Market

Hong Kong is in a unique position. In many ways, it bridges the divide between China and financial markets around the world – not to mention Hong Kong’s own vibrant TMT (technology, media and telecommunications) market. The Hong Kong Stock Exchange has a strong track record as a dynamic force that draws in investors and companies from near and far.

Biotech as an industry has, however, not been particularly active when compared with other areas; something that is true for both IPOs and M&A. M&A data shows that interest in acquiring biotech companies has remained relatively stable over the last five years, with deal value rising. In the same period, only two Hong Kong biotech companies have been acquired.

Data: MergerMarket Graph: BDO Global

Global funding and valuations for biotech have also been robust, with several new unicorns (companies valued at more than $1 billion) appearing over the last couple of years.

That being said, biotech companies often struggle to secure funding early on in their development. In part due to the industry’s high R&D costs and time-to-market.

This is also the case for Hong Kong. To increase biotech companies’ access to funding and give investors better opportunities to back early-stage companies, the Hong Kong Exchange launched a revised set of regulations in April 2018.

The first years’ results are impressive. From April 2018 to April 2019, nine companies IPO’ed under the new regulations, raising a combined $3.8 billion.

Not all listings have seen subsequent growth in share price, though. In part because several issues still exist within the space.

How Companies Need To Prepare

In short, a biotech company looking to list under the new laws can take advantage of lower demands for financial reporting and proven revenue streams to gain access to funding. The new rules do, however, include several demands, including:

  • The company must have a core product beyond the concept stage
  • Registered patents or intellectual property relating to its core products
  • Cornerstone investor on board at least six months before the listing
  • Expected market capitalisation of a minimum of HK$ 1.5 billion
  • Working capital to cover at least 125% of costs for at least 12 months

The company must also be able to disclose relevant information such as:

  • Strategic objectives
  • Core product details
  • Descriptions of any approved products
  • Details of the company’s R&D
  • Service agreement details
  • Risks
  • Operating cost estimates
  • Financial reports

Each point comes with specific responsibilities and challenges. For example, when securing one or more cornerstone investors. Evaluation is done on a case-by-case basis and includes looking at assets or assets under management, as well as the investor’s understanding of the field. Being able to document both is a requirement that can, in some cases, prove problematic and lead to delays. The same applies to striking the best balance between lower financial reporting requirements and presenting relevant information to investors that make them positive about the potential of your company and products. Furthermore, although financial reporting requirements are lower, they still exist. They, along with audit and taxation issues, may be unfamiliar territory for not only companies but also potential investors.

Investors face new risks

Auditory and tax issues are weighty risks, but they are far from the only ones facing investors looking at biotech with increased interest.

Clinical trials are pivotal for biotech companies, and unsuccessful or faulty tests may lead to significant delays – or competitors beating a company to market. Regulatory oversight and approval processes are also lengthy, and new companies may not have the necessary expertise to expedite the process on their own.

Once a product reaches the market, it is still not a guarantee for success. Market acceptance by physicians and patients, as well as third parties, requires an in-depth understanding of the industry’s ins and outs.

Before getting to trials and markets, an investor must evaluate a company based on a limited data set. Most companies looking to take advantage of the new Hong Kong rules and regulations have a limited operating history, making it difficult to evaluate the business and predict future performance.

The remedy to many such risks is better knowledge and understanding of the biotech industry, particularly the Hong Kong and China scene. This applies to scientific and financial aspects of the industry, as well as the listing process.

Innovent Biologics HK$3.8bn (US$485 million) listing provides an excellent case study. The company secured ten cornerstone investors who combined for 58% of the float. Even though demand was overwhelming, the company offered its shares as slightly below top-level to help boost secondary performance. Its subsequent performance validated the approach.

Bright Future for Hong Kong’s Biotech

When the new regulations were introduced, the goal was to attract new companies, including from mainland China, to list on the exchange. That goal has - so far - been successfully achieved. Several of the companies who have IPOed in the first year after the rule changes are from mainland China. Considering current demographic and economic developments, such as increased number of elderly and the rising Asian middle class, it is no surprise that entrepreneurship, innovation and investment are growing.

In other words, the future for biotech listings in Hong Kong is bright – but there are a few clouds on the horizon. Some new listings have struggled to maintain their stock price, which could make investors reticent to back new listings. At the same time, both companies looking to list and investors face challenges due to the novel aspects of their undertakings. Much work remains to be done in relation to injecting new knowledge about biotech technology and companies, as well as the associated opportunities and risks, into the investor community.

In all instances, risks for both companies and investors are varied. Audit, transfer pricing issues for tax issues, registrations and compliance are all areas where assistance may be required. Connecting with industry experts and insiders will stand any potential investor – and company looking to list - in good stead.

BDO Hong Kong – The Perfect Partner

BDO Hong Kong works in an advisory capacity for companies in the biotech industry, as well as companies across the TMT sphere. Our position as on-the-ground experts backed up by a truly global team (BDO has offices in over 160 territories) enable us to offer a wide range of services – something that also applies to companies looking to IPO in Hong Kong. Our IPO-related services include:

  • Buy-side advisory and due diligence
  • Sell-side acquisition and merger advisory
  • Taxation and audit
  • Transfer pricing
  • Risk advisory
  • Financial reporting advisory
  • Business consulting
  • Investor contact and securing cornerstone investors

Contact us to hear more about specific services and how we can assist with optimising your company’s performance.