How Will the New STAR Market Rules Unleash Opportunities for Medical Device Companies? Four Key Questions Answered

On June 10, 2022, the Shanghai Stock Exchange (hereinafter referred to as the “SSE”) issued and implemented the “Guidelines for the Application of Review Rules for Issuance and Listing on the SSE Science and Technology Innovation Board No. 7—Applicability of the Fifth Set of Listing Standards to Medical Device Enterprises” (hereinafter referred to as the “Guidelines”).

This announcement sent shockwaves through the industry, heralding the arrival of a “spring” for medical device initial public offerings (IPOs). In 2022, the pace of IPO issuances slowed, with numerous medical device companies filing applications and queuing for listing on the Hong Kong Stock Exchange, while the overall market sentiment cooled. Previously, only one domestic medical device company—MicroPort EP—had gone public on the STAR Market under its fifth set of listing criteria. The new regulations have opened a fresh pathway for unprofitable innovative medical device companies to list on the STAR Market.

The so-called fifth set of listing criteria for the STAR Market refers to the requirement that an issuer applying for listing on the STAR Market must have a projected market capitalization of no less than RMB 4 billion. Its core business or products must be approved by relevant national authorities, demonstrate significant market potential, and have already achieved phased results.

The Shanghai Stock Exchange’s recent issuance of the Guidelines further clarifies the circumstances and requirements under which medical device companies may qualify for the fifth listing standard, providing a significant boost to the medical device industry. This move signifies that the fifth listing standard on the STAR Market is now formally open to medical device enterprises, representing a major positive development for both primary market investors and companies.

Following the release of the new regulations, some companies stated that they had previously prepared for an IPO on the Beijing Stock Exchange. However, with the STAR Market’s fifth listing standard—now offering better liquidity—being opened to medical device companies, they can begin considering this new listing pathway.

How Will the New STAR Market Rules Reshape the Industry Landscape? VCBeat (WeChat ID: vbceat) posed four questions to multiple industry insiders to elucidate the significance of these new regulations.

1. If pharmaceutical companies apply for listing on the STAR Market under Standard 5, at least one core product must have been approved to initiate Phase II clinical trials. What are the different requirements for medical device companies seeking listing on the STAR Market under Standard 5?

The STAR Market has explicitly clarified that medical device companies can list under the fifth set of listing criteria, thereby supporting enterprises that are still in the R&D phase and have not yet generated significant revenue. Currently, the primary requirements focus on the companies’ scientific and technological innovation attributes and their future profitability.

In terms of scientific and technological innovation attributes, the core technical products of applicant enterprises shall fall within the scope encouraged and supported by the national strategy for technological innovation in medical devices and related industrial policies., primarily including advanced products for inspection and testing, diagnosis, treatment, monitoring, life support, traditional Chinese medicine (TCM) diagnosis and treatment, implantation and intervention, and health rehabilitation, as well as their key components, parts, accessories, and basic materials.

For innovative outcomes, the enterprise is required to have at least one core technical product that has completed product testing and clinical evaluation in accordance with relevant laws and regulations governing medical devices, with results meeting the applicable requirements; alternatively, the product must satisfy other requirements for filing a medical device registration application. There shall be no major adverse circumstances that could adversely affect the product’s registration application or its market launch following registration.

Although the fifth set of listing standards imposes no revenue requirements for companies going public, it emphasizes market size, thereby focusing on future profitability.The Guidelines emphasize the need to substantiate market potential. The applicant’s core business or products must demonstrate significant market potential, and the company should prudently forecast and disclose specific details demonstrating compliance with this criterion, taking into account factors such as the innovativeness and R&D progress of its core technology products, a comparative analysis of strengths and weaknesses relative to competitors, clinical needs, and the competitive landscape.

Fourth, it is required to possess significant technological advantages.Applicant enterprises must possess distinct technological advantages and shall disclose whether such advantages exist by addressing the correlation between core technologies and core products, metrics for assessing the advancement of core technologies, team background and R&D achievements, as well as technological reserves and sustained R&D capabilities.

5. Proposing requirements for information disclosure and verification.Applicant enterprises shall objectively and accurately disclose information regarding their core technology products and their advanced nature, R&D progress and phased achievements, approval and registration status, projected market size, and future commercialization arrangements for production and sales, while fully disclosing related risks. Meanwhile, intermediaries shall conduct proper verification and due diligence on the corresponding content.

Some investors have stated outright that this standard is by no means low; it demands strong innovative capabilities from medical device companies. Compared with the pharmaceutical sector, the medical device industry offers greater scope for imitation. The fifth set of listing standards requires companies to demonstrate original innovation in their products—offering what others do not have, and improving upon what others already offer.

II. Will the New Regulations Stimulate Investment in the Medical Device Sector?

Investors have stated that previous restrictions on exit mechanisms dampened the willingness of investment institutions to invest. The new regulations have provided a certain impetus to primary market investments in medical devices by opening up channels for domestic IPOs of innovative medical devices, thereby boosting investor confidence. Currently, market activity is increasing, valuations across both primary and secondary markets are reasonable, and market trends are gradually improving.

3. How many medical device enterprises in China currently meet the requirements of the Fifth Set of Standards?

Multiple industry insiders unanimously stated: Affected by the cooling market conditions last year, it is currently difficult for unprofitable medical device companies to achieve a valuation of RMB 4 billion.. Referencing the current Hong Kong and A-share markets, there are relatively few medical device companies with a market capitalization exceeding RMB 4 billion. According to data from Medleaves, since the implementation of the Chapter 18A listing requirements for the Hong Kong Stock Exchange in 2018 and the fifth set of listing criteria for the STAR Market in 2019, among 13 medical device companies, five had an initial public offering (IPO) market capitalization below HKD 7.5 billion, accounting for 38%, with a median market capitalization of HKD 12.9 billion. As of April 30, 2022, 11 companies had a market capitalization below HKD 7.5 billion, representing a significant proportion of 85%, with a median market capitalization of HKD 4.6 billion. The number of companies with a market capitalization exceeding HKD 10 billion has decreased from seven at IPO to just two currently.

Therefore, only a select few leading high-quality enterprises in the industry can reap the benefits of the new regulations.Listing on the STAR Market via the Fifth Set of Criteria. It is a springtime for medical device unicorns with valuations reaching RMB 4 billion, yet most enterprises can still only list on the Beijing Stock Exchange.

Meanwhile, industry insiders have pointed out that in addition to considering listing standards, attention must also be paid to the delisting rules of the STAR Market and post-listing revenue scale. For instance, one of the STAR Market’s delisting criteria is having negative net profits after deducting non-recurring gains and losses for two consecutive years, coupled with annual operating revenue below RMB 100 million. Otherwise, even after a successful listing, companies still face the risk of delisting.

IV. With the introduction of new regulations, does this mean that medical device companies preparing for listings on the Beijing Stock Exchange or the Hong Kong Stock Exchange can shift their focus to the STAR Market?

An investment banking practitioner stated that the new regulations for the STAR Market primarily benefit medical device companies preparing to list in Hong Kong and innovative medical device firms facing financing hurdles in the primary market. Companies planning to list on the Beijing Stock Exchange (BSE) are unlikely to switch to the STAR Market, as the latter has significantly higher entry barriers, with stringent requirements for scientific and technological innovation attributes and profitability. The BSE mainly serves small and medium-sized enterprises, including those recognized as specialized, refined, distinctive, and innovative (“SRDI”), and even allows traditional industry players to go public. In contrast, the STAR Market is positioned to support “hard technology” sectors, with innovative healthcare and semiconductor companies collectively accounting for over 50% of its listings. Moreover, the STAR Market imposes stricter requirements on companies’ future profitability.

Previously, IPOs of medical device companies were concentrated in the vascular intervention sector. Following their listings, many companies experienced sustained stock price declines, leading to subdued industry sentiment, inverted valuations between primary and secondary markets, and a slowdown in the pace of medical device IPOs. The widespread attention garnered by the STAR Market’s new policies has undoubtedly bolstered confidence in the medical device industry and helped alleviate market pessimism. A wave of medical device company listings is expected in the near future. However, we must remain vigilant against false prosperity; only enterprises with genuine innovation capabilities and profitability will achieve long-term success in the secondary market.