The Year of Transformation for Healthcare IPOs: Hong Kong or Nasdaq?

Editor’s Note: This article is republished from 36Kr, authored by yanyan, and reposted with permission by VCBeat.

Following the introduction of the new regulations by the Hong Kong Stock Exchange in 2018, four pre-profit biotechnology companies went public one after another. The initial market performance of the first three—Ascletis Pharma, BeiGene, and Hua Medicine—was less than satisfactory.

Many are eager to know how investment institutions view the HKEX’s new regulations—are they too aggressive? Is the entry threshold for companies too low? Is Hong Kong’s capital market ready?

More people are looking to investment bankers with Wall Street backgrounds—who have increasingly joined biotechnology companies as chief financial officers in recent years—to gauge the true state of affairs.

At the Healthcare and Life Sciences Summit, participants engaged in spirited debates and shared diverse perspectives on critical issues such as whether the Hong Kong Stock Exchange’s listing requirements are too lenient and whether companies should pursue listings in Hong Kong or on the Nasdaq. Below are some of the key insights shared during the event.

Zhang Li, a partner at CDH Investments, stated, “First, the perception that its entry barrier is low stems largely from comparisons with China’s A-share market. The A-share market operates under an approval-based system, whereas the Nasdaq Stock Market has no such review mechanism and is driven entirely by capital within a market economy. Therefore, in my view, it is reasonable for the Hong Kong market to adopt certain practices that differ from those of the A-share market.”

Looking at the overall market situation, at this particular juncture, not only Hong Kong stocks but also A-shares and U.S. stocks are experiencing significant volatility. Such market fluctuations have been influenced by broader macroeconomic factors, such as deleveraging.

"The impact of deleveraging became evident in the capital markets two years ago, leading to a decline in investment available to the real economy. With signals already released two years ago, market expectations have generally declined. However, as most investors in the Hong Kong stock market are institutional investors, value is bound to return under their relatively rational investment approach."

Investors share at least one consensus: “health” is perpetually a sunrise industry. Even though companies in Hong Kong’s biopharmaceutical sector have recently underperformed in the secondary market, capital markets will inevitably provide an avenue for any biopharmaceutical enterprise with genuine investment value.

Shao Chunyang, a partner at JunHe LLP, has handled two IPO projects for biopharmaceutical companies. He stated, “The Hong Kong Stock Exchange maintains relatively stringent review standards for the R&D activities of biopharmaceutical enterprises, covering numerous aspects such as patents and intellectual property rights associated with R&D products. Not just any company can go public. For instance, during the development of a product, should a company pursue multiple product lines? There have been cases where companies launched numerous product lines, exhausted their initial capital, failed to secure follow-on funding, and consequently encountered operational difficulties. Companies must comprehensively consider factors such as the amount of financing required at each stage, the appropriate financing strategies, the timing for realizing the value of product R&D, and the point at which profitability can be achieved.”

Li Bin, a senior partner at Huiqiao Capital Group—which has invested in two listed innovative pharmaceutical companies, BeiGene (with a market capitalization of USD 7.6 billion) and Hua Medicine (with a market capitalization of HKD 8.3 billion)—has experience in both the primary and secondary markets. Regarding his view on the Hong Kong market, he stated, “As a newly opened market, no one knows where the bottom line of the Hong Kong market lies. Whether in Hong Kong or mainland China, the boundary between the primary and secondary markets was blurred when this market was first established. Discussions about whether the Hong Kong market is ready, or whether the entry barriers are too high or too low, merely reflect the perspectives within the primary market circle.”

Compared with projects in the U.S. market, the quality of projects in China’s primary market is uneven, naturally leading to numerous cases of inflated company valuations. Wang Fei, a fund manager at Greenwoods Asset Management, previously worked in the U.S. secondary market. His observation is that “U.S.-listed biotechnology companies are significantly cheaper than their Chinese counterparts and exhibit better corporate governance.” The new regulations introduced by the Hong Kong Stock Exchange allow companies that have only completed Phase I clinical trials to go public, which is inherently a neutral development. However, if the listing threshold were set at the level of completing Phase III clinical trials, objectively speaking, very few Chinese companies would qualify for an IPO. The transition from the primary to the secondary market requires time. In the past, after investing in the primary market, it might take over a year to reach the next financing round, during which valuations consistently rose, virtually eliminating the risk of losses. However, the current situation in the secondary market for biopharmaceuticals is far from optimistic. Companies considering entry at this stage should proceed with caution.

In the secondary market, Hong Kong is currently situated in an unfavorable market environment. The Hang Seng Index has fallen by approximately one-quarter over the past nine months. From a longer-term perspective, Hong Kong’s stock market index today remains below its level from ten years ago. In contrast to the Nasdaq’s P/E ratio of more than 20 times and the A-share market’s nearly 30 times, the average price-to-earnings (P/E) ratio for Chinese companies listed in the Hang Seng Index is only 11 to 12 times.

Valuation inversions have become a frequent occurrence, and chief financial officers largely agree on the underlying cause: markets are constantly evolving, and this is merely a temporary phenomenon. A surge of primary-market investors has flocked to the biopharmaceutical sector, driving up valuations. This dynamic often leads to valuation inversions at the interface between the primary and secondary markets—namely, during initial public offerings (IPOs).

Billy Cho, who has joined Zai Lab, brings over 20 years of experience in the pharmaceutical industry. Zai Lab currently has a market capitalization of $1 billion and is set to enter its commercialization phase this year. Regarding the phenomenon of inverted market valuations, Billy Cho offers his own insights: “Over the past two decades in the United States, biological innovation in every aspect has been highly correlated with capital support. Investors take a long-term view, enabling these companies to grow alongside them. The Greater China region today resembles NASDAQ thirty years ago, where there was considerable uncertainty about how to determine valuations. Now, with increasing amounts of capital and talent flowing into China, I am fully confident in the future of the Chinese market. Valuation ultimately depends on the ability to generate cash flow; therefore, only a healthy, well-functioning ecosystem can secure capital support from both public and private sources.”

Before joining Hua Medicine, Lin Jiecheng worked at Bank of America Merrill Lynch. When asked whether listed companies should choose Hong Kong or NASDAQ for their IPOs, Lin remarked, “Investors are the least patient group. As a new stock market emerges, it inevitably faces growing pains. Each case must be evaluated on its own merits; every investment portfolio is unique, and different fund managers employ distinct management strategies. Hua Medicine chose to list in Hong Kong, primarily because our markets for both pharmaceutical sales and manufacturing are based in China.”

In this regard, as the first company to list under the new Hong Kong stock market regulations, Ascletis Pharma was structured as an offshore entity from its inception, with the initial goal of listing on NASDAQ. However, following the introduction of the new regulations, Ascletis changed its strategy. Founder and CEO Wu Jinzi’s rationale for changing the listing venue aligned with Lin Jiecheng’s thinking: “As a China-based company expanding globally, our primary market is in China. Therefore, from a capital perspective, listing in Hong Kong is more advantageous for the company.”

Tan Bo, CFO of 3SBio, possesses listing experience on both the NASDAQ and the Hong Kong Stock Exchange. The decision made by 3SBio approximately five years ago to delist from NASDAQ and pivot to the Hong Kong market was particularly challenging. At that time, the price-to-earnings (P/E) ratio in China’s A-share market reached 70x, significantly higher than that of the Hong Kong market. When 3SBio delisted, its market capitalization was nearly USD 400 million; it currently stands at over USD 3 billion. Reflecting on the more than eightfold increase in market value over five years, Tan Bo stated, “During our more than five years listed on NASDAQ, our stock price ranged from a high of over USD 20 to a low of just above USD 5. U.S. investors’ unfamiliarity with China’s policy environment led to 3SBio’s valuation on NASDAQ being lower than that in the A-share market. Of course, this was also influenced by various factors affecting Chinese concept stocks. Under these circumstances, we chose to return to a market where investors were more familiar with us. In 2015, favorable opportunities arose in Hong Kong, prompting our listing there.”

So, is it possible for Zai Lab, which was already listed on NASDAQ in 2017, to return to Hong Kong for a listing? Billy Cho responded, “It’s hard to say. At the time of our IPO, we had no choice but NASDAQ. Every choice is a double-edged sword. On one hand, NASDAQ is a very mature market, while Hong Kong is an emerging market on the rise. Our P/E ratio would likely be higher in Hong Kong. However, our partnership structure aligns very well with NASDAQ’s requirements for corporate governance transparency. For us, choosing NASDAQ was a wise decision for Zai Lab.”