HKEX Proposes New Listing Rules Allowing Unprofitable or Revenue-less Biotech Firms to Go Public

VCBeat (WeChat ID: vcbeat) reports. On February 23, the Hong Kong Stock Exchange released the Consultation Paper on the Listing Regime for Emerging and Innovative Companies (hereinafter referred to as the “Consultation Paper”). The Consultation Paper indicates that the Hong Kong Stock Exchange will allow the following companies to list in Hong Kong:

a) Biotechnology companies that fail to meet the financial eligibility tests, including those with no revenue or profit track record;

b) High-growth and innovative companies with a weighted voting rights structure;

c) Eligible issuers seeking a secondary listing on the Stock Exchange.

The market had long anticipated the Hong Kong Exchanges and Clearing Limited’s (HKEX) reform of its listing regime. In June 2017, HKEX released the Consultation Paper on the Proposed Establishment of an Innovation Board, which stated that a comprehensive review of Hong Kong’s listing regime had identified certain deficiencies affecting Hong Kong’s overall competitiveness relative to other major global listing venues. This led to the formulation of what was described as HKEX’s “most significant listing regime reform in 25 years.”

Since the release of the “Consultation Paper” last June, the Hong Kong Stock Exchange has steadily advanced its listing regime reforms. In December 2017, it published a consultation conclusion, deciding to broaden the existing listing framework to permit the three aforementioned types of companies to list in Hong Kong, subject to appropriate disclosures and safeguard measures.

At a press conference on the 23rd, Charles Li, Group CEO of HKEX, stated that the consultation period has been compressed to one month, given that the proposed changes have undergone extensive discussion and broad market consensus has been reached, coupled with demand from market participants such as issuers. He expects that, barring significant revisions during this round of market consultation, HKEX could release the consultation conclusions as early as late April. Formal listing applications will be accepted once the consultation conclusions are published and the relevant amendments to the Listing Rules take effect.

The Hong Kong Stock Exchange stated that in the United States, biotechnology companies constitute the majority of those seeking public listings either at their inception or during the early stages of biopharmaceutical product development. The various phases defined by regulatory oversight and product approval processes of internationally recognized authorities, such as the U.S. Food and Drug Administration (FDA), serve as indicators to determine the nature and development progress of these biotechnology firms. In the absence of traditional metrics such as revenue or profitability, these indicators provide investors with a reference framework and enable them to independently value the respective biotechnology companies.

Biotechnology company applicants are expected to demonstrate that they possess the following characteristics:

(a) A biotech company must have at least one core product that has passed the concept stage. The Stock Exchange of Hong Kong will determine whether a product has passed the concept stage based on whether it has achieved the development milestones for its respective product category;

(b) Focusing on R&D and dedicated to developing core products;

(c) having been continuously engaged in the research and development of core products for at least 12 months prior to listing;

(d) The proceeds from the listing will be primarily used for research and development to launch core products into the market;

(e) Must possess long-term patents, registered patents, patent applications, or intellectual property rights related to its core products;

(f) If the applicant is engaged in the research and development of pharmaceutical (small-molecule drug) products or biological products, it shall demonstrate that it possesses a portfolio of multiple potential products;

(g) At least six months prior to the proposed listing date, it has received a substantial amount of third-party investment (not merely nominal investment) from a sophisticated investor, and such investment has not been withdrawn as of the time of the initial public offering.

Furthermore, the consultation paper proposes that the expected market capitalization of such issuers at the time of listing shall be no less than HK$1.5 billion. The consultation paper also strengthens the disclosure requirements for such companies and restricts material changes to their core business activities. Such companies will be identified by adding the stock marker “B” at the end of their stock codes.

The appeal of the Hong Kong Stock Exchange to mainland Chinese enterprises lies in its lower listing thresholds, access to a diverse base of global investors, and flexible exit mechanisms.

The Hong Kong Stock Exchange (HKEX) imposes no mandatory profitability requirement on companies seeking listing, allowing them to meet financial eligibility criteria through various assessment methods. For instance, under the Market Capitalization/Revenue/Cash Flow Test, a company is only required to have generated revenue exceeding HK$500 million in its most recent fiscal year, possess a market capitalization of over HK$2 billion, demonstrate positive cash inflows, and achieve aggregate cash flow exceeding HK$100 million during the three years preceding listing. This threshold is relatively easier for the vast majority of high-growth enterprises to meet and is significantly lower than the listing requirements for the Main Board.

In addition to the relative ease of “going public,” exiting the Hong Kong Stock Exchange (HKEX) is also simpler. Its lock-up period is shorter than that of A-shares, and exit options are more diversified.

This means that investors can quickly reap the growth rewards of their portfolio companies, with shorter investment horizons and more controllable returns and risks. Driven by institutional investors, these new-type companies will soon embark on their journey to list on the Hong Kong Stock Exchange.

In terms of capital scale, the Hong Kong Stock Exchange (HKEX) is a world-leading capital market. As of the end of 2017, there were 2,118 listed companies on the Main Board and the Growth Enterprise Market (GEM) of the HKEX, with a total market capitalization of approximately HK$34 trillion, representing a 37% year-on-year increase. In 2017, 164 companies were listed on the HKEX, a 38% increase from 2016. The total funds raised through initial public offerings (IPOs) amounted to HK$128.2 billion, a 34.4% decrease from the previous year. The average daily turnover was HK$88.2 billion, up 32% from HK$66.9 billion in 2016.

In this context, mainland Chinese enterprises, particularly internet companies and innovative pharmaceutical and biotechnology firms, have shown strong enthusiasm for listing in Hong Kong. Tech giants such as Xiaomi, Kuaishou, and Lufax, along with healthcare companies including Ping An Good Doctor, WeDoctor, and Henlius Biotech, have recently been reported to be planning Hong Kong IPOs.

It is expected that following the release of the Hong Kong Stock Exchange’s new listing rules, more mainland Chinese biotechnology companies will list on the exchange to raise capital or attract global investors. Meanwhile, domestic companies in the innovative drugs and biologics sectors will benefit from more accessible financing channels, thereby fostering innovation and development within China’s pharmaceutical industry.