In June 2017, the Hong Kong Stock Exchange (“HKEx”) initiated a holistic review of the Hong Kong listing regime to enhance its overall competitiveness against other major global listing venues, in particular to attract companies from emerging and innovative sectors. During this review, the HKEx identified the biotech industry and companies operating in the industry as a highly attractive pool of candidates for a Hong Kong listing. The HKEx recognized the fact that, in the U.S., biotech companies comprise the majority of companies seeking a listing in the early stage of the company’s development and the development of the company’s products. The HKEx also acknowledged that many biotech companies have legitimate capital markets needs ahead of having a revenue-generating commercial product or service. Why biotech companies? The HKEx believes that the regulation and oversight by internationally recognized regulatory agencies, such as the FDA, CFDA and EMA, and the stages involved in their approval process provide external validation and an indication as to the nature of biotech companies, and their development progress, in the absence of traditional financial indicators, such as revenue and profit.
In February 2018, the HKEx published a draft of the new Chapter 18A of the Main Board Listing Rules which sets out the listing requirements and guidance for a pre-revenue biotech company which is unable to meet the current Main Board financial eligibility tests on profit, revenue and market capitalization (see Note below). Under the new Chapter 18A of the Hong Kong Listing Rules, a biotech company that does not meet any of the three financial eligibility tests may still list in Hong Kong if it can demonstrate the following features:
Suitability to List
- The biotech company must have developed at least one Core Product(s) beyond concept stage.
- A Core Product(s) is defined as a regulated product (being a biotech product, process or technology) that is required by applicable laws and/or regulations to be evaluated and approved by a competent authorities based on data derived from clinical trials before it could be marketed and sold in the regulated market.
- What is the meaning of “beyond the concept stage”? For pharmaceuticals and biologics, the completion of Phase I clinical trials and the relevant competent authority has no objection for the biotech company to commence Phase II clinical trials. For medical devices (including diagnostics), the medical device is already categorized as a Class II medical device or above; completed at least one clinical trial on human subjects and the relevant competent authority has no objection for the company to commence sales of the device.
- The biotech company is primarily engaged in research and development for its Core Product(s) for at least 12 months prior to listing.
- The primary reason for a listing in Hong Kong is to raise funds to finance research and development to bring the Core Product(s) to commercialization.
- The biotech company must possess durable patent, registered patent, patent application and/or IP in relation to Core Product(s).
- If the biotech company is engaged in the research and development of pharmaceutical products or biologic products, it must demonstrate that it has a pipeline of those potential products.
- The biotech company must have received meaningful third-party investment from at least one sophisticated investor at least 6 months before date of proposed listing. In relation to a sophisticated investor, the HKEx will consider net assets or assets under management, relevant investment experience and investors’ knowledge and expertise in the biotech industry.
- The biotech company must meet enhanced working capital requirements (125% of requirement for 12 months following date of prospectus). This is a listing requirement.
- The biotech company must have two years’ of operations in the current business under substantially the same management team. This is a listing requirement.
Expected Market Capitalization
- The biotech company must have a minimum market capitalization at time of listing of at least HK$1.5 billon. This is a listing requirement.
Enhanced Prospectus Disclosure (Required Disclosure)
- Details on the phases of development for its Core Product(s).
- Material communications with all relevant competent authorities relating to its Core Product(s) (unless disclosure is restricted under relevant laws and regulations).
- All material safety data relating to Core Product(s).
- Immediate market opportunity for Core Product(s).
- Rights and obligations in respect of any in-licensed Core Product(s).
- Details of operating costs, capex, working capital and R&D spending.
- Details of patents and other IP rights (unless applicant can demonstrate that such information is highly sensitive commercial information).
- R&D experience of management.
Restriction on Cornerstone Investors
- Cornerstone investors should not count towards initial public float requirement at time of listing.
- Why? To reduce the influence of pre-arranged deals on book-building process and ensure that pricing process for IPO will be market-driven.
Material Change of Business and De-listing
- If the biotech company fails to develop its business plan, the company will not be allowed to fundamentally change its principal business and if it fails to meet the continuing obligations under the Listing Rules to maintain sufficient operations/assets, the listed biotech company will be given a period of 12 months to re-comply this requirement or be de‑listed.
The new Chapter 18A and other listing reforms relating to companies with weighted voting rights structure are expected to be effective in April 2018. The new listing regime for biotech companies is an exemption from the Financial Eligibility Tests set out in Rule 8.05. A biotech company must still comply with all the other requirements of Chapter 8 of the Main Board Listing Rules (such as those relating to management and ownership continuity, public float and transferability of shares).
Note: The Financial Eligibility Tests for a listing on the Main Board of the HKEx refers to Rule 8.05(1)(a) (profit test – HK$50 million in the past three financial years with net profits of at least HK$20 million in most recent year and aggregate net profits of at least HK$30 million in the 2 years before that); Rule 8.05(2)(d), (e) and (f) (the market capitalization/revenue/cash flow test – market capitalization of at least HK$2 billion at time of listing, revenue of at least HK$500 million for most recent audited financial year and positive cash flow of at least HK$100 million in aggregate for the 3 preceding financial years) and Rule 8.05(3)(d) and (e) (the market capitalization/revenue test – market capitalization of at least HK$4 billion at time of listing and revenue of at least HK$500 million for most recent audited financial year ).