In its latest consultation paper the Hong Kong Stock Exchange (“HKEx”) has proposed new rules to attract new economy companies such as technology giants to list, ending the debate since Alibaba Group Holding Ltd chose to list in New York instead of Hong Kong in 2014 and raised a staggering US$25 billion, the world’s largest initial public offering at that time. The new rules are expected to take effect in mid-2018. The new rules will also make it easier to list pre-revenue biotech companies. This article will focus on the latter.
“Biotech Companies” are defined as “companies primarily engaged in the research and development , application and commercialization of products, processes or technologies in the biotech space.”
Biotech Companies usually only generate revenue at a later stage as the initial stage often involves intensive capital expenditure.
In the US, biotech companies make up a majority of applicants seeking a listing at an early stage of development. For example in the US, the fact that these biotech companies need to meet the stringent criteria set up by the U.S. Food and Drug Administration (“FDA”) in order to be granted an approval could provide an indication as to the value of these biotech companies, in the absence of traditional indicators such as revenue and profit.
The HKEx’s February 2018 consultation paper is now proposing to add a new chapter 18A in its listing rules to cater for these pre-revenue Biotech Companies and high growth companies that have weighted voted rights. The Biotech Companies need to meet the following criteria:
Listing and Eligibility Criteria of Pre-Revenue Biotech Companies
Initial market capitalization: at least HK$1.5 billion
Track record: In operation in its current line of business for at least two financial years prior to listing under substantially the same management
Working capital: Has available working capital to cover at least 125% of the group’s costs for 12 months (including proceeds from the IPO)
Eligibility for listing as a Biotech Company
(a) the Biotech Company must have developed at least one core Biotech Product (Core Product) which is regulated by a Competent Authority such as the FDA and the China Food and Drug Administration beyond the concept stage. The HKEx would consider a Core Product to have been developed beyond the concept stage if it has met the developmental milestones specified for the relevant type of product;
(b) it must have been primarily engaged in R&D for the purposes of developing its Core Product(s);
(c) it must have been engaged with the R&D of its Core Product(s) for a minimum of 12 months prior to listing;
(d) it must have as its primary reason for listing the raising of finance for R&D to bring its Core Product(s) to commercialisation;
(e) it must have durable patent(s), registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s);
(f) if the applicant is engaged in the R&D of pharmaceutical (small molecule drugs) products or biologic products, it must demonstrate that it has a pipeline of those potential products; and
(g) it must have previously received meaningful third party investment (being more than just a token investment) from at least one investor which the HKEx considers to be sophisticated at least six months before the date of listing (which must remain at IPO). This factor is intended to demonstrate that a reasonable degree of market acceptance exists for the applicant’s R&D and Biotech Product. Where the applicant is a spin-off from a parent company, the Exchange may not require compliance with this factor if the applicant is able to otherwise demonstrate to the HKEx’s satisfaction that a reasonable degree of market acceptance exists for its R&D and Biotech Product (for example, in the form of collaboration with other established R&D companies).
While these biotech companies do not need to meet the listing requirements under the current main board eligibility tests, it must fulfil other listing requirements under Chapter 8, such as the 25% public float requirement.
Consultations closed on 28 March 2018. We and no doubt many others have provided comments to the HKEx in response to the consultation paper. The HKEx will need time to review and digest these various comments. In the meantime, the market looks forward with anticipation to the publication of the revised and possibly final new rules.