Since Hong Kong Exchanges and Clearing Limited (HKEX) added chapter 18A to its main board listing rules in April 2018, allowing biotech companies with no revenue or profits to be listed, Hong Kong has become the preferred listing location for an increasing number of biotech companies. As of 31 December 2021, a total of 48 biotech companies were listed under chapter 18A, and more than 20 more companies have filed their application forms. In this context, the authors will address 10 frequently raised enquiries from their past services in relation to listing under chapter 18A.
What are the conditions for listing? Chapter 18A sets out four listing conditions for biotech companies: (1) at least one core product past the concept phase; (2) satisfy eligibility requirements on R&D focus, IP and product pipelines; (3) an expected market value of no less than HKD1.5 billion (USD192 million) with meaningful third-party investment from at least one sophisticated investor; (4) financial records of at least two fiscal years; and (5) adequate operating working capital.
How is the core product chosen? Biotech companies generally choose a mainstay product with good commercial prospects from their pipeline, categorised into drugs (small molecule drugs), biological agents or medical devices. The HKEX considers other biotech products on a case-by-case basis.
In addition, such products must be reviewed and approved by competent authorities such as the National Medical Products Administration (NMPA), the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA), based on clinical trial data before launch. Any product that does not require approval by competent authorities, or can be reviewed and approved without submission of clinical trial data, should not be considered a core product.
How is the passing of the concept phase determined? This refers to the core product having been approved for phase II clinical trial. In an NMPA application, the clinical study for new drugs is generally divided into five stages – preclinical study and phase I, II, III and IV trials.
Since 2015, the NMPA has adopted a one-step approval procedure for clinical trial applications (including phases I to III) of all new drugs, therefore a new drug may not be progressively approved or further confirmed. Drugs in such listing projects must have entered the phase II clinical trial to meet the requirements of chapter 18A, and all significant communication with competent authorities and related results should be disclosed to prove that the NMPA has no significant doubts or objections to the completed or ongoing clinical trials. For generic drugs, proof of at least one human clinical trial is required to demonstrate that the NMPA does not object to a phase II or subsequent phase trial.
What are the IP requirements for a core product? Biotech companies must own the IP rights of their core products, including their own registered patents or patent applications developed internally, as well as obtain exclusive licences for the development, production and commercialisation of the core products through authorisation by the right holder.
Who are “sophisticated investors”? In addition to companies, funds and investment institutions in the pharmaceutical, healthcare or biotechnology sectors, investors, investment funds or financial institutions with total assets under management of no less than HKD1 billion are recognised as “sophisticated investors”.
What is considered a “meaningful investment”? Depending on the market value of the biotech company applying for listing, a shareholding of 1% to 5% is generally sufficient, taking into account the nature and amount of investment, the investment shares, the timing and other factors.
How is a listing structure chosen? Nearly 80% of Hong Kong-listed biotech companies have adopted a red-chip structure, such as BeiGene and InnoCare Pharma, while the rest are largely under H-share structures, such as Junshi Biosciences and CanSino Biologics. The two types of listing structures have their fair shares of pros and cons.
After the China Securities and Regulatory Commission’s (CSRC) issuance of the draft Overseas Listing Filing System for public comment, in December 2021, regulatory approval for the two structures is no longer significantly different for the foreseeable future. However, if the applicant is more concerned about overseas asset allocation, and the convenience and flexibility of capital operation, it may give priority to the red-chip structure. If the applicant’s ownership structure is relatively complex, bears a heavy tax burden for restructuring, or is considering an A + H listing, the H-share structure is more suitable.
What are the advantages of chapter 18A compared with the Shanghai Stock Exchange (SSE) Star Market? Compared with chapter 18A, the SSE Star Market’s standard no. 5 set a higher threshold for market value, while requirements for R&D pipeline reserves, core team and core technology platform value rely more on “window guidance”.
In 2021, 17 biopharmaceutical companies failed to complete IPOs on the Star Market. The main reasons for their failure include the high requirements for sci-tech innovation and stricter standards for the pipeline model based on authorised technology introduction.
By comparison, chapter 18A has a clearer and more transparent regulatory approval process, allowing for pre-listing consultation and communication (pre-A1 submission) with the HKEX regarding special circumstances or unusual matters, with targeted adjustments based on communication results, hence a higher level of certainty.
What are the disclosure requirements for products in the listing documents? The overall requirement is that a biotech company should clearly and accurately disclose its business model and products without compromising any scientific accuracy, including the source of the relevant products in the R&D pipeline, market coverage, market potential, important research information (preclinical/clinical data, R&D progress, future development plans, etc.) and business strategy.
Is significant business change allowed after listing? Without HKEX approval, biotech companies listed under chapter 18A should not carry out any individual or series of acquisitions, sales or other transactions or arrangements that will result in a fundamental change in their main business activities described in the listing documents. In other words, if a biotech company intends to expand or diversify its business, it should communicate with the HKEX in advance to obtain pre-approval.
Jane Zhang is a partner and Xi Wenjing is a paralegal at Jingtian & Gongcheng
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