Listing of pre-revenue biotech stocks in Hong Kong

The Hong Kong Stock Exchange has recently added a new chapter to its listing rules to allow biotech companies which do not satisfy the financial eligibility criteria for listing on the Hong Kong Stock Exchange.

Ordinarily, a company must satisfy one of the three financial tests in order to be eligible to list on the Main Board of the Hong Kong Stock Exchange. Each of these tests would require an applicant to have reached certain minimum profit or revenue thresholds over a track record period. Two of these tests further require a minimum level of expected market capitalisation on listing.

In recognition that biotech companies operate in a R&D-intensive sector and may have legitimate capital markets needs before having a revenue-generating commercial product or service, the Hong Kong Stock Exchange has added a new chapter (Chapter 18A) to its Main Board Listing Rules. Under Chapter 18A, biotech companies which satisfy certain requirements may be eligible for listing on the Main Board of the Stock Exchange even if they do not satisfy the usual financial eligibility tests. This update looks at the requirements and obligations which apply specifically to biotech companies exploiting the waivers from the financial eligibility criteria.

Entry requirements

Financial

Although the usual financial eligibility criteria will be waived, there are still some financial requirements, including that the applicant must:

• achieve a minimum expected capitalisation of HK$1.5billion; and
• ensure that it has available sufficient working capital to cover at least 125% of the group’s costs (including general as well as R&D costs) for at least 12 months from the date of publication of its listing document (which working capital can include the proceeds of the IPO)

Business and operations

The applicant must have been in operation in its current line of business for at least two financial years prior to listing under substantially the same management.

The applicant must also demonstrate to the Stock Exchange that it is suitable for listing under Chapter 18A.  In this regard, the applicant must:

• have developed at least one core product beyond the concept stage;
• have been primarily engaged in R&D for the purposes of developing its core product(s);
• must have been engaged with the R&D of its core product(s) for a minimum of 12 months prior to listing (and, if the core product is in-licensed or acquired from third parties, the applicant must demonstrate R&D progress since the in-licensing/acquisition);
• have as its primary reason for listing the raising of finance for R&D to bring its core product(s) to commercialisation;
• have registered patent(s), patent application(s) and/or other intellectual property in relation to its core product(s);
• if engaged in the R&D of pharmaceutical (small molecule drugs) products or biologic products, demonstrate that it has a pipeline of these potential products; and
• have previously received meaningful third party investment from at least one sophisticated investor at least six months before the date of the proposed listing (which must remain at IPO).

In relation to the requirement that an applicant must have developed at least one core product beyond the concept stage, the threshold depends on whether the core product is a new pharmaceutical product, a new biologic product or a medical device. For new pharmaceutical products and new biologic products, the requirement is that the applicant must have completed Phase I clinical trials and the relevant Competent Authority must have no objection for it to commence Phase II (or later) clinical trials. For medical devices, the applicant must demonstrate that the product is categorised as Class II medical device or above, it has completed at least one clinical trial on human subjects, and the Competent Authority has endorsed or not expressed objection for the applicant to proceed to further clinical trials or to commence sales of the device. At the moment, the Hong Kong Stock Exchange recognises the US FDA, the China Food and Drug Administration and the European Medicines Agency as a “Competent Authority”. The Stock Exchange may recognise other national or supranational authorities as a Competent Authority for the on a case-by-case basis at its discretion.

We expect the Stock Exchange to adopt a conservative approach to this requirement.  Indeed, the two biotech companies to have listed under Chapter 18A since it came into force both have core products that have at least commenced Phase II clinical trials, which is a later stage than that stipulated by the Chapter 18A (which requires that at least one core product has completed Phase I clinical trials).

In relation to the requirement that an applicant must have received meaningful third party investment from at least one sophisticated investor, the sophistication of the investor will be assessed on a case-by-case basis by reference to factors such as net assets or assets under management, relevant investment experience and the investor’s knowledge and expertise in the relevant field. Generally, dedicated healthcare or biotech funds, major pharmaceutical or healthcare companies or their venture capital funds and investors, investment funds or financial institutions with assets of at least HK$1billion under management will all be considered sophisticated investors. The Stock Exchange will assess whether the investment from the sophisticated investor is “meaningful” on a case-by-case basis by reference to factors such as the nature of the investment, the amount invested, the size of the stake taken up and the timing of the investment. Generally, if the expected market capitalisation is between HK$1.5billion and HK$3billion, an investment of at least a 5% stake in the applicant will be considered meaningful, if the expected market capitalisation is between HK$3billion and HK$7billion, an investment of at least a 3% stake in the applicant will be considered meaningful, and if the expected market capitalisation is more than HK$8billion, an investment of at least a 1% stake in the applicant will be considered meaningful.

Enhanced disclosure requirements

A biotech applicant must make additional disclosures in its listing document, including, without limitation, its strategic objectives, details of its core product(s), details of its R&D experience, details of relevant experience of directors and senior management, risks, claims and compliance status and estimate of operating costs, capital expenditure and working capital.

Enhanced continuing obligations

A number of post-listing periodic disclosures will be required in interim and annual reports in relation to the R&D activities, including details of the key stages for each of its core products under development, and a general indication of the likely timeframe, if the development is successful, for the core product to reach commercialisation and the expenditure incurred on the R&D activities.

The company will not be allowed to effect any acquisition, disposal or other transaction, which would result in a fundamental change in its principal business activities without the Stock Exchange’s consent.
 

This information is for educational purposes and general guidance only and does not constitute legal advice in any respect. Professional legal advice must be sought prior to acting on any matter contained in this update.