News & Insights

New chapter on listing of pre-revenue biotech companies in HK: At a glance

On 24 April 2018, The Stock Exchange of Hong Kong Limited (the “Exchange”) published the consultation conclusions and announced the new rules to: (a) permit listings of biotech companies that do not meet any of the Main Board financial eligibility tests; (b) permit listings of companies with weighted voting right structures; and (c) establish a new concessionary secondary listing route for Greater China and international companies that wish to secondary list in Hong Kong.

The new rules broadly follow the proposals set out in the consultation paper published in February 2018 (see our client alert of 5 March 2018), with a few amendments to reflect comments from consultation respondents on certain details.  The new rules have come into effect on 30 April 2018, from which date companies seeking to list under the new rules may submit formal listing applications to the Exchange.

This client alert gives you a quick summary of the key points of the new Chapter 18A of the Main Board Listing Rules (as supplemented by the Exchange’s Guidance Letter HKEX-GL92-18) which sets out additional listing conditions and other requirements for biotech companies that do not meet any of the Main Board financial eligibility tests.

Suitability criteria

Definition of “Biotech Company” A “Biotech Company” defined under the new Chapter 18A of the Main Board Listing Rules refers to a company primarily engaged in the research and development, application and commercialisation of products, processes or technologies that involve the application of science and technology to produce commercial products with a medical or other biological application.
At least one “Core Product” beyond concept stage

 

 

What is a “Core Product”?

A “Core Product” refers to a biotech product that is required by applicable laws, rules or regulations to be evaluated and approved by a competent authority (namely, US Food and Drug Administration, the China Food and Drug Administration, the European Medicines Agency or any other national or supranational authority which the Exchange recognises as a competent authority on a case by case basis) based on data derived from clinical trials (i.e. on human subjects) before it could be marketed and sold in the market regulated by that competent authority.

How would the Exchange consider whether different types of biotech products have been developed “beyond the concept stage”?

The Exchange has provided specific guidance on the developmental milestones that a Biotech Company must meet in respect of biotech products that are pharmaceuticals (small molecule drugs), biologics, and medical devices (including diagnostics):

  • for a new pharmaceutical (small molecule drug) product or a new biologic product – completed Phase I clinical trials, and the relevant competent authority has no objection for it to commence Phase II (or later) clinical trials;
  • for a pharmaceutical (small molecule drug) product which is based on previously approved products or a biosimilar – completed at least one clinical trial conducted on human subjects, and the relevant competent authority has no objection for it to commence Phase II (or later) clinical trials; and
  • for a Class II or above medical device (which includes diagnostic devices) – completed at least one clinical trial on human subjects (which will form a key part of the application required by the competent authority); and either the competent authority has endorsed or not expressed objection for the applicant to proceed to further clinical trials, or the competent authority has no objection for the applicant to commence sales of the device.

For other types of biotech products, the Exchange will consider on a case by case basis.

Research and development (“R&D”) It must:

  • have been primarily engaged in R&D for the purposes of developing its Core Product(s);
  • have been engaged with the R&D of its Core Product(s) for a minimum of 12 months prior to listing (in the case of a Core Product which is in-licensed or acquired from third parties, the applicant must be able to demonstrate R&D progress since the in-licensing/acquisition);
  • (for companies engaged in the R&D of pharmaceutical (small molecule drugs) products or biologic products) have a pipeline of those potential products; and
  • have, as its primary reason for listing,the raising of finance for R&D to bring its Core Product(s) to commercialisation.
Intellectual property rights It must have registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s).
Meaningful third party investment from at least one “Sophisticated Investor” It must have previously received meaningful third party investment (being more than just a token investment) from at least one “Sophisticated Investor” at least six months before the date of the proposed listing (which must remain at IPO).

How will the Exchange assess whether an investor is a “Sophisticated Investor”?

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.  Examples of the types of investors that would generally be regarded as “Sophisticated Investors” include:

  • a dedicated healthcare or Biotech fund or an established fund with a division/department that specialises or focuses on investments in the biopharmaceutical sector;
  • a major pharmaceutical/healthcare company;
  • a venture capital fund of a major pharmaceutical/healthcare company; and
  • an investor, investment fund or financial institution with minimum assets under management of HK$1 billion.

How will the Exchange assess whether a third party investment is a “meaningful investment”?

Assessed on a case by case basis by reference to the nature of the investment, the amount invested, the size of the stake taken up and the timing of the investment. The following investment amount will generally be considered as a “meaningful investment”:

Applicant’s market capitalisation

Minimum amount of third party investment

HK$1.5 billion – HK$3 billion ≥ 5% of the issued share capital of the applicant at the time of listing
HK$3 billion – HK$8 billion ≥ 3% of the issued share capital of the applicant at the time of listing
More than HK$8 billion ≥ 1% of the issued share capital of the applicant at the time of listing


Additional conditions / qualifications for listing

Initial market capitalisation at the time of listing HK$1.5 billion
Track record An applicant seeking to list under the new Chapter 18A must be in operation in its current line of business for at least two financial years prior to listing under substantially the same management.

Note: The accountants’ report to be included the listing document of an applicant seeking to list under the new Chapter 18A may cover only two financial years (instead of three financial years as required for other applicants seeking to list under the existing rules), but in this case, it has to apply for exemption from the relevant disclosure requirements under the Third Schedule of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.

Ownership continuity The Exchange will review any change in ownership of an applicant in the 12 months prior to the date of the listing application in assessing the suitability of the applicant for listing.
Working capital

 

 

An applicant must have available sufficient working capital to cover at least 125% of the group’s costs for at least 12 months from the date of publication of its listing document (after taking into account the IPO proceeds).  These costs must substantially consist of (a) general, administrative and operating costs (including any production costs); and (b) research and development costs.
Public float An applicant must have at least HK$375 million (equivalent to 25% of the minimum HK$1.5 billion market capitalisation requirement) of public float at the time of listing, which is exclusive of subscriptions by existing shareholders at IPO and subscriptions through cornerstone investments.

As long as the applicant is able to meet this requirement, cornerstone investments and subscriptions by existing shareholders could be included in the determination of the company’s public float, provided that the existing shareholders or cornerstone investors are not core connected persons or otherwise not recognised by the Exchange to be members of the public.

Enhanced disclosures An applicant will be required to include a prominent warning statement and enhanced risk disclosures in the listing document.
Stock marker “B” The listed equity securities of a Biotech Company listed under Chapter 18A must have a stock name that ends with the marker “B”.


Post-listing requirements / restrictions

Enhanced disclosures A Biotech Company listed under Chapter 18A must include in its interim and annual reports details of its R&D activities during the period under review.
No fundamental change of principal business

 

Without the prior consent of the Exchange, a Biotech Company listed under Chapter 18A must not effect any acquisition, disposal or other transaction or arrangement, which would result in a fundamental change in the principal business activities as described in the listing document issued at the time of its application for listing.
Accelerated de-listing process Where the Exchange considers that a Biotech Company listed under Chapter 18A fails to comply with the continuing requirement to maintain sufficient operations or assets, the Exchange may give it a period of not more than 12 months to re-comply with this requirement. If it fails to re-comply within such period, the Exchange will cancel its listing.


Biotech Advisory Panel

The Exchange is in the process of assembling a panel of industry experts to form a Biotech Advisory Panel to assist it, on an individual and “as needed” basis, in reviewing listing applications and assessing the suitability (including sustainability) of biotech companies applying for a listing under Chapter 18A.   The Exchange will announce the list of members of the Biotech Advisory Panel on its website in due course.

Remarks

Biotech companies intending to seek a listing under the new Chapter 18A should note that while the Exchange has provided guidance in Guidance Letter HKEX-GL92-18 on the factors that it will take into account when considering the suitability for listing of biotech companies, the Exchange retains the discretion to find a company not suitable for listing even if it satisfies all those factors.

It should also be noted that not all types of biotech products are automatically accommodated by the rules under the new Chapter 18A.  Biotech products which do not fall into the categories set out in Guidance Letter HKEX-GL92-18 will be considered by the Exchange on a case by case basis.  The Exchange has indicated that in these circumstances, it will determine whether the applicant can demonstrate that it is subject to a sufficiently robust regulatory process that would provide investors with sufficient frame of reference in order to make an informed investment assessment as to value.  In particular, it may accept applicants that conduct clinical trials that do not strictly follow the traditional classification of Phase I and Phase II trials, e.g., (i) trials that are equivalent to entering Phase II trials whose results demonstrate an acceptable safety profile and provide preliminary evidence of efficacy; and (ii) combined Phase I/II trials.

In case of any doubt, potential applicants may wish to make enquiries with the Exchange prior to submitting their listing applications.

Key Contacts

Ronny Chow

Partner | Corporate Finance

Email or call +852 2825 9435

Alexander Que (Alex)

Partner | Corporate Finance

Email or call +852 2825 9770

Rhoda Yung

Partner | Corporate Finance

Email or call +852 2825 9624

Kelvan Cheung

Partner | Corporate Finance

Email or call +852 2825 9279

Maynard Leung

Partner | Corporate Finance

Email or call +852 2825 9415

Gary Wong

Partner | Corporate Finance

Email or call +852 2825 9798

Eugina Chan

Consultant | Corporate Finance

Email or call +852 2825 9786

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