Daily Economic News | From 0 to 48, What Else Does the Hong Kong '18A' Biotech Companies Listing Rule Bring Apart from Facilitating the Listing of Innovative Enterprises?

The successful development of an innovative drug cannot be separated from the comprehensive support of policies, systems, and capital, and the '18A' system is the best illustration of this statement.

In April 2018, the Hong Kong Stock Exchange added Chapter 18A 'Biotechnology Companies' to its Main Board listing rules, allowing biotechnology companies that have no revenue or profit to submit listing applications. As a result, the Hong Kong Stock Exchange has become the preferred listing destination for an increasing number of biotechnology companies.

However, it cannot be ignored that the average fundraising amount has pulled back and market liquidity is low, which has raised concerns among companies and investors. Are enterprises suitable for going public in Hong Kong? What will the 18A system bring to enterprises? Which tracks have more investment opportunities in the future?

On January 24th, the 'Hong Kong Biotech Companies 18A IPO Investment Guide: A Report Co-written by Frost & Sullivan, TradeGo and LeadLeo' (hereinafter referred to as the 'Report') was officially released. It provides a reference guide for biotech companies that are already or intend to list on the Hong Kong stock market.

Since 2018, a total of 48 companies have gone public through the 18A rule, with 23 companies currently in the delisting (i.e., hearing stage) status.

In terms of pre-listing financing, 18A companies have a high frequency of fundraising before listing, with prominent valuation growth. Specifically, among the listed 18A companies, 39 have had between 2 to 6 rounds of fundraising before listing, accounting for as high as 84.78% of the total. Among them, the company with the most fundraising rounds before listing is Qiming Medical (02500.HK), which has undergone 12 financings.

Moreover, there were at most 16 companies whose pre-listing valuation increased by 10 to 50 times. The issued valuations of 18A companies all increased to varying degrees compared to their last round of financing. Among them, the highest increase was seen in CanSino Biologics (09966.HK), with the issued valuation increasing by as much as 66.26% compared to the last round.

From an industry perspective, 71 biotech companies mainly focus on three tracks: medical devices, pharmaceuticals, and cutting-edge medical technologies. Among them, there are a total of 47 companies in the pharmaceutical track, which is the most numerous, accounting for 66.2% of all 18A companies; the number of companies in the cutting-edge medical technology track is the least, with only 4 companies, all of which are AI diagnostic and treatment device enterprises, accounting for 5.6%.

Among the listed biotech companies, there are 35 pharmaceuticals, 12 medical devices, and 1 cutting-edge healthcare technology company.

Some analysts believe that this is related to the development stages of various industries. Since the pharmaceutical policy reform in 2015, with the improvement of patients' affordability, the growth of the patient population, and the expansion of medical insurance coverage, the development of China's biopharmaceutical industry has been unprecedentedly rapid, and the variety of sub-industries has become relatively complex.

In 2020, the market scale of the domestic pharmaceutical industry was 1.6 trillion yuan. According to the 'Report', with an overall annual compound growth rate of 6.8%, the market scale is expected to expand to 2.3 trillion yuan by 2025.

Market value is the most direct reflection of market development expectations. In terms of market value, the total market value of the 35 listed companies in the biopharmaceutical subsector alone amounts to HK$737.43 billion, making it the sector with the largest total market value among the three major tracks. However, the August 28th effect is evident, as the market value of a single company, BeiGene, approaches 29.1% of the total market value of the 35 companies, which is close to the sum of the market values of all 27 18A biopharmaceutical companies ranked after the top 27.

However, the pharmaceutical industry still accounts for the largest proportion by weight, with chemical drugs accounting for 49% of the pharmaceutical market in 2020, amounting to 7945 billion yuan. Next is traditional Chinese medicine, which occupies a 30% share of the pharmaceutical market with 4880 billion yuan. But biopharmaceuticals had the fastest average annual compound growth rate from 2016 to 2020, and their market size accounted for 21% of the pharmaceutical market in 2020.

This also results in a relatively weaker market value. The total market value of the 12 listed medical device companies is HK$137.05 billion, less than 20% of that of the pharmaceutical industry.

The market capitalization differences are also significant. The number of companies with market capitalizations exceeding HK$5 billion, HK$10 billion, and HK$50 billion is 8, 3, and 1 respectively. Among them, MicroPort Robotics has the highest total market capitalization in this sector, accounting for as high as 41.0% of the market value.

Looking at sub-industries, these companies mainly focus on areas such as vascular intervention, neurosurgery, non-vascular intervention, diabetes, diagnostic and therapeutic equipment, and molecular diagnosis. Among them, 12 companies are involved in the largest number of vascular intervention projects; the main indications are distributed across heart and vascular diseases.

In the frontier medical technology sector, which has the fewest listed companies, the current focus is mainly on the AI diagnostic and treatment equipment industry. Not only did Eagle Eye Technology (02251.HK) achieve a zero breakthrough in listing as an 18A company in 2021, but the market is also in the early stages of sprinting forward.

From the perspective of earnings-per-share capability, if a listed company has met the market value/earnings ratio test requirements under Rule 8.05(3), its management team has remained unchanged for at least the past three fiscal years, and the ownership and control rights in the most recent audited fiscal year have also remained unchanged, then its stock name may not carry the 'B' symbol.

Currently, the four companies that have removed the 'B' symbol are all biopharmaceutical companies, namely BeiGene, Sino Biologics (01801.HK), Junshi Biosciences (01877.SH), and Fosun Pharma (02696.HK).

As of December 31, 2021, there were a total of 23 companies classified as 18A that had submitted their listing applications but not yet been listed on the Hong Kong Stock Exchange.

According to the segmentation of tracks, compared with the 18 A-share listed companies where biopharmaceuticals and medical devices accounted for an absolute weight, among the 23 companies that have been delisted but not yet listed, biopharmaceuticals still account for more than 50%. The proportion of frontier healthcare and medical services has significantly increased, making the ratio more balanced.

In terms of the number of issuers, from 2018 to 2021, there were 5, 9, 14, and 20 listed companies on the 18A board of indexes respectively, showing a gradual increasing trend overall, with more IPOs in the second half of the year; however, in terms of average fundraising amount, it was slightly larger from 2020 to the first half of 2021, and then saw a slight correction in the second half of 2021.

The Report anticipates that in 2022, the number of listed companies on the market for 18A stocks will remain at around 20, with an average fundraising amount possibly continuing a downward trend.

"The 18A market has gone through three stages of development: exploration phase, frenzy phase, and adjustment phase," Liu Shoujian, Deputy Chief Executive Officer of CCB International, believes. "In the future, on one hand, more global high-quality biotech companies will choose to list on the 18A market, while on the other hand, the IPO enthusiasm and subsequent stock price performance of different companies will continue to diverge." Facing the future of the 18A market, Liu Shoujian said.

It is worth noting that for pharmaceutical companies that have mastered certain R&D technologies but have raised large amounts of funds and have not yet achieved profitability, listing on the Sci-tech Innovation Board (STAR Market) is another option. However, the similarities and differences between it and the Hong Kong capital market in China are worthy of attention.

At the 6th China Pharmaceutical Innovation and Investment Conference, Dai Wen, Chief Analyst for the A+H Healthcare sector at Huatai Securities Research Institute, analyzed investors' preferences. She believes that "investors in the mainland and Hong Kong have some different preferences." Specifically, there are more traditional Chinese medicine companies listed on the Hong Kong Stock Exchange, but there are more medical device companies in the A-share market.

In addition, the choice of listing location is closely related to the company's needs and the background of its investors. For example, pharmaceutical companies that want to conduct global clinical trials may prefer to list on the Hong Kong stock market for dollar financing.

Bao Haijie, Managing Director of the Hong Kong Exchange and Co-Head of Market Development, believes that in addition to financing time and price, the difficulty, timing, and approval process for refinancing should also be considered within the company's listing considerations. 'What is important is not only the listing cost but also whether there are ongoing legal risks and litigation risks later on. The costs in this regard mainly include considering the possibility of class-action lawsuits, policy uncertainties, regulatory uncertainties, and whether a legal team needs to be hired for legal support.'

Wang Yinxiang, Chairman of Gaoke Science & Technology Group (01167.HK), stated that for biotech companies without revenue, the speed of financing is very important. The A-share market has a large trading volume, and it usually takes 6 months to 1 year to raise funds in the primary market; however, the Hong Kong market in China has a faster financing process, with most financings concluding within a week after listing. However, financing in the Hong Kong market is a test of the company's and its products' international market recognition, and liquidity is relatively lower.

It can be seen that companies have different opinions on the choice of listing locations. However, regarding the market development logic, more consensus will surely be reached within the industry.

Wang He, co-founder and CEO of Yongtai Biotech (06978.HK), believes that in the first two decades of the 21st century, the pharmaceutical industry has experienced a rapid development from small molecules to large molecules, and then to cell and gene therapy. In the next two decades, using more complex cell and gene therapies to treat refractory diseases has become the main direction for biopharmaceutical development.