Since the new regime for listing of innovative companies was put in place four months ago, there has been a number of biotechnology companies seeking a listing on the Main Board of The Stock Exchange of Hong Kong Limited (the Stock Exchange) through Chapter 18A of the Rules Governing The Listing of Securities on the Stock Exchange (Listing Rules) (Chapter 18A).
In view of the numerous enquiries received by the Stock Exchange about the new chapters under the Listing Rules, the Stock Exchange has recently published an FAQ on the listing regime for companies in the emerging and innovative sectors (August FAQ), including companies seeking listing under Chapter 18A.
As at 27 September 2018, three biotechnology companies have been listed via Chapter 18A, and eight other biotechnology companies have submitted their A1 application and undergoing the vetting process.
In this article, we will take a quick look at how these companies have satisfied some of the main requirements of the Listing Rules and potential issues biotechnology companies should watch out for if they are contemplating a listing on the Main Board via the Chapter 18A regime.
The biotech issuers listed under Chapter 18A are:
||Type of Biotech
||Hua Medicine (Hua Medicine)
||31 August 2018
Goldman Sachs (Asia) L.L.C.
CLSA Capital Markets Limited
|14 September 2018
||BeiGene Ltd. (BeiGene)
||30 July 2018
Morgan Stanley Asia Limited
Goldman Sachs (Asia) L.L.C.
|8 August 2018
||Ascletis Pharma Inc (Ascletis)
||20 July 2018
Morgan Stanley Asia Limited
Goldman Sachs (Asia) L.L.C.
China Merchants Securities (HK) Co., Limited
|1 August 2018
Observations from listed Chapter 18A biotechnology companies prospectuses
Core Products and Competent Authorities
A biotechnology company applying for listing under Chapter 18A must have developed at least one Core Productbeyond the concept stage. The Core Products of Hua Medicine, BeiGene and Acsletis all fall within the category of “pharmaceutical” as set out in the Guidance Letter issued by the Stock Exchange on the Suitability of Listing of Biotech Companies (GL92-18), and are regulated by one of the Competent Authorities under the Listing Rules, being the China Drug Administration (formerly known as the China Food and Drug Administration). It is noted that some of the other Chapter 18A listing applicants have core products which fall within the biologics or medical devices categories. The Stock Exchange has recently provided guidance on what “Other Biotech Products” would be eligible to list under Chapter 18A. See also “Reminders from the Stock Exchange for Chapter 18A applicants under the August FAQ” below.
The Stock Exchange has also clarified in its August FAQ it may recognise other national or supranational authority as Competent Authority on a case by case basis. It will take into account various factors such as whether the authority can be recognised as a comparable authority as to the Competent Authorities; and whether the approval process of that authority in relation to the biotech product in question is comparable to the process and expertise of a Competent Authority.
Patents and licensing arrangements
Under Chapter 18A of the Listing Rules, an applicant must have registered patent(s), patent application(s) and/or intellectual property in relation to its core product(s).
According to the disclosures of the three listed Chapter 18A biotech companies, apart from having their own registered patent or patent applications, it is also common to see biotechnology issuers entering into in-licensing arrangements with other biotechnology companies involving the Core Products. The biotech issuer either obtained exclusive licence to develop, manufacture and commercialise its Core Products (Ascletis) or market certain commercial products.
For example, Ascletis entered into exclusive licensing agreements with respective pharmaceutical/ biotechnology companies to develop, manufacture and commercialise its Core Products Ravidasvir, ASC09 and ASC06 respectively. Whereas in BeiGene, it obtained an exclusive licence to market Celgene Corporation’s (Celgene) approved cancer therapies ABRAXANE, REVLIMID and VIDAZA in China, excluding Hong Kong, Macau and Taiwan as its commercial products. BeiGene also granted Celgene an exclusive right to develop and commercialise one of its Core Products, tislelizumab for solid tumours, in the United States, Europe, Japan and the rest of the world other than Asia.
The Listing Rules specifically required that the biotech listing applicant must prominently disclose to investors a warning that the relevant core product may not ultimately be successfully developed and marketed (Rule 18A.05).
A number of commonly found biotech related risk factors disclosed by biotech listing applicants include:
- The company depend substantially on the success of its drug candidates. Clinical trials of its drug candidates may not be successful. If the company is unable to commercialise its drug candidates or experience significant delays, the business may be materially harmed.
- If the company is not able to obtain or experience delays in obtaining, required regulatory approvals, it will not be able to commercialise its drug candidates, and the ability to generate revenue may be materially impaired.
- Even if the drug candidate receives regulatory approval, it may fail to achieve the degree of market acceptance by physician’s patients, third party payors and others in the medical community necessary for commercial success.
- The company often has a limited operating history hence it is difficult to evaluate the current business and predict the future performance.
- History of incurring net losses and the company anticipates it may continue to incur net losses for the foreseeable future.
- The company may rely on third parties to conduct preclinical studies and clinical trials and manufacture its drugs and drug candidates. If these third parties do not successfully carry out their contractual duties and meet expected deadlines, it may not be able to obtain regulatory approval for or commercialise its drugs and drug candidates and business could be substantially harmed.
- The company may have entered into collaboration or formed collaborations or strategic alliances or may form or enter into additional licensing arrangements in the future, however the issuer may not realise the benefits of such collaborations, alliances or licensing arrangements.
- The company may be successful in obtaining or maintaining adequate patent protection for one or more of its drug candidates.
According to paragraph 27 of Part I of the third schedule to the Companies (Winding Up Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) and paragraph 31 of Part II of the third schedule to CWUMPO, a listing applicant is required to include in the prospectus information on (i) the applicant’s gross trading income or sales turnover, and (ii) the applicant’s profits and losses and assets and liabilities prepared by the auditors, respectively, for each of the three financial years immediately preceding the issue of the prospectus.
According to Rule 18A.06 of the Listing Rules an eligible biotech company could take advantage of having a shortened track record period by complying with Rule 4.04 modified, so that references to “three financial years” or “three years” in that rule shall instead reference to “two financial years” or “two years”, as the case may be.
Accordingly, the biotech listing applicant could apply to The Securities and Futures Commission of Hong Kong for an exemption from compliance with paragraph 27 of Part I and paragraph 31 of Part II of CWUMPO as described above on the grounds, among others, that:
- It is a biotech company applying for listing pursuant to Chapter 18A of the Listing Rules.
- The accountants report prepared for the two financial years prior to the issue of the prospectus is in accordance with Rule 18A.06 of the Listing Rules and it would be unduly burdensome for the listing applicant to have to also comply with the abovesaid provisions of CWUMPO.
- All other relevant information required to be disclosed under the Listing Rules and the CWUMPO have been adequately disclosed in the prospectus.
It is noted that the sophisticated investors of the listed Chapter 18A biotech issuers are mainly dedicated healthcare funds and biotech funds as well as established funds with a focus on investments in the biopharmaceutical sector (Hua Medicine/ Ascletis), or Securities and Exchange Commission of the United States-registered investment advisers who are highly experienced in biotech industry investments (BeiGene).
In the August FAQ, the Stock Exchange clarified there are no “bright line” tests for the definition of “sophisticated investors” as they may vary according to many factors. The Stock Exchange will take into account the factors set out in its guidance letter GL 92-18, which are illustrative examples but are neither exhaustive nor binding. It will take into account all relevant circumstances in its assessment.
Cornerstone Investors and Market Capitalisation
It is noted that both BeiGene and Asclelis have cornerstone investors. The lock-up period of the cornerstone investors’ interests in the respective listed issuers are both subject to the common period of six months.
In the August FAQ, the Stock Exchange has reminded for biotech listing applicants, it must ensure that it has at least HK$375 million of public float at the time of listing, which must exclude subscriptions by existing shareholders at IPO and subscriptions through cornerstone investments.
An existing shareholder of a Chapter 18A listing applicant may also subscribe for additional shares in the IPO provided that the applicant is able to meet the additional public float requirement under Rule 18A.07.
Use of proceeds
The Stock Exchange expects that Chapter 18A issuer would use a substantive portion of the proceeds to cover its operating costs and research and development costs (Note 1 to Rule 18A.03). It is noted that Hua Medicine, BeiGene and Ascletis had all disclosed they intend to use over 70% of the proceeds for these costs on their respective Core Products.
Chapter 18A Biotech issuer with a Dual Primary Listing
BeiGene is also the first Chapter 18A biotech company with a dual primary listing on the Main Board of the Stock Exchange. The American Depositary Shares of BeiGene, each of which represents 13 ordinary shares, are listed for trading on the Nasdaq under the symbol “BGNE.”
We note that BeiGene has adopted the generally accepted accounting principles in the United States (US GAAP) in the preparation of accountants’ report and subsequent financial reports. The Stock Exchange clarified in the August FAQ that US GAPP is permitted for an overseas issuer whose primary listing is on another stock exchange under Rule 19.39(c) or in case of a dual primary listing in the U.S. In such case, the applicant may apply for a waiver from Rule 4.11 to use US GAPP in the preparation of an accountant’s report. For further details, see the August FAQ.
Reminders from the Stock Exchange for Chapter 18A applicants under the August FAQ
Could a biotech company with revenue and profit under Main Board Listing Rule 8.05 be able to list under the Chapter 18A?
No, a biotech company which is able to meet the financial eligibility requirements under Rule 8.05 cannot list under Chapter 18A. In determining whether a biotech company is able to meet the financial eligibility requirements under Rule 8.05, the existing rules and guidance will be applied (for example, examining whether any revenue / profit is generated from activities outside the ordinary and usual course of its business).
What detailed information are biotech companies expected to disclose in their listing document?
Apart from the required disclosure as set out in the Listing Rules, including Chapter 18A, the Stock Exchange has reminded biotech issuers in the August FAQ that where applicable, the listing document should have sufficient disclosure on the data related to the (i) safety, and (ii) sustainability of efficacy of the Core Products from all completed clinical trials.
If a person is in charge of a clinical trial at a study site to oversee compliance with relevant requirements and standards, the biotech listing applicant should disclose details of any overlapping roles such person has with the key opinion leaders in the relevant field/industry. Where additional compensations are given to such person in charge, which may impair the integrity of the biotech listing applicant’s clinical trials, the applicant should also disclose measures to address any potential conflicts of interest and independence issues which may arise.
“Other Biotech Products” considered to be eligible to list under Chapter 18A
In GL92-18, the Stock Exchange sets out the categories of Biotech Products that are accepted for listing under Chapter 18A. The Stock Exchange has clarified in the August FAQ that when assessing what “Other Biotech Products” category would be accepted, it would be assessed on a case by case basis.
Where there is a regulatory regime for the applicant’s product, the Stock Exchange will require the applicant to demonstrate that it meets the requirement of paragraph 3.4 of GL92-18 by reference to such regulatory regime. Where there is no regulatory regime which sets out the external milestones and objective framework to assess the development progress and a level of scrutiny, scientific accuracy and importance for a product under the “Other Biotech Products” category, the Stock Exchange will consider, for example:
- the number, significant of selection and diversity of the test sampling population in pre-clinical and clinical trials;
- follow-on study findings of staged testing;
- time-frame and impediments to commercialization;
- where the pre-clinical and clinical results have been published in leading medical journals:
- the peer review editorial and selection process;
- background of the relevant journal;
- review process of the journal;
- where Competent Authorities have published relevant guidelines on their views and aspects of a comparable framework and/ or objective indicators of “Other Biotech Products”.
For details, see August FAQ.
It is expected that there would be a continuous number of biotechnology issuers seeking a listing on the Main Board of the Stock Exchange pursuant to Chapter 18A. Potential Chapter 18A applicants are reminded to take heed of the reminders from the Stock Exchange when preparing for their application. As the regime is still in its early days, it is expected new issues will arise over time.
Frequently Asked Questions on Listing Regime for Companies from Emerging and Innovative Sectors (published on 24 August 2018)
As defined under Ch.18A of the Listing Rules, being a regulated product that alone or together with other regulated products forms the basis of a biotech company’s listing application.
See FAQ No. 036-2018 of August FAQ
See FAQ no. 038-2018 of August FAQ
See FAQ no. 034-2018 of August FAQ
See FAQ no.035-2018 of August FAQ