Hong Kong ups disclosure requirements for biotech IPOs

The new regime came into effect in April 2018 alongside measures allowing IPOs by technology companies of a certain size that had weighted voting rights (WVR) structures. Hong Kong wanted to improve its competitive position versus US bourses and the anticipated introduction of a dedicated technology board in Shanghai – which launched last year as the Star Market.

AVCJ Research has records of more than a dozen IPOs by private equity-backed pre-revenue biotech companies. Three of them – Innovent Biologics, Shanghai Henlius Biotech, and Ascletis Pharma – raised more than $400 million apiece.

Regulators were always concerned about retail investors with little relevant expertise having exposure to unproven biotechnology companies. To this end, the recent changes to disclosure requirements call for scientific descriptions and data in the prospectus to be “more readable and understandable by using plain language without compromising scientific accuracy.”

Listing candidates must also provide timetables for the development of their core products that are fair and balanced, while stressing that investments could be wiped out in the event of an R&D failure. Various studies in the US have estimated that the likelihood of a drug progressing from phase-one clinical trials to approval by the US Food & Drug Administration is about 10%. A higher proportion of drugs stumble during phase two trials than in phases one or three.

In addition, the revised Hong Kong regulations require disclosure of the valuation of each round of pre-IPO investments and explanations for material fluctuations between rounds, information on the sophisticated investors (which are often PE and VC investors), and future financing plans with and without listing proceeds.

Listing candidates must give comprehensive descriptions of the competitive landscape and competitors to core products, including material information on the relevant addressable market rather than the overall market size. More details must also be submitted on the origins and rights of products (whether they are in-licensed or self-developed); the development pathway for treatments (commercialization plans, regulatory and marketing strategies); and the use of IPO proceeds.

The existing rules have elements of quality control. Candidates must have a minimum market capitalization requirement of HK$1.5 billion ($191 million), enough working capital for at least 12 months, and the backing of a sophisticated investor at least six months before the IPO. 

On launching the regime, the exchange established a committee to advise it on biotech IPOs and started hiring relevant talent, while investment banks deepen local analyst coverage of biotech. Speaking to AVCJ last month, Brian Chi, a partner at Loyal Valley Capital, noted that the gap between Hong Kong and New York in terms of technical analysis has narrowed. At the same time, he believes Chinese investors have a better understanding of homegrown pharma companies than their peers in the US.

A separate amendment offers further guidance for biotech companies with in-licensed or acquired products. They must have completed at least one regulated clinical trial on human subjects since acquisition or demonstrate engagement in R&D for at least 12 months prior to the listing. For acquired products that are already commercialized, a significant portion of the IPO proceeds must be used to launch it in other markets.

The regulator has also placed limits on the extent to which existing investors can participate in IPOs, recognizing the popularity of these offerings among retail investors. An investor that holds more than 10% of the shares can take part in an IPO as a cornerstone investor. Those with less than 10% can subscribe to the cornerstone placement and the general offering. Where offerings are substantially oversubscribed, the exchange will consider adjustments to the clawback mechanism.

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• Topics
• Greater China
• Healthcare
• IPO
• Regulation
• China
• Hong Kong (China)
• Pharmaceuticals