Bio-tech Listings on HKEX (18A)

1. Introduction

In light of the prevalence of biotechnology in such an era o innovation and technology, the Hong Kong Stock Exchange (“the Exchange”) published Chapter 18A of the Main Board Listing Rules (“Chapter 18A”) on 24 April 2018. The introduction of Chapter 18A aims to assist pre-revenue Biotech companies that fell outside of the traditional listing regimes from applying to list in Hong Kong.

In addition to the main rules stipulated in Chapter 18A, Guidance Letters and a set of frequently asked questions (“FAQ”) are subsequently published to clarify the scope and requirements for the listing procedures. These relevant additional resources are updated from time-to-time and are summarized as follows:

  • HKEX-GL92-18 (Guidance on suitability for listing of Biotech Companies);
  • HKEX-GL85-16 (Guidance on placing to connected clients, and existing shareholders or their close (associates, under the Rules);
  • HKEX-GL86-16 (Guidance on producing simplified listing documents relating to equity securities for new applications);
  • HKEX-GL107-20 (Guidance on disclosure in listing documents for Biotech Companies); and
  • FAQ on the Listing Regime for Companies from Emerging and Innovative Sectors.

The introduction of Chapter 18A marks an important first step towards broadening Hong Kong’s listing regime to pre-revenue companies and has received encouraging results so far. Following two years of the launch and ­ as of 9 Aptil 2020, 16 pre-revenue biotech companies were listed through Chapter 18A and a total of HK$39.68 billion has been raised.

2. Requirements for Listing
An applicant applying for listing under Chapter 18 A must (1) fulfill basic conditions set out in the Main Board Listing Rules Chapter 8 (except rules 8.05, 8.05A, 8.05B and 8.05C), (2) demonstrate to the Exchange’s satisfaction that it is eligible and suitable for listing as a Biotech Company, and (3) fulfill additional requirements listed in Rule 18A.03. The Guidance Letter HKEX-GL92-18 provides detailed guidance regarding the suitability requirement.

The requirements are summarized below:

2.1 Definition
The definition of “Biotech Company” as stipulated in Rule 18A.01 must be met A “Biotech Company is defined as “a company primarily engaged in the research and development, application and commercialisation of Biotech Products.

2.2 Core Product
An applicant must have developed at least one Core Product beyond the concept stage. “Core Product” is defined as “Biotech products, processes or technologies that are required by applicable laws, rules or regulations to be evaluated and approved by a Competent Authority 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.

A “Competent Authority” is defined as “the US Food and Drug Administration, the China Food and Drug Administration, the European Medicines Agency”, and other national or supranational authority recognised by the Exchange as a Competent Authority.

The Exchange would consider a product to be developed beyond the concept stage if it has met certain developmental milestones. The requirements are summarised below:

Type of Product Developmental Milestones
(i)     New pharmaceutical (small molecule drug) product

(ii)   New biologic product

Applicant must demonstrate that:

(i)     it has completed Phase I clinical trials; and

(ii)   the relevant Competent Authority has no objection for it to commence Phase II (or later) clinical trials.

(i)     Pharmaceutical             (small molecule drug) product which is based on previously approved products

(ii)   Biosimilar

Applicant must demonstrate that:

(i)     it has successfully completed at least one clinical trial conducted on human subjects, and

(ii)    the relevant Competent Authority has no objection for it to commence Phase II (or later) clinical trials.

In-licensed or Acquired Core Products It should have completed at least one clinical trial regulated by the relevant Competent Authority on human subjects since the in- licensing or acquisition.

If such requirement is not met, the Exchange will assess the reason behind and whether substantive R&D work and process(es) equivalent to the completion of one clinical trial on human subject has been performed by the applicant.

Medical devices Applicant must demonstrate that:

(i)      the product is categorized as Class II medical device;

(ii)   it has completed at least one clinical trial on human subjects; (iii)either the Competent Authority or the Authorised Institution 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.

Other products will be assessed on a case-by-case basis. If there is no regulatory regime which sets out the milestone or an objective framework to assess such core product(s), the Exchange will consider factors such as:

  • the number, selection process and diversity of the test sampling population, and availability of data from pre-clinical and clinical trials;
  • time-frame and impediments to commercialisation;
  • whether pre-clinical and clinical results have been published in medical or scientific journals; and
  • any guidelines published by a Competent Authority.

2.3 Research and Development (“R&D”)
An applicant must have been primarily engaged in R&D for the purposes of developing its Core Product(s)8, and the primary reason for the listing is to raise fund for R&D to bring its Core Product(s) to commercialization. For Biotech Companies that develop medical devices which have a short development cycle, the Exchange may take into account their business plan and development stage of the pipeline products such that they may allocate a portion of listing proceeds to.

An applicant must demonstrate that it has a pipeline of pharmaceutical or biological products if the applicant is engaged in the R&D of such product.

2.4 Patents

An applicant must have registered patent(s), patent application(s) and/or intellectual property for its Core Product(s).

2.5 Third Party Investment
In order to demonstrate a reasonable degree of market acceptance for an applicant’s R&D and product(s), an applicant must have previously received “meaningful third party investment” from at least one
“Sophisticated Investor” at least 6 months before the proposed listing date.
  1. Meaningful Third Party Investment
    In determining whether a third party investment is “meaningful”, the Exchange will assess on a case
    by case basis taking into account the following factors: the nature of the investment, the amount invested, the size of stake taken up and the timing of the investment.

    Rule 3.2(g)(ii) has set out indicative benchmarks for the investment amount generally be considered as a “meaningful investment”, and the information is summarized below:

    Applicant’s amount of market capitalisation Investment amount (of the issued share capital of the applicant at the time of listing)
    Between HK$1.5 billion to HK$3 billion Not less than 5%
    Between HK$3 billion to HK$8 billion Not less than 3%
    More than HK$8 billion Not less than 1%
  2.  Sophisticated Investor
    In determining whether an investor is a “Sophisticated Investor”, the Exchange will assess on a case by case basis taking into account the following factors: net assets or assets under management, relevant investment experience, the investor’s knowledge and expertise in the relevant field, etc.
    The following are generally considered as a “Sophisticated Investor” by the Exchange:
  • 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.If an application is a spin-off from a parent company, compliance with this requirement may not be required by if it can demonstrate to the Exchange’s satisfaction that a reasonable degree of market acceptance exists for its R&D and product. An applicant may demonstrate such quality by collaborating with other established R&D companies.

2.6 Market Capitalization
At the time of listing, an applicant must have an initial market capitalization of at least HK$ l ,500,000,000.

2.7 Track Record
An applicant must have been in operation in its current line of business for at least two financial years before listing under substantially the same management.

2.8 Working Capital
An applicant must ensure it has available sufficient working capital to cover at least 125% of the group’s costs for at least 12 months since the date of publication of its listing document after taking into account proceeds from the applicant’s initial listing . The costs must substantially consist of both (a) general, administrative and operative costs and (b) research and development costs.

Owner continuity of an applicant will also be assessed. The Exchange will review any change in ownership of the applicant in the 12 months prior to the date of listing in determining the applicant’s suitability for listing.

Nevertheless, the factors listed above are neither exhaustive nor binding. The Exchange retains the discretion to determine an applicant’s suitability for listing and may take into account all other relevant circumstances while performing such an assessment.

3. Requirements for Listing Documents
An applicant is required to include in its listing documents (1) usual information as set out in Appendix lA of Listing Rules, (2) disclosure requirements listed in Chapter 18A. The Guidance Letter HKEX-GL107 provides detailed guidance regarding the disclosure in listing documents.

An applicant must provide information that is accurate and complete in all material respects and not be:
misleading or deceptive In addition, the overriding general principle of disclosure in a listing document as
set out in Main Board Rule 11.07 applies on all applicants, where they must provide information and particulars necessary for investors to make an informed assessment of the listing.

The requirements as per the disclosure required for listing documents are summarized below:

3.1 Summary Section
An applicant should include the following information in the Summary Section:

  • development timetable of Core Products in a fair and balanced manner;
  • a risk factor that potential investors may lose all their investments in the Biotech Company;
  • a scientific description of the biotech technology; and
  • key clinical data of their Core Products.

To the interest of the retail investors, this section should be written in simple and plain language and cross-references to the Business section shall be made when highly technical content or detailed description of sciences are involved.

3.2 Competitive Landscape and Addressable Market
The following information should be disclosed:

  • Competitive landscape of applicant’s Core Products and other key pipeline products to be commercialized in targeted markets. This including competitors’ pipeline products targeting the same indication and their development stages, the name, price and reimbursement coverage of any such products, and any expiration dates of key patents from competing products;
  • Material information on the relevant addressable market of Core Products and other pipeline products rather than the overall market; and
  • A comparison between the applicant’s product and other direct competing areas in terms of technologies, indications, targeting market, etc.

3.3 Communication with Competent Authorities
An applicant should disclose whether China’s National Medical Products Administration has raised material concerns or objections towards the completed or ongoing clinical trials. If there is no communication between the applicant and the relevant Competent Authority, a negative statement should be included.

3.4 Commercialised Core Products
If a Core Product (i) has been commercialised in a specific market for a specified indication, and (ii) the applicant intends to expand its indication or to launch it in another market, the applicant should disclose:
(i) A Breakdown of funds used to support R&D; and
(ii) Their importance in advancing the Core Product.

3.5 Core Products and Advanced Pipelines Candidates Classified and Regulated as Orphan Medicines and/or Innovative Therapies
The following information should be disclosed:

  • the basis for drug candidates to qualify in a particular regulatory pathway,
  • the exemptions granted by the relevant Competent Authorities in certain regulatory processes and the advantages therein for drug products admitted, reviewed and potentially approved under such designation;
  • the commercialisation plan and/or market strategy to be taken for a particular drug product to (iv)enter a primary market and other markets, including information about the timeline of the next
    regulatory milestones leading up to the filing of new drug applications, and key differences between the primary market and other markets;
  • the calibre and experience of participating research institutions in a collaboration,
  • material terms and conditions of the collaboration and who will own the intellectual property rights, patent and sub-licensing rights.

3.6 Pipeline Products
An applicant should:

  • specify the origins and the jurisdiction rights regarding the products;
  • highlight any pipeline products that will be prioritised for development by the applicant, or that the company would allocate a large portion of listing proceeds to it even if it has not been developed beyond the concept stage;
  • provide a balanced disclosure of material information on relevant studies for each pipeline product;
  • if the products are at a very early preclinical stage and meaningful preclinical research data is not available, or if the data is scientifically sensitive, the applicant should consider excluding it from the listing document; and
  • disclose associated risk factors on the inherent uncertainties on pipeline products.

3.7 Valuation
An applicant should:

  • disclose the valuation of each round of pre-IPO investments; and
  • explain material fluctuations in valuation with the immediate previous round of pre-IPO financing with reference to key development of the products, business milestones, and competitive advantage over its peers.

3.8 Sophisticated Investors
An applicant should disclose material information on their Sophisticated Investors, such as the fund’s background and track record in relevant industries.

3.9 Net Liabilities
An applicant should disclose in the Summary Section and Risk Factors Section whether it has incurred net liabilities during the Track Record Period as a result of significant fair value change of convertible financial instruments and that they will be turning into a net assets position upon listing

3.10 Burn Rate
The following information should be disclosed in the Summary section and other relevant sections

  • A period of time with the basis that the applicant can maintain its viability with existing cash balance with and without the IPO proceeds; and
  • When the applicant plans to raise its next round of financing based on its bum rate.

3.11 Other Requirements
According to Chapter 18A, the following additional information should be disclosed:

  • relevant experience of the applying company’s directors and senior management regarding R&D, manufacturing and commercialisation of products;
  • the salient terms of any service agreements between the applicant and its key management and technical staff;
  • any measures adopted by the applicant to retain key management or technical staff;
  • specific risks, general risks and dependencies, including potential risks in clinical trials, risks associated with the approval process of Core Product(s), and the extent to which the applicant’s business is dependent on key individuals and the impact of the departure of key management or technical staff on the applicant’s business and operations; and
  • an estimated cash operating cost.