In the last 15 years, as China's life science sector has matured, the country has developed a sophisticated network of VC/PE investors to fund the industry's development. The network, however, has one remaining major deficiency: there has been no China venue for IPOs of pre-revenue companies. Because China-Hong Kong exchanges require companies to show two years of profitability for an IPO, the exchanges were out of the question for young biopharmas. Later this year, they will have an option: under new rules, pre-revenue biopharmas will be able to IPO in Hong Kong, according to new regulations expected to become effective in the second half of 2018.
The changes are coming at a perfect time for China biopharmas: a raft of young innovative companies, mostly founded by returnees, are moving into late-stage clinical trials and need capital to fund their large, expensive Phase II/III tests.
Not surprisingly, the new Hong Kong listing requirements have drawn the attention of several high profile novel China biopharmas, companies that include (among others) Suzhou's Innovent, Hua Medicine of Shanghai, Hangzhou's Ascletis, Hong Kong's Grail Shanghai Henlius, Ascentage Pharma of Suzhou, Shanghai Tasly Pharma, Fountain Medical Development -- companies that have taken advantage of China's combination of growing scientific expertise and efficient drug development.
All of these companies, each born after 2010, have been developing portfolios of novel drug candidates. As they get closer to commercialization, they would be ideal candidates for IPOs in Western countries, the natural time to transition away from venture capital and begin public market financings. Venture capital, useful in the early days of a company, requires owners to give up more equity per dollar than public offerings, and western companies usually turn to IPOs to raise public capital to pay for late-stage trials.
In recent years, two young, very prominent pre-revenue China biopharmas have done exactly that, IPOing on US markets. BeiGene (NSDQ: BGNE) raised $158 million on the US Nasdaq exchange in 2016 in an upsized offering, and Zai Lab (NSDQ: ZLAB) followed in 2017, completing a $165 million IPO that valued the company at $1.4 billion. Both offerings were well-received, and both companies have done will since, trading higher. Even if there had been a China alternative, the two companies might have chosen to list in the US. Nevertheless, their solution to their pre-revenue situations demonstrates a need, which, at the time, China-Hong Kong exchanges could not address.
The Hong Kong Stock Exchange
Meanwhile, the Hong Kong Exchange has had its own problems. For the past few years, Hong Kong has been the number one global exchange in terms of IPO dollar volume (for all industries). In 2017, it fell to fourth spot, a disappointment. Because the exchange found this situation intolerable, it decided to modernize its regulations, getting more in step with ex-China exchanges -- it's really just playing catch-up -- that have long since featured the more accommodative requirements. Thus, the HK biopharma revamp.
Besides pre-revenue companies, Hong Kong also will allow large high-tech companies to list with two ownership classes, a system that allows founders/owners to maintain control over shareholder votes and that Alibaba (NYSE: BABA) demanded. Because Hong Kong would not offer the two-class structure, Alibaba took its $25 billion IPO to the New York exchange in 2014, depriving Hong Kong of the largest IPO of all time, the prestige of listing a home-grown favorite, and considerable trading revenues in the following years.
To prevent more Alibabas, along with the BeiGenes and Zai Labs of China, Hong Kong belatedly decided it needed more accommodative rules to regain the top spot for global IPO fundraising exchange.
The New Regulations
For young biopharmas, here are the new regulations:
- In place of the requirement that companies must have two years of profits, Hong Kong proposes that companies must have a net worth of at least $190 million, as shown in the valuation at their most recent investment;
- Companies are required to have successfully completed Phase I trials showing at least one candidate have demonstrated safety in human studies;
- The companies must have IP, with patents in hand or filings for patents; and
- The company must have backing from at least one top-tier venture capital firm.
Expected Hong Kong Biopharma IPOs
The following lists China life science companies that are reported to be looking at a Hong Kong IPO (note: in most cases, these listings are rumored only; they have not been officially announced. Usually these rumors turn out to be true, but any of these could end up listing on a non-Hong Kong exchange):
- Innovent (Suzhou), developing novel biologics and biosimilars;
- Hua Medicine (Shanghai), a diabetes company planning a $400 million Hong Kong IPO;
- Ascletis (Hangzhou) with a late-stage dual hepatitis C therapy ;
- Henlius (Shanghai), a Fosun Pharma JV developing biologic drugs;
- Shanghai Tasly Pharma, the biologic operations of Tianjin's Tasly Pharma;
- Ascentage Pharma (Suzhou) developing small molecule apoptosis drugs for cancer;
- Grail, a diagnostics spinout from Illumina that formed a Hong Kong JV;
- Fountain Medical Development (Beijing CRO);
- Ping An Good Doctor ($1 billion Hong Kong IPO at a $5 billion valuation);
- Ping An Healthcare Management (valuation: $8.8 billion).
Innovent Biologics of Suzhou is a perfect example of this group of made-in-China novel drug developers. In late 2016, Innovent raised $260 million in a Series D round, a record venture funding for a China biopharma company. The D round, which bought Innovent's total VC fundraising to $410 million, was led by China's State Development & Investment Corporation (SDIC), a state-owned entity whose participation shows official China backing in Innovent.
Founded in 2011, Innovent is developing 12 biologic drugs, a combination of novel drugs and biosimilars. Four candidates are in clinical trials, three of them in Phase III. In addition, Innovent sold ex-China rights in 2015 for six oncology drug candidates to Lilly for $1 billion in upfront and milestone payments.
Despite the significant amount of VC investments, Innovent still needs more capital to bring its portfolio to commercialization. Most of the $1 billion from Lilly is milestones, and Innovent must get through commercialization to realize the full value of the agreement. To meet the need, the company is contemplating Hong Kong and US exchanges for its IPO.
Shanghai Henlius, the Fosun Pharma biosimilar JV, has several biosimilars in clinical trials, but is still years away from a marketed product. It is also rumored to be in talks with the Hong Kong exchange. Because the discussions are advanced, it could be the first pre-revenue biopharma to list on the Hong Kong exchange. Its parent, Fosun Pharma, has a joint Shanghai-Hong Kong listing, and Fosun's China drug distribution JV, Sinopharm, received a warm welcome when it debuted on the Hong Kong exchange way back in 2009. So the links are already there.
In other situations, JHL Biotech, a Korea-China biosimilar/biologics company, has voted to de-list from Taiwan. It will probably want to raise capital by IPOing somewhere in China, and Hong Kong will offer a better valuation than the Taiwan listing it has just given up.
Sinovac has just completed a privatization, and although it is already profitable, will want to re-list after it takes a few years to buff up its financials, add a few new products and write a prospectus that will entice new investors. Hong Kong would be a possibility, although with revenues it is unlike many other companies in the group, giving it an alternative.
On the other hand, WuXi AppTec, China's biggest CRO, which de-listed from New York two years ago, announced it will re-list on the Shanghai exchange, with a goal of raising $910 million. It has a history of nearly two decades of profitable operations, so WuXi is in a much different position than the drug/device companies it serves as clients.
Interestingly, China needed just seven weeks to approve the WuXi IPO. In years past, China regulators would take two to four years to OK a company, considering each company according to its place in line. This clearly was not the case for WuXi. Now, important IPOs move immediately to the front of the line, showing that China, like Hong Kong, is updating its IPO procedures as Shanghai fights to list high-profile companies.
On the other hand, last year, WuXi chose Hong Kong as the spot for WuXi Biologics, its biologics CRO/CMO division, which was the second largest biopharma IPO globally in 2017, and the largest biopharma IPO for the year in Hong Kong. It raised $511 million in June at a valuation of $3 billion. Showing that Hong Kong investors are interested in China life science plays, WuXi Biologics has doubled its valuation in less than a year --it is now worth $7.6 billion.
China's Reaction
For years, China has been promising to reform its IPO procedures, making them more market oriented. Traditionally, China was mainly interested in protecting IPO investors -- each IPO had to show a profit for initial investors -- and it was more than willing to keep a stranglehold on IPO approvals, preventing small China companies from accessing public markets for new capital.
That has changed. In 2017, the Shanghai exchange completed $19.7 billion of IPOs, good for second place globally, and significantly ahead of Hong Kong's $14.7 billion (fourth place). In fact, Hong Kong was only slightly ahead of Shenzhen's $12.6 billion. Yes -- the three greater China exchanges were in the top five globally, joined by New York in first place and London in third.
To bolster its competitive edge, China's regulators are now talking about instituting the dual ownership classes that Hong Kong will allow, and they are considering China listings for depository shares of companies with foreign shares. Plus, they are willing to provide rapid reviews of important new companies -- WuXi AppTec being the prime example in the biopharma sector.
So far, however, they have not offered to remove the requirement that IPO companies have profitable operations, leaving Hong Kong to own this segment in China. Most likely, in the regard as well, Shanghai will eventually change.
Conclusion
Hong Kong's updated rules come at a perfect time: the post-2010 China biopharmas have matured into later development stages and need IPOs to cross into commercialization. In the past, the 2005-2008 US IPOs of China biopharmas were not ultimately successful. After initial post-IPO increases in value, US investors found the companies difficult to understand or too slow to increase revenues. One-by-one, virtually all of the US-listed biopharmas privatized and re-listed in China/Hong Kong, where they found greater acceptance. Now, with its new set of regulations, Hong Kong will be able to provide an IPO venue, open to global investors, for these companies.
Disclosure: none.
