May 12, 2020

Hong Kong Stock Exchange Issues New Guidance for Listing Pre-Revenue Biotech Companies

Since the introduction of a new listing regime on 30 April 2018 that enables the listing of pre-revenue Biotech Companies[1] on the Main Board of the Hong Kong Stock Exchange (the “Exchange”), a total of 16 of these listings have completed. After reviewing Chapter 18A of its Main Board Listing Rules (“Chapter 18A”), the Exchange updated two earlier guidance letters (HKEX-GL92-18 and HKEX-GL85-16) to clarify its positions on certain issues relating to the listing suitability of Biotech Companies and the subscription by existing shareholders in Chapter 18A IPOs. The Exchange also published a new guidance letter (HKEX-GL107-20) on 29 April 2020 to provide further guidance on disclosures in listing documents for listing applicants under Chapter 18A.

This client alert highlights the Exchange’s key supplemental guidance and its effect on:

  • Application of the “beyond concept stage” and 12-months R&D listing suitability criteria for in-licensed or acquired Core Products of a listing applicant

  • Assessment of the suitability criteria for listing applicants with commercialized Core Products, medical device products, or “Other Biotech Product” without any regulatory or external milestones

  • Rights of participation by existing shareholders in Chapter 18A IPO

  • Grant of clawback waivers to listing applicants under Chapter 18A

  • Enhanced prospectus disclosure requirements in a listing applicant’s competitive landscape, communications with regulating authorities, pipeline products, and valuation and background of pre-IPO investments

  • Specific prospectus disclosure requirements for listing applicants with commercialized core products, orphan medicines or innovative therapies

Updated Guidance Letter HKEX-GL92-18 on Suitability for Listing of Biotech Companies

Additional guidance for Biotech Companies with in-licensed or acquired products

  • To demonstrate that the in-licensed or acquired Core Product has developed beyond the concept stage[2], a listing applicant should have completed at least one regulated clinical trial on human subjects since the in-licensing or acquisition. If not, the Exchange will evaluate the reason for absence of such trial and whether substantive R&D work and processes equivalent to one clinical trial on human subjects have been performed by the listing applicant, but administrative process will not be considered as substantive R&D work.

  • To demonstrate engagement in R&D of its in-licensed or acquired Core Products for at least 12 months before listing[3], a listing applicant under Chapter 18A must show R&D progress since the in-licensing or acquisition, which could be from preclinical to clinical stage; from one phase of clinical trial to the next; or obtaining regulatory approval from Competent Authority to market the product.

Additional guidance for Biotech Companies with commercialized products

For Core Products already commercialized in a given market for specified indications, and if the listing applicant will use a significant portion of the listing proceeds to expand the indications of such product or launch it in another market, the 12-months’ R&D listing requirement would be met if the listing applicant has expended on further R&D for clinical trials required by the Competent Authority to bring the commercialized Core Product for a new indication or a new regulated market.

Additional guidance for medical device companies

For listing applicants that develop medical devices to demonstrate that their primary reason for listing is raising funds for R&D to commercialize its Core Products[4], the Exchange may take into account the applicant’s business plan and pipeline development stage such that a portion of the listing proceeds could be allocated to set up production facilities for the manufacturing of its Core Products, and establish sales, marketing and medical teams for the commercialization of its Core Products.

Additional guidance for Biotech Companies with products not falling into any regulatory regime on external milestones  

For Biotech Products that do not fall within the three main categories (i.e. pharmaceutical, biologics and medical devices) for a Chapter 18A listing, and if there is no regulatory regime setting out external milestones or objective framework to assess the products’ development progress, market and clinical relevance, the Exchange will now consider (i) data from preclinical and clinical trials and the number, selection process and diversity of test sampling population; (ii) time-frame and impediments to commercialization; (iii)  the impact factor of any publication of the pre-clinical and clinical results in medical/scientific journals; and (iv) any relevant guidelines, comparable framework or objective indicators and the related views published by Competent Authorities.

The Exchange will only follow the categorization of a Biotech Product as categorized by the relevant Competent Authority, and the listing applicant cannot reclassify its product as “Other Biotech Product” because of failure to meet the listing requirements within its regulated category.

Additional guidance for existing shareholders’ participation in the IPO

Existing shareholders of a listing applicant with less than 10% shares may subscribe for IPO shares as a cornerstone investor or a placee, whereas a 10%+ existing shareholder may only participate in the IPO as a cornerstone investor. Existing shareholders may exercise any pre-IPO contractual anti-dilution right and subscribe for shares in the Chapter 18A IPO, which aligns with the Exchange’s guidance for special rights of pre-IPO investors in IPOs outside Chapter 18A.

Additional guidance on the clawback mechanism

The Exchange is mindful of the additional potential risks of Biotech Companies to retail investors and, at the same time, the popular demand by these investors in recent Chapter 18A IPOs. In order to balance such risks and investment sentiments, if the Hong Kong retail-tranche of a Chapter 18A IPO is highly over-subscribed, the Exchange will consider a proposal to adjust the clawback mechanism on a case-by-case basis and modify the minimum public/retail subscription requirement under PN18 of the Listing Rules, but only if compelling reasons are provided. While the Exchange has not set out further factors to grant such modifications (such as minimum offering size), such discretion by the Exchange would at least facilitate greater flexibility in the allocation to reflect demands for Chapter 18A IPOs.      

New Guidance Letter HKEX-GL107-20 on Disclosure in Listing Documents for Biotech Companies

A more concise summary for retail investors

Since Biotech Companies have attracted significant interest from retail investors who may not possess deep knowledge of biotechnology and medical science, a listing applicant under Chapter 18A should:

  • Make disclosures on scientific descriptions and data in the Summary section of the prospectus more readable and understandable by using plain language without compromising scientific accuracy. Meaningful headings and sub-headings, and cross-referencing to the Business section of the prospectus for technical contents should also be used

  • Ensure that the development timetable of its Core Products[5] is disclosed in a fair and balance manner, and include a risk factor that potential investors may lose all of their investments in an R&D failure of the listed issuer

A more comprehensive description about the competitive landscape

A listing applicant under Chapter 18A should disclose in the prospectus (i) a comparison between its products and direct competing products by technologies, indications and targeting market; (ii) the competitive landscape of its Core Products and key pipeline products to be commercialized in targeted markets (including name and price of competitors’ pipeline products targeting same indication, their IP expiration and reimbursement coverage); and (iii) material information on the relevant addressable markets, rather than overall market size, of Core Products and key pipeline products.

Specific disclosure about product development and commercialization

A listing applicant under Chapter 18A should also disclose in the prospectus the following about the development and commercialization of its Core Products and pipeline products: 

  • A summary of all important communications with and any material concerns raised by the relevant Competent Authorities[6] (e.g. the China National Medical Products Administration) on the clinical trials, or, if there is no such communications, a negative statement to such effect

  • If a portion of the listing proceeds is to be used to expand the specified indications or market of any commercialized Core Product, a breakdown of funds to support R&D and their importance in advancing the Core Product

  • For Core Products or key pipeline regulated as orphan medicines and/or innovative therapies, information on (i) basis to qualify in a regulatory pathway, exemptions granted under such classification and the advantages of approval under such designation; (ii) commercialization plan, regulatory and marketing strategies, timeline of the next regulatory milestones until NDA; and (iii) details of any collaboration with research institutes, including its background, material terms and conditions and IP ownership allocations

  • Information on the development of pipeline products by way of a Pipeline Table, including whether (i) they are in-licensed or self-developed and the jurisdiction rights; (ii) the listing applicant will prioritize any strategically or commercially critical products for development; and (iii) a significant portion of the listing proceeds will be applied for concept stage pipeline products, along with material information on relevant studies and data

Specific disclosure about financial position 

A listing applicant under Chapter 18A should also disclose in the prospectus information on (i) the valuation of each round of pre-IPO investments and any material fluctuations in valuation against the immediate previous round with reference to development of products business and competitive advantages; (ii) material information on the background and biotech track record of Sophisticated Investors[7]; (iii) any net liabilities during the Track Record Period from significant change in fair value of convertibles to be converted upon listing into a net assets position; (iv)  “capital burn rate” for maintaining viability with and without listing proceeds within a reasonable period and (v) timetable for next round of financing based on such burn rate.

[1] According to Chapter 18A, “Biotech Company” means a company primarily engaged in the research and development, application and commercialization of Biotech Products, and “Biotech Products” means biotech products, processes or technologies.

[2] Section 3.2(a) of HKEX-GL92-18 provides that a Biotech Company must have developed at least one Core Product beyond the concept stage, namely that it has met the developmental milestones specified for the relevant type of product.

[3] Section 3.2(c) of HKEX-GL92-18 provides that the Biotech Company must have engaged in R&D of its Core Product(s) for a minimum of 12 months prior to listing.

[4]Section 3.2(d) of HKEX-GL92-18 provides that the Biotech Company must have as its primary reason for listing raising funds for R&D to bring its Core Product(s) to commercialization.

[5] According to Chapter 18A, “Core Product” means a Regulated Product that (alone or together with other Regulated Products) forms the basis of a Biotech Company’s listing application under Chapter 18A, and “Regulated Product” means a Biotech Product  required by applicable laws 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.

[6] According to Chapter 18A, “Competent Authority” means the U.S. Food and Drug Administration, the China Food and Drug Administration, the European Medicines Agency. The Exchange may, at its discretion, recognize other national or supranational authorities as a Competent Authority (depending on the nature of the Biotech Product).

[7]According to HKEX-GL92-18, the Exchange considers an investor as a  “Sophisticated Investor” by reference to factors such as its net assets or assets under management, relevant investment experience, and the investor’s knowledge and expertise in the relevant field.