In June 2017, the Hong Kong Stock Exchange (“HKEx”) initiated a holistic review of the Hong Kong listing regime to enhance its overall competitiveness against other major global listing venues, in particular to attract companies from emerging and innovative sectors. During this review, the HKEx identified the biotech industry and companies operating in the industry as a highly attractive pool of candidates for a Hong Kong listing. The HKEx recognized the fact that, in the U.S., biotech companies comprise the majority of companies seeking a listing in the early stage of the company’s development and the development of the company’s products. The HKEx also acknowledged that many biotech companies have legitimate capital markets needs ahead of having a revenue-generating commercial product or service. Why biotech companies? The HKEx believes that the regulation and oversight by internationally recognized regulatory agencies, such as the FDA, CFDA and EMA, and the stages involved in their approval process provide external validation and an indication as to the nature of biotech companies, and their development progress, in the absence of traditional financial indicators, such as revenue and profit.
In February 2018, the HKEx published a draft of the new Chapter 18A of the Main Board Listing Rules which sets out the listing requirements and guidance for a pre-revenue biotech company which is unable to meet the current Main Board financial eligibility tests on profit, revenue and market capitalization (see Note below). Under the new Chapter 18A of the Hong Kong Listing Rules, a biotech company that does not meet any of the three financial eligibility tests may still list in Hong Kong if it can demonstrate the following features:
Suitability to List
Expected Market Capitalization
Enhanced Prospectus Disclosure (Required Disclosure)
Restriction on Cornerstone Investors
Material Change of Business and De-listing
The new Chapter 18A and other listing reforms relating to companies with weighted voting rights structure are expected to be effective in April 2018. The new listing regime for biotech companies is an exemption from the Financial Eligibility Tests set out in Rule 8.05. A biotech company must still comply with all the other requirements of Chapter 8 of the Main Board Listing Rules (such as those relating to management and ownership continuity, public float and transferability of shares).
Note: The Financial Eligibility Tests for a listing on the Main Board of the HKEx refers to Rule 8.05(1)(a) (profit test – HK$50 million in the past three financial years with net profits of at least HK$20 million in most recent year and aggregate net profits of at least HK$30 million in the 2 years before that); Rule 8.05(2)(d), (e) and (f) (the market capitalization/revenue/cash flow test – market capitalization of at least HK$2 billion at time of listing, revenue of at least HK$500 million for most recent audited financial year and positive cash flow of at least HK$100 million in aggregate for the 3 preceding financial years) and Rule 8.05(3)(d) and (e) (the market capitalization/revenue test – market capitalization of at least HK$4 billion at time of listing and revenue of at least HK$500 million for most recent audited financial year ).