PE-VC background remains critical for pre-revenue biotech IPOs, says HKEX executive

Christina Bao, managing director and co-head of sales & marketing at the Hong Kong Exchanges and Clearing (HKEX)

The Hong Kong stock exchange has stressed the importance of having sophisticated investors for pre-revenue biotech companies seeking an initial public offering (IPO) in the city, as it is fielding a strong pipeline of hopefuls looking to capitalise on investors’ enthusiasm in health-related stocks.

The validation from private equity (PE) and venture capital (VC) investors is almost like “a regulatory checkpoint” that helps screen out companies only at the concept stage, said Christina Bao, managing director and co-head of sales & marketing at the Hong Kong Exchanges and Clearing (HKEX), in an interview with DealStreetAsia.

The presence of PE-VC investors is a reflection of “how the market is receiving it,” said Bao. “The biotech industry is so specialised that it’s very hard for retail investors to verify… I think it very much depends on people who have had years of training and practice to give some validation.”

The operator of the Hong Kong stock exchange has underlined the value of institutional investors as part of the requirements for biotech listings under Chapter 18A – a listing regime that it introduced in April 2018 to allow pre-revenue biotech businesses to tap Hong Kong’s public market.

The new regulation specified that a biotech company looking to launch its IPO must receive third-party investment from at least one sophisticated investor no less than six months before the date of its proposed listing to demonstrate “a reasonable degree of market acceptance.” It stipulates that such investor(s) must remain at IPO, in addition to other requirements including a core product that has completed Phase I clinical trials and is all set for Phase II or later stage of clinical verification.

The stock exchange’s emphasis on investor background comes as Hong Kong is ushering in a rising number of healthcare and biotech IPO hopefuls. By the end of August 2021, about 60 healthcare and biotech companies have filed their listing applications in Hong Kong, including 28 targeting to go public under Chapter 18A, according to official statistics from the HKEX.

So far, the number of IPO applicants in the sector this year has more than doubled that of 2020 when a total of 23 healthcare and biotech IPOs were completed in the Asian financial hub.

“Now is an unprecedented era for China’s biotech industry to take off – not only from the capital markets’ perspective, but also from the perspective of China’s overall healthcare enhancement in terms of per capita spending, available healthcare services, regulatory support, as well as a healthcare talent pool that has grown over the years,” said Bao.

As of the end of August, 21 healthcare companies have been listed in Hong Kong, accounting for approximately one-third of IPOs during the period. Collectively, these issuers have garnered about HK$55 billion ($7.1 billion), or one-fifth of the total IPO fundraising. Ten of the 21 companies went public through Chapter 18A, raising a combined HK$24 billion ($3.1 billion).

Edited excerpts from the interview with Bao:

Is Beijing’s tightening regulations on US IPOs by Chinese firms giving rise to listings in HK?

The HK IPO market has performed really well, with over 60 companies raising more than HK$270 billion ($34.7 billion) year-to-date. The market momentum is very strong.

In the healthcare sector, we have seen 21 companies raising a total of about HK$55 billion ($7.1 billion) as of the end of August. These include 10 pre-revenue biotech companies listed through Chapter 18A, raising a total of around HK$24 billion ($3.1 billion). I think this good momentum will carry on because the healthcare sector has been developing rapidly partly due to regulatory reforms in China, especially in the pharmaceutical and medical devices industries.

Over the years, we have remained committed to promoting this market to serve issuers’ and investors’ demand for good investable assets. Especially in the past three years, with the introduction of the new listing regime, the HK market is now a different market from [what it was] three years ago. It is not just because of the new listing policies, but also because of investors’ appetite, as well as potential issuers growing into maturity over time and getting ready for a listing.

The HK market is positioned as a transparent and rule-based IPO market… As long as companies have faith in HK listing regulations and rules, they’re always welcomed to list here. Of course, the post IPO performance is subject to the [specific] sector and performance of each individual company. As a market operator, it is very difficult for us to predict which companies will later join the IPO pipeline or which companies will be more favoured by the market… The varied aftermarket performance of biotech companies, for example, is an indicator that the HK market is a very effective market capable of identifying companies with higher potential and businesses that are better understood by investors.

I think the effectiveness, transparency, and consistency of the market are what we are paying attention to, regardless of the regulatory environment.

Does the biotech and healthcare IPO pipeline look strong for the rest of 2021? 

As of the end of August, about 60 healthcare companies have submitted A1 listing applications, including 28 firms pursuing a Chapter 18A listing. The number of new healthcare listing applicants, so far, this year has more than doubled that of the whole year of 2020 – when 23 healthcare IPOs were completed in HK. In comparison, the 60 applications are proof of market interest towards the biotech chapter.

Meanwhile, what I’m seeing – at least in the past few months – is that the market has been quite enthusiastic with investing in biotech IPOs, especially with some of these IPOs being oversubscribed by a few hundred times by retail investors. There’s no magic formula with regard to which ones are going to be outstanding and which ones will take more time to succeed. But I think the market awareness is at a very high level, which is another good sign of more sustainable growth and an appetite for this particular sector in HK.

Within biotech and healthcare, which subsectors do you expect to contribute to a larger proportion of IPOs in HK in the next one to three years?

In 2018, when Chapter 18A was introduced, we were seeing more small molecule companies applying for an HK listing. But [newly listed] companies this year are from new types of subsectors.

One is mRNA- and protein-based technologies, as well as their applications for the treatment of various diseases including oncology. The pandemic has accelerated their growth and other novel modalities for drug companies, vaccines, and diagnostic products. The second is the subsector of medical devices. More than 10 medical devices applicants are in the IPO pipeline, covering diagnostics and medical equipment, as well as AI-empowered medical devices. The third area is around service-focused, platform-based CRO (contract research organisation), CMO (contract manufacturing organisation), and CDMO (contract development and manufacturing organisation), which continue to be a subsector with great market interest and a more visible path to commercialisation.

There is also the digital health segment. During the pandemic, people have turned to online solutions for healthcare products and services, which greatly advanced the applicability of Internet health services and online prescriptions, driving long-term growth opportunities in this sector.

Another area that I think is interesting is using AI for drug discovery, diagnosis, and other therapeutical applications. This subsector, which does not count a lot in our IPO backlog at this moment, has attracted massive funding from investors in the private market for their efficiency in supporting drug discovery, R&D, clinical trials, and beyond.

Do you think we will see more IPOs coming from some of these most innovative subsectors in the years to come?

One interesting thing about science is that it is based on facts and true findings, instead of speculation and wishes. Although we hope that things can evolve much faster, it still very much depends on how the technology may unfold and how quick the adoption of certain technologies, as well as their applications and commercialisation [can be].

It is almost like a closed loop. If it doesn’t add up in one particular point, things may not turn out to be great. In the case of mRNA technology, which has been there for years, its major breakthroughs were made only during the pandemic period.

In an interview with Bloomberg in Sept 2020, you mentioned the importance for pre-profit and/or pre-revenue biotech firms to be backed by specialised investors as part of the “critical” criteria for an HK IPO. How much is that standard being valued nowadays?

This is part of the listing rules under Chapter 18A for pre-revenue biotech companies, under which we require at least one sophisticated investor’s commitment to this biotech firm before it is qualified for an HK listing. Another dimension is that the applicant needs to pass Phase I clinical trials regulated by competent authorities like FDA or CFDA and is granted to proceed with Phase II trials. It is sort ofa regulatory checkpoint” that helps screen out companies that are only at the concept stage.

The other side of the matter is about how the market is receiving it. The biotech industry is so specialised that it’s very hard for retail investors to verify if it is a good company with growth potential; if it is a solid business; and if the company has a better chance than others to succeed in its later stage of clinical trials, etc. I think it very much depends on people who have had years of training and practice to give some validation.

I think part of the focus of this chapter is on investor protection. The aftermarket performance of listed biotech companies varies. The risks involved are probably more than other sectors, especially more than businesses that directly serve consumers since those allow retail investors to have some degree of judgment based on their personal experience. Retail investors need better validation from more sophisticated investors.

Moving forward, do you expect PE-VC investors to play a bigger part in biotech listings in HK? 

Whether it is the cornerstone investment or public offering [of a biotech company], there are many sophisticated investors. The average size of a biotech IPO issuance under Chapter 18A is somewhere in the range of $250-350 million. For a sought-after IPO of this size, the offering could run out quickly enough, leaving many investors no choice but to buy in only after the listing.

What we focus more on is how we can build a successful and sustainable biotech ecosystem in HK for these companies to continue raising capital. As of the end of August, 38 pre-revenue biotech companies have collectively raised HK$99 billion ($12.7 billion) through HK IPOs. Some of them have conducted follow-on offerings, which have amounted to HK$68 billion ($8.7 billion).

Another benefit for biotech companies to list in HK is: As long as they’re qualified for the Hang Seng Composite Index, they are also qualified to be included in the Stock Connect scheme to raise money from mainland investors.

At HKEX’s annual biotech summit in 2020, the then-chief executive Charles Li had said that he expected the exchange to surpass Nasdaq in the next five to 10 years in terms of stock trading and fundraising for the biotech sector. Is the exchange on track to fulfill that ambition?

Now is an unprecedented era for China’s biotech industry to take off – not only from the capital markets’ perspective, but also from the perspective of China’s overall healthcare enhancement in terms of per capita spending, available healthcare services, regulatory support, as well as a healthcare talent pool that has grown over the years… A lot of things can be done in areas including the early diagnosis of diseases, China’s aging population, online medical consultancy, and other general health services.

From our perspective, we focus more on how we can assist in the process of bringing in more funding for these companies with talent and ambitions so that resources are better allocated. So far, we are the world’s No.2 hub for biotech IPO fundraising. I don’t think we are in this mindset of “overtaking.” It’s more about how we can help and be part of a grant journey to a better future for the entire population, especially in this part of the world.

When it comes to the composition of stock issuers in HK, we have not seen many SE Asian companies coming here for an IPO. Do you see this change in the near future? What could potentially draw more SE Asian firms to list in HK?

It’s fair to say that we have quite some international issuers coming to list in HK over the years. With regard to biotech, its recent development is global. The technologies across countries and regions are not very different in terms of their stages of advancement, partly because the collaborations in the sector amongst scientists worldwide have been prevalent over the years. I believe that this global exchange of information, knowledge, and technology will continue to help the industry grow as a universal industry, rather than being limited to a particular geographical area.

We have been engaging with some potential issuers in SE Asia and we believe they have a certain level of interest. But as I mentioned, they need to be a little bit beyond a local practitioner, with global ambitions and better knowledge of the international capital markets.

HK is very much a global market that has ranked top worldwide in seven years out of the past 12 years in terms of IPO fundraising. If it is an issuer with global ambitions and plans to raise capital from both international and Greater China investors, wherever the company is located, HK is definitely the right place [for them to go public].

We have been delaying some of our marketing events in SE Asia because of the COVID. But we look forward to going back to the region and meeting our clients locally.

Are there certain sectors in which SE Asian companies could potentially look at HK as a more favourable IPO location than their counterparts across other sectors?

Historically, HK has been strong with the listings of companies across traditional economy sectors including consumer, financial services, and real estate. For new economy sectors, HK now has probably all major e-commerce issuers [in the Greater China region], as well as companies in the fields of social media, short-video platforms, gaming, and hard technology.

Are there any updates that you can share in HK’s process of drafting its SPAC listing rules that are said to be potentially much more stringent than those we’re seeing elsewhere?

The SPAC has been a trendy topic over the past 18 months or so. It has been cooling down since around April 2021, with even the US regulators trying to streamline SPAC practices. If a new listing form is going to be introduced, the regulators will need to take into consideration of this particular market’s circumstances and the objectives that they want to achieve. It’s not just a copy-and-paste exercise.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.