Last year, Hong Kong revealed plans that inspired biotech companies to ease up on the listing rules, which made the industry of financing and investors very happy. The area itself, Hong Kong, has become an attractive financing location that has caught the eye of many Chinese companies creating new drugs. As the rules go into effect Monday, it’s become very evident that Hong Kong lacks experience in the biotech industry. The new rules now allow for all companies, such as biotech businesses, to have no revenues or profits and the opportunity to place an application for a city listing. This includes about 10 particular companies, which are mainly Chinese. One in particular is Temasek. It’s already issuing U.S. IPO plans and floaters. This comes with the determination to cash in on the opportunity to have a listing near their home base. However, this has created frustration for financial experts inside a city that lacks the appropriate experience. Three percent of Hong Kong stock, in terms of capitalization, derives from what is called “new economy” sectors. It doesn’t matter if they are tech or even biotech says a report by the Hong Kong Exchanges and Clearing.
The comparison is between NASDAQ at 60 percent and for the New York stock exchange that’s at 47 percent. At the last known account, many investors, bankers as well as industry executives said there were less than 20 bio-pharma and biotech bankers that had the appropriate experience. Kevin Xie who is the head of healthcare and co-founder of a small investment bank called China Renaissance, says it’s has not been easy to find or even hire the adequate professionals. The pool itself is so limited on a global scale, its imperative talent understand the overall industry.
This same concern has brought about head investment banks moving their employees from the United States to fill the holes that exist in Hong Kong. However, since locally they don’t have the finance licenses, they can only advise and not work on the deals directly. Mr. Li Hang, who heads the Greater China equity capital markets at CLSA believes that sector special bankers are needed to conduct the biotech deals. If not, they will look like they don’t know how to do comprehensive appraisals. The Chief Executive of HKEX, Charles Li, adds his thoughts regarding finding talent, in that, just recently in the past months its been a struggle to hire needed biotech candidates. Either still, when Li made the announcement for the new rules, he pointed out that his company discovered several experts, employees of pharmaceutical companies and even scientists, that were willing to sit on an advising board to help a listing committee approve IPO applications.
Hong Kong is attracted to the IPOs because it is familiar with firms that are Chinese, the timezone works with local executives and also the new rules.
Yang Dajun, a chairman of Ascentage Pharma, which is also a Chinese biotech business, states that it shows on the Nasdq that investor money regarding the biotech stocks are from the United States, whereas in Hong Kong they get to reach out to the Asian and Chinese investors near home.
The forecast by JPMorgan analysts shows that the Biologic industry in China is expected to double to at least $52 billion by 2021 with a global spurt of 60 percent. Bio-pharma and biotech firms are the ones that produce the biologic products. At this point, U.S. companies lead in raising capital that accounts for early 44 percent of funds in the industry by way of IPOs within the last five years. A fifth of this is from Chinese groups, states a data report by Thomson Reuters. This has really drawn a lot of interest from Hong Kong. The shares in Wuxi Biologics last June jumped 39 percent in their initial entry to the market and have maintained a high at 167 percent. Unfortunately, there are warnings of risks within the industry sector from insiders. They state that biotechs rely on small early stage drugs that make it more vulnerable for failure.
The CFA Institute Asian-Pacific head of Advocacy, Mary Leung, questions the evaluation for particular companies done by average investors. She believes that the long demonstration period companies have to prove that they are successful is almost comparable to an investment in Bitcoin.
This comes as a serious concern for Hong Kong since retail investors are used to having regulation protections. Prior to the rules loosening from being very strict, it was required of all companies to have at least a defined level of cash flow and three years of profits before submitting any application for a listing. The smaller investors make up about 20 percent of the trading on a daily basis in Hong Kong. However, in New York its around two percent. At a conference in the prior month, Ken Hitchner, the Asia-Pacific Chairman and Chief Executive of Goldman Sachs, questions if many will stick with it since 30 to 40 percent of biotech businesses are expected to fail miserably. He continued that the industry will see exploding success, but not without headlines that will possible read of the disasters and the challenges of dealing with this kind of hemorrhaging innovation.