2018 marked a significant milestone in Hong Kong’s journey towards creating a vibrant biotech market for investors which allows Asian innovation to receive the funding it needs to progress. It was in that year that the Hong Kong Stock Exchange (HKEX) launched the bold and visionary move of allowing clinical-stage biotech companies not yet generating revenues from their products to launch initial public offerings (IPOs) via its ‘Chapter 18A’ mechanism.
This calculated risk, one that even more established hubs in countries like the UK and Switzerland had yet to take, has paid off – particularly prior to the COVID pandemic. Since that landmark, almost 60 firms – predominantly from mainland China – have chosen listing on HKEX as a means of accessing global capital, raising around HKD 118 billion in funding.
What’s more, a fifth of these companies are already revenue generating, meaning that there are tangible results for future issuers and investors to draw from. Additionally, 30 of these stocks are included in ‘Stock Connect,’ a landmark mutual market access programme between Hong Kong and Mainland China that allows Mainland Chinese investors to directly invest in stocks listed on HKEX.
Now “a pre-eminent centre for capital formation in the biotech industry” according to Christina Bao, HKEX’s co-head of sales and marketing, Chapter 18A has had a knock-on effect on the city’s entire healthcare financing space. 118 healthcare-related companies are now listed on HKEX, having raised a combined HKD 270 billion, making Hong Kong the largest fundraising hub for the industry in Asia, and second largest worldwide, behind only NASDAQ in the US. It represented the monetisation event that many in the venture capital (VC) community were hoping for, creating a far greater degree of liquidity for investors in the swathe of Chinese healthcare start-ups that had emerged in the preceding decade.
A Challenging 2022
However, just as capital markets in the US and Europe have been buffeted by high interest rates and resulting stock valuation challenges in the past 18 months, Hong Kong too has suffered. Only eight new biotech companies listed on HKEX in 2022, raising an aggregate of USD 473 million; a significant reduction compared to previous years in terms of both number of deals and aggregate funds raised, according to reporting from law firm Skadden. Moreover, the average biotech IPO size was USD 59.1 million in 2022, considerably down from the 2018-2021 average, which Skadden notes reflected reduced deal sizes in challenging market conditions.
Bao is nevertheless optimistic that Hong Kong has the fundamentals to ride out this macroeconomic storm, pointing out that “We are seeing the momentum pick up again in 2023, as we welcomed seven biotech listings in the first half of the year, and the recent listings have had decent post-IPO performance… Once interest rates begin to stabilise, the appetite for high-risk investments in areas like biotech will likely increase as a result.”
“Life science companies listed on the NASDAQ are hardly booming at the moment either!” counters Da Liu, managing director of the Hong Kong-based venture capital firm CR-CP Life Science Fund. He is also confident that, at least for Asian investors like CR-CP, Hong Kong will remain a good location through which to channel biotech funding. “Companies decide where to list based on the funds they can generate, but also the locality to their markets. Therefore, HKEX’s Chapter 18A will continue to be our preferred IPO destination.”
An Enabling Ecosystem
Building a globally competitive stock exchange for biotech investment requires more than simply enabling clinical-stage companies to IPO. A legion of support services has had to be developed over the past five years and, while there is still a road to travel, stakeholders seem positive on the ecosystem that has been built around HKEX.
“Since establishing Chapter 18A five years ago, the capital market in Hong Kong has become familiar with the dynamics of the biotech industry,” says Dai Xiaochang, executive director & chief strategy officer at Chinese RNA therapeutics biotech Sirnaomics, which chose to list on HKEX in 2021. “The number of research analysts that cover our sector has seen tremendous improvement and growth and Sirnaomics is currently covered by four major banks’ research teams.”
Since establishing Chapter 18A five years ago, the capital market in Hong Kong has become familiar with the dynamics of the biotech industry
Dai Xiaochang, Sirnaomics
Bao is similarly effusive, stating that “we have seen the financial services community – from analysts to law firms and specialist investors – quickly adapting to serve the evolving needs of healthcare and biotech-related issuers and investors. Specialist investors are particularly important because they bring their expertise, especially in IPO price formation, and to establish trading benchmarks.”
Other stakeholders are, however, more critical of the wider biotech funding ecosystem that currently exists in the city. Industry veteran Lo Yuk Lam, a man who has had a hand in almost all the city’s biotech success stories to date, states that HKEX is “not as appealing” as NASDAQ. “This is not helped by the fact we lack great business analysts in Hong Kong, and we are not able to properly value what a company is worth,” he adds.
Qiming’s Investment Strategy
Nisa Leung is managing partner at Qiming Venture Partners, a pioneer in the Chinese VC industry which has had 41 IPOs from its portfolio companies – 35 in biotech and healthcare – since March 2020 across NASDAQ, HKEX, and the A-share market in China. Qiming has been an important cog in the skyrocketing Chinese healthcare market over the past decade, as it climbed from eighth to second in the world in value today. Leung expects another 20 to 30 IPOs from Qiming’s portfolio in the next 18 months, but is agnostic on where her Chinese clients list, preferring to choose a location based on current market conditions.
“We are in a fortunate position where we can evaluate and decide our exit venues as conditions change,” she says. “For example, for companies to list via Chapter 18A, at least one asset must be in Phase II clinical studies, whereas the Shanghai Stock Exchange requires at least one asset in Phase III trials. NASDAQ has no such requirements, so IPO candidates can file for an IPO with assets only in the pre-clinical phase.”
Pushed on whether Qiming might consider investing in Hong Kong’s own companies, as opposed to their mainland Chinese counterparts, Leung counters that her firm is “always looking to invest in companies that are the best in what they do, irrespective of location.” One example of this is Hong Kong-based and HKEX-listed biotech Insilico Medicine. The artificial intelligence drug discovery outfit recently celebrated the milestone achievement of an AI-discovered candidate reaching Phase II clinical trials, which CEO Alex Zhavoronkov calls, “the first true example where AI has been used for target discovery, chemistry, and prediction of clinical trial outcomes.”
“We were an early investor in Insilico Medicine and have worked with Alex on several critical steps along the way, including relocating from the Greater Bay Area to Hong Kong,” explains Leung. “In November 2022, the company signed a collaboration agreement with Sanofi that could be worth up to USD 1.2 billion including milestones and royalties. The company’s generative AI drug discovery platform will develop up to six targets with plentiful potential use cases in the future.”
Beyond the Mainland
Of the 60 companies to list on HKEX since the implementation of Chapter 18A, only one is from Hong Kong with the rest from mainland China. While not an issue in itself, if Hong Kong truly aims to brand itself as an international biotech hub, it would behove it to welcome a broader issuer base, including local firms as well as those from across Asia.
As this ecosystem continues to grow, we will attract issuers from other jurisdictions seeking to tap our markets
Christina Bao, HKEX
Bao admits that “Hong Kong is the main international capital raising centre for China, and therefore it is natural that the biggest group of Chapter 18A companies originate from mainland China. However, as this ecosystem continues to grow, we will attract issuers from other jurisdictions seeking to tap our markets.” HKEX has already established an office in Singapore with the aim of providing on-the-ground cross-industry support to its South-East Asian clients and Bao adds that there is interest in deepening its footprint in Japan and Korea.
“We want to welcome more innovative companies from Asia to come to Hong Kong and were pleased to receive an application from a Singaporean company via Chapter 18A recently,” she reveals. “We note interest from companies elsewhere and, while our journey to develop Hong Kong as Asia’s leading healthcare fundraising hub will take time, I believe we are progressing well.”