Stepping into a new era: new chapter of Listing Rules of biotechnology companies announced by Hong Kong Stock Exchange

Source: R & D customer on April 24, 2018, the Hong Kong Stock Exchange published a summary of the advisory opinions on the listing system of Companies in emerging and innovative industries, and decided to add a new chapter to the Listing Rules of the main board, chapter 18a, to implement the proposal to allow biotechnology enterprises without earnings or profits to be listed on the main board of Hong Kong Compared with the previous Advisory text of chapter 18a, the stock exchange has only made minor changes in the details to respond to the opinions of all parties At the same time, the Stock Exchange issued a fuze for the implementation of the new regulations, giving a number of details This paper selects the key points for interpretation What are the conditions for a biotech company without income to be considered suitable for listing? According to chapter 18a and fuze, biotech companies that fail to pass any financial qualification test under the current listing rules can still be considered suitable for listing according to chapter 18a of the Listing Rules if they have the following characteristics: biotech companies must have at least one core product that has passed the concept stage SEHK will determine whether the core product has passed the concept stage according to whether it has reached the development progress goal of relevant product categories (see the next section for specific analysis); It mainly focuses on research and development to develop core products; it has been engaged in the research and development of core products for at least 12 months before listing, and if the core products are the outsourcing licensed technology or the core products purchased from the third party, the applicant must be able to show the progress of the research and development since the outsourcing licensed technology / the purchased products; the listing fund is mainly used for research and development to launch the core products into the market; It must have registered patents, patent applications and / or intellectual property rights related to its core products; if the applicant is engaged in the research and development of Pharmaceutical (small molecule drug) products or biological products, it must prove that it has multiple potential products; At least six months before the proposed listing date, at least one senior investor has provided a considerable amount of third-party investment (not only symbolic investment), and the investment has not been withdrawn until the IPO If the applicant is separated from the parent company and can prove to SEHK in other ways that there is a considerable degree of market recognition for its R & D and biotechnology products (such as cooperation with other mature R & D companies), SEHK may not require the applicant to comply with this provision According to the fuze, the stock exchange will assess whether an individual investor belongs to the above-mentioned "senior investor" according to specific circumstances, considering such factors as its net assets or management assets, relevant investment experience, knowledge and professional skills in relevant fields, etc To this end, the stock exchange will generally consider the following categories of investors as examples of "senior investors" (for illustration only): specialized health care or biotechnology funds, or large funds with branches / departments specialized or focused in the field of biopharmaceutical investment; major pharmaceutical / healthcare companies; Venture capital funds of large pharmaceutical companies / healthcare companies; investors, investment funds or financial institutions with assets under management of not less than HK $1 billion The stock exchange will assess whether an individual third-party investment is a considerable amount of investment according to the specific situation of an individual, considering such factors as the nature of the investment, the amount of investment already made, the number of shares invested and the timing of investment The following investment amount is generally regarded as "considerable investment", which can be used as index reference: for applicants whose market value is between HK $1.5 billion and HK $3.0 billion, the investment accounts for not less than 5% of the issued share capital at the time of listing; for applicants whose market value is between HK $3 billion and HK $8.0 billion, the investment accounts for not less than 3% of the issued share capital at the time of listing; For applicants with a market value of more than HK $8 billion, the investment accounts for not less than 1% of the issued share capital at the time of listing How can a regulated product be considered to have passed the concept stage? According to the guidance letter of the stock exchange, under the following circumstances, the stock exchange will regard the regulated products as having passed the concept stage: drugs (small molecule drugs) If the core product is a new drug product (small molecule drug), the applicant must prove that the product has passed the first phase of clinical trials, and the relevant competent authority does not object to its carrying out the second phase (or subsequent phase) of clinical trials; If the core product is based on the previously approved pharmaceutical product (small molecule drug) (for example, the application approval procedure in 505 (b) (2) of FDA), the applicant must prove that the product has passed at least one human clinical test, and the relevant competent authority does not object to the second stage (or later stage) of the clinical test If the core product of biological preparation is a new biological preparation product, the applicant must prove that the product has passed the first phase of clinical trial, and the relevant competent authority does not object to its carrying out the second phase (or subsequent phase) of clinical trial; If the core product is a bio generic drug, the applicant must prove that the product has passed at least one human clinical trial, and the relevant competent authority does not object to the second stage (or subsequent stage) of the clinical trial to prove the bioequivalence If the core product of medical equipment (including diagnostic equipment) belongs to medical equipment (including diagnostic equipment), the applicant must prove that: the product is the second level or above classified medical equipment under the classification standard of the relevant competent authority; The product has passed at least one human clinical test, which will form a key part of the application required by the competent authority or authorized institution; the competent authority or authorized institution agrees or does not object to the applicant's further clinical test; or the competent authority (in the case of a member of the European Commission, the authorized institution) does not object to the applicant's starting to sell the relevant equipment For the listing application of other biotechnological products that do not meet the above standards, if the listing applicant can prove that the relevant biotechnological products have passed the concept stage (including the above factors in this paragraph by reference) and have suitable framework or objective indicators for investors to make informed investment decisions, the stock exchange will consider them individually according to the situation The decision to accept such listing application shall be implemented with the consent of the CSRC in accordance with Article 2.04 of the listing rules According to chapter 18a of the listing rules, the stock exchange has only explicitly confirmed the FDA, the State Food and Drug Administration of China (now the State Drug Administration) and the European drug administration as the competent authorities In some cases, depending on the nature of biotechnology products, the stock exchange may regard other national or supranational institutions as competent authorities The SEHK shall seek the approval of the SFC before approving the relevant authorities The stock exchange also stressed that the factors contained in the guidance letter are not all inclusive or binding, and that the stock exchange will consider all relevant conditions when assessing whether the applicant is suitable for listing What are the rules for the expected market value? According to chapter 18a of the listing rules, the expected market value of an applicant applying for listing shall not be less than HK $1.5 billion at the time of listing What are the requirements for performance records? The stock exchange requires applicants of biotechnology companies to have been engaged in existing business for at least two accounting years before listing, and the management is basically the same Generally, the requirement that the management level of a listed company remains unchanged for three years and the controlling shareholders remain unchanged for the financial year prior to the listing is not applicable However, when the stock exchange evaluates whether the applicant is suitable for listing, it will check whether the ownership of the applicant may have changed within 12 months prior to the listing application date What are the requirements for working capital? The stock exchange requires that the working capital of the applicant applying for listing in accordance with chapter 18a of the Listing Rules (including the amount of capital raised included in the initial public offering) shall be sufficient to meet at least 125% of the group's expenses for at least 12 months from the date of publication of the listing documents These expenses mainly include general, administrative and operating expenses and R & D expenses The stock exchange also expects that most of the capital raised in the IPO will be used to meet the above expenses Working capital required under this section may be calculated without capital expenditure, but if the capital expenditure is from borrowing, the relevant interest and repayment shall be taken into account For the avoidance of doubt, biotech companies must include R & D expenditures (whether or not capitalized) when calculating their working capital requirements under this section What are the additional disclosure requirements of the stock exchange for the listing documents of biotechnology companies? The special disclosure requirements for listing documents of applicants applying for listing on the stock exchange in accordance with chapter 18a of the listing rules are detailed in article 18a.04 of the draft solicitation opinions in Chapter 18a of the listing rules, including the following items: strategic objectives; details of each core product; There is no statement of any unexpected or adverse significant change after the effective date of regulatory approval related to core products; if there is any significant change, it must be disclosed in a prominent position; describe the details of the approved products (if any), the unexpired patent protection period and existing and expected market competitors owned by the applicant; Details of R & D experience of biotechnology companies (including operation in the laboratory R & D process, overall expertise and experience of main management and technical staff, and R & D cooperation agreement); relevant experience of directors and senior management of biotechnology companies in the development, manufacturing and commercial development of biotechnology products; The main terms of any service agreement entered into between the applicant and its key management personnel and technical personnel; the measures taken by the applicant to retain the key management personnel or technical personnel, as well as the safeguard measures and arrangements for its resignation; and any legal claim or lawsuit that may affect the research and development of any core product; Disclosure of specific risks, general risks and dependence factors, including potential risks of clinical trials, risks in the process of approval of core products, and the degree of business dependence on major individuals, and the impact of the resignation of major management or technical personnel on the business and operation of the applicant; information related to and having a significant impact on the business operation of the company, including: 1 Project risks caused by environmental, social and health and safety issues; 2 Compliance with laws, regulations and licensing requirements of the country where the company is located, as well as taxes, patent fees and other major payments paid to the government of the country where the company is located; 3 Details of past experience in dealing with laws and practices of the country where the biotechnology company is located 4 Previous experience in handling the concerns of local governments and communities on research and experimental sites, and relevant management arrangements; estimation of cash operating costs related to core products, including R & D and clinical trial costs incurred in developing core products, and various related costs; Whether the applicant has accepted the expert technical evaluation and listed the evaluation in the listing document For each core product, biotechnology companies should make a warning in a prominent position to warn investors that the core product may not be successfully developed and marketed in the end Biotechnology companies are also required to continue to disclose information on their R & D activities in the interim report and annual report to the same level of detail as the disclosure requirements of the listing documents What are the restrictions for existing shareholders to subscribe for shares and cornerstone investors