Two years in, Hong Kong’s biotech experiment has been validated
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On April 30th, the two-year anniversary passed of the Stock Exchange of Hong Kong’s (HKEX) implementation of its new biotech chapter. As we reflect on it two years later, this pivotal decision has aged well with time and is delivering on its promise in a big way. While casual observers might recall that the new biotech era in Hong Kong started off with some growing pains, listings have strengthened over time to the extent that Hong Kong is right up there with New York and is arguably even the stronger market for biotech listings in early 2020. The timing couldn’t have been better. Just as current events illustrate how vital our industry is to the world, biotech is starting to bloom in Asia. This wouldn’t be possible without the public markets.
In case you do not know, here is some history.
HKEX was previously missing out on biotech company listings because the exchange had revenue and profit requirements that disqualified the typical biotech company from looking to have an initial public offering there. Most biotechs are solely focused on research and development (R&D) at the time of listing and rarely have meaningful revenue, let alone profit, when they are ready to go public. Without this ability in Hong Kong, world-class Chinese biotechs like BeiGene and Zai Lab could only look to New York as a listing venue in the past. Realizing biotech’s role in the new economy, HKEX changed its requirement for the sector on April 30, 2018. There was much fanfare about this decision, but also some doubt about whether biotech could thrive in a market that had no experience valuing R&D like this.
A rocky start – first impressions are hard to shake.
To be honest, it couldn’t have started out worse. Aiming to maximize the enthusiasm, the first company to list, Ascletis Pharma, went off at an unrealistic valuation and fell hard immediately. To this day, it is still down 79% from the IPO price. The next listing, a secondary IPO by BeiGene, was underwater for over a year. The third listing, Hua Medicine, has also been a poor performer since the beginning. Without a doubt, if the exchange and bankers could do this over again, I’m sure they would have chosen a different lineup of companies to start with and at lower valuations. First impressions are hard to shake, and you can’t blame some casual observers (especially outside of Asia) for losing interest after this rocky start.
But the Hong Kong market for biotech has grown stronger over time.
What the casual observer has missed since then is that the IPO market in Hong Kong has strengthened over time to the extent that it is cooking with gas today. The turn happened in October of 2018 when Innovent Biologics, a world-class and experienced company that was founded in 2011, went off at a relatively reasonable valuation. It is up over 200% since then and currently sports a $7B+ valuation. Innovent has also subsequently completed two follow-on offerings in Hong Kong, a key element of a functioning biotech market. In my opinion, this company has all the characteristics of being a global leader one day and should have been the first company to go public under the new biotech chapter. Much of that is out of the exchange’s hands, but a wink and a nod wouldn’t have hurt.
Since Innovent’s IPO, the market for biotech has been what I would describe as robust, while strengthening over time. 13 companies have officially gone public under the biotech chapter since Innovent. Some have gone up and some have been flat or down, a completely normal market. Successful ones that stand out include CanSino Biologics (+870%), Junshi Biosciences (+120%), and Alphamab Oncology (+125%). Hong Kong’s new biotech rule has fostered a culture of investing in life sciences, and that is very important. An underappreciated benefit is that the IPO market for other life sciences companies there, while not technically under the pre-revenue biotech rule, has also been very strong. These include WuXi AppTec (+145%), Hansoh Pharmaceutical (+136%), and Viva Biotech (+55%).
Today, you could argue that the IPO market for biotech in Hong Kong is, at least for the time being, just as strong and if not stronger than New York. The last five IPOs have all been big winners in their initial trading. Furthermore, the amount of money raised has been impressive. Three companies during this turbulent 2020 have already raised a total of over $900M and a fourth company (Kintor) is slated to IPO this week. This compares to $1.35B raised throughout the entire of 2019. The pipeline of future listings is very strong. This is all while the rest of the market has faced significant challenges. Biotech is the hottest sector in Hong Kong, and Hong Kong biotech might be the hottest IPO story happening anywhere in the world today. At the same time, Nasdaq has had one China biotech IPO in 2020 (I-Mab) and two others (Genetron Health and Legend Biotech) are on file.
Current events show how vital of a move this was.
I think the ultimate validation of Hong Kong’s new biotech chapter is the timing. COVID-19 has illustrated to the world how vital biology is to society. Ours is likely to be a sector of focus for years to come. That the HKEX did this two years ago is key. I strongly believe that if you don’t have a stock market for biotech, you cannot have a biotech sector because ours is one of the most capital intensive industries that exists. Companies need to constantly raise new money and that is not possible without a healthy public market component for financing. The fact that HKEX had already put this in place will no doubt help companies in Asia rise to the challenge during this pivotal moment. Since the time of the decision, Shanghai has made a similar move with the creation of its STAR Market and Shenzhen’s ChiNext was also recently given approval to do the same.
HKEX was also right when it made its initial bet by recognizing that biotech is a vital sector of the new economy, and an engine of growth. To be a competitive global exchange of the future, it was important for HKEX to get in on this business. The performance of biotech vs the rest of the stock market in Hong Kong since then has been striking. My company has created the China BioPharma Index, a basket of 29 Chinese biopharmaceutical companies, 83% of which are listed in Hong Kong. As of May 15th, the Loncar China Biopharma Index is +10% YTD in 2020, +21% over 1 year, and +5% since the first biotech IPO happened in July of 2018. This compares to the Hang Seng Index (total return) of -15% YTD in 2020, -13% over 1 year, and -13% since the first biotech IPO in July of 2018. The new economy has been a driver of growth.
This is just the beginning.
While this success is real and impressive, it is important to note that it is only the beginning for biotech in Hong Kong. One big mistake the naysayers made is that they expected everything to be perfect on day one and passed judgement after the first few listings were not great. In reality, the way to evaluate a big change like this is over the course of many years. It is true that everything was not in place on day one (number of buy-side and sell-side analysts covering the sector) and still is not, and it is also true that the listings got off to a rocky start. But they have since gained strength, and that is an entirely normal course of events for something new. The U.S. biotech sector was not built overnight either. When you consider that Hong Kong is only two years into its biotech chapter, I think you can only view the present situation as a great start and a resounding validation of the idea to do it.
There is one final issue that needs to be mentioned. HKEX did make one big miscalculation two years ago when this was all starting. Back then, it was suggested that the exchange would go after biotech listings from all over the globe, including from the United States. In my view, that was biting of more than they can chew and was not realistic because you have to earn that first. It is even less realistic now in a world of COVID-19 and the political protests that have been taking place in the city. While HKEX has not achieved (and might not for some time, if ever) this aggressive goal, today it has become without a doubt an excellent home for China-focused biotech companies. There is great demand and momentum for that. This is a huge achievement that HKEX, and all of Asia, deserves to be proud of. The biotech chapter is off to a great start.