Like other things Chinese, Hong Kong targeting US’s Nasdaq for biotech IPO listings. Recent change to registration rules tempting cash-starved startups.

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The News:

Two Chinese biotechs recently scrapped plans to list in New York and instead aim to raise up to $800 million in Hong Kong IPOs, seeking to cash in on new rules to court early-stage drug developers, sources said. Fidelity Investments-backed Innovent Biologics and Ascentage Pharma both plan to float in the second half of this year and are working with several advisers, Reuters reported.

They join a growing queue of Chinese biotechs targeting IPOs in Hong Kong, which as of May, 2018 began allowing firms in the sector with no profits or revenues to list, though some observers doubt if the market, dominated by traditional companies, will painlessly cope with the burgeoning, cutting-edge science sector.

The new rules are part of a broader effort by Hong Kong Exchanges and Clearing (HKEX) to encourage more new economy companies to float in that city as it competes with New York to be the world’s largest listings hub.

Neither Innovent nor Ascentage have recorded any revenues yet.

Ascentage, which focuses on therapeutics for cancers, hepatitis B and aging-related diseases, is aiming to raise up to $300 million, two sources said, according to Reuters.

“We were already ready to file (an IPO application) in the US, but we have shifted to Hong Kong for listing as the HKEX opens its doors to us,” Ascentage’s chairman Yang Dajun told Reuters. “This is great news for biotech firms which are based in China and want to tap more Chinese and Asian investors,” he said of Hong Kong’s rule change.

Suzhou-based Innovent, which counts mutual fund giant Fidelity and Singapore state investor Temasek among its backers, is looking to raise between $300 million and $500 million in its Hong Kong float, according to two other sources.

The two companies chose Hong Kong because of the city’s new listing regimen, its familiarity with Chinese firms, potentially higher valuations and its convenient time zone for mainland executives, the sources said.

Innovent and Ascentage will be following Shanghai Henlius Biotech, backed by Chinese conglomerate Fosun International, diabetes-focused drug developer Hua Medicine and US-based cancer detection start-up Grail, among others, in eyeing Hong Kong listings. That rush is making some market participants question if Asian investors can adequately cope with the complexities of biotech sector investing.

“The US has very mature investors for the sector, but the Asian investors are quite new to it,” said Li Hang, head of Greater China equity capital markets at investment bank CLSA.

Founded in 2011, Innovent has built a portfolio of 16 potential products for treating cancer, autoimmune disorders and other diseases, and seven of those are in clinical development. Ascentage, founded in 2010, has seven products in clinical development and 17 in total approved for clinical studies in China, the US and Australia.

Steve’s Take:

Most of us can probably agree that China has been catching up to the US as an economic powerhouse for years. That’s old news.

But now, Hong Kong is grabbing increased global attention as it has drastically changed listing rules for biotech firms, potentially opening the way to both Chinese companies seeking public funding and international firms weighing entry to China. A Shanghai biosimilars developer, for example, is now considering an offering, says Brian Yang for Informa Intelligence Ltd. That’s au courant with the Nasdaq’s throng of such listings.

Yang says, “Another day, another Chinese biotech is poised to go public.”

As mentioned above, this time it’s biosimilar developer Shanghai Henlius Biotech Co. Ltd., which is preparing for a planned public listing in Hong Kong. Established as a joint venture company formed by Shanghai Fosun Pharmaceutical (Group) Co., Ltd. and Henlius Biopharmaceuticals Co., Ltd., Shanghai Henlius is mainly focused on developing follow-on versions to some best-selling biologics.

Banking on “affordable innovation”, the company believes low-cost biologics to treat some of the most prevalent cancers will have bright prospects in China, where cancer occurrence rates continue to rise while few patients can afford high-priced original biologic drugs for cancer.

Henlius, with a valuation of $1.5bn, reportedly is aiming to raise an estimated $500m from the proposed IPO on the Hong Kong Stock Exchange (HKEX), adding to a growing list of Chinese biotech and health companies seeking new public funding.

Suzhou-based Innovent Biologics Inc.is also reportedly to file for an IPO in either Nasdaq or Hong Kong, seeking to raise $2.5bn.

Innovent and Henlius are among around two dozen companies contemplating a listing in Hong Kong, including biotech firm Harbour BioMed, an antibody developer based in Shanghai, and Fountain Medical Development Ltd., a contract research organization (CRO).

Hong Kong becoming a listing of choice is largely driven by recent rule changes announced December 15, 2017. These will allow biotech companies that have no revenues or that are not profitable to be listed as long as their expected market capitalization is no less than $1.5bn.

“The biotech sector has been chosen as the initial focus in widening market access for early stage companies as the activities undertaken by Biotech companies tend to be strictly regulated under a regime that sets external milestones on development progress,” said HKEX in a statement. “Biotech companies also make up a majority of companies in the pre-revenue stage of development seeking a listing,” it added.

In comparison, to be listed on mainland China’s two stock exchanges in Shanghai and Shenzhen, companies must have revenues and been profitable for three consecutive years.

Hong Kong New Listing Rules:

1) Setup a new Biotech chapter;

2) No requirement for revenues or profits;

3) Minimum expected market capitalization of $1.5bn; and

4) Issuers that have weighted voting rates (WVR) structures subject to additional disclosure and safeguards.

The rule changes will elevate the Hong Kong exchange to compete with Nasdaq in the US, where several Chinese biotechs have already been successfully listed.

Steve's Take: Watch out @Nasdaq, rule changes enable #HongKong exchange to elevate their game and several #Chinese #biotechs have already been successfully listed Click To Tweet

One of these is BeiGene (Beijing) Co. Ltd., which has seen its share price soar five-fold since its IPO on Nasdaq in 2016, and Zai Lab Ltd., a new drug developer focused on in-licensing novel assets from outside China, also has a Nasdaq listing.

Product and culture familiarity and proximity are just some reasons that officials in Hong Kong believe they can compete with Nasdaq in luring Chinese biotechs.

Indeed, Hong Kong has in the past years been actively seeking to link closely with the two mainland China Stock Exchanges in Shanghai and Shenzhen.

Per Renaissance Capital, 2017 saw a surge of public listings from Chinese companies: 137 global IPOs raised $32.2bn, accounting for a large share of the total for 74 companies that raised $141bn.

Bottom Line:

China and America have avoided a full-scale trade war, for now at least. Although on Friday, June 15, 2018 the Trump administration moved the US to the brink, by announcing tariffs on $50 billion on Chinese imports and pledging additional investment restrictions. Beijing immediately vowed to retaliate.

By agreeing previously to increase purchases of US goods in a bid to shrink its surplus with America, President Xi Jinping has avoided a “growth-sapping trade spat,” says Bloomberg. What’s more, it appears that his plan to dominate industries of the future remains unchecked.

Meantime, China’s pledges to open up such long-impeded industries as finance and to reduce barriers for autos and other sectors is set to lure even closer engagement with corporate America, deepening the “Chimerica” union.

China’s GDP will overtake the US level in 2029 at these projected average growth rates: US +2.0% vs. China +6.5%. China and the US make up almost 40% of the world economy. As China grows, it’s making up a larger share of the global economy. But the growth is not all at America’s expense–China is muscling out Europe and Japan, too.

Ronald Wan, the CEO at Partners Capital, said as a group of Chinese internet and technology companies have expanded and are now near the stage of going public, the competition to win over big Chinese “unicorn IPOs” has also intensified among global markets.

That is probably why stock exchanges in Hong Kong, China, the US and Singapore have made or considered rule changes to entice such companies, whose debuts are expected to bring significant changes to their capital markets, he added.

Wan is dead on. And it’s no longer a matter of “if” the Chinese exchanges will overtake New York, but “when.” Get used to the probability that some of your investments eventually will be priced in the China Yuan Renminbi. It’s clear to me that China’s rise is destined to pose ongoing challenges for Donald Trump and his “America First” doctrine. A full-scale trade war won’t help.

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