HKEX and Star Market: How do new drug developers choose?

By Jason Cheng, Mao Shengdi and Yuan Xin, Dentons
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In the past two years, new drug development enterprises have drawn wide attention in the capital market. These enterprises need “special treatment”, as they often have difficulty meeting financial requirements on main board listing due to their particularity.

In 2018, the Stock Exchange of Hong Kong Ltd (HKEX)significantly amended the IPO system and carried out various pilot reforms, including those for Hong Kong listings of biotech companies that failed to pass financial tests. This year, the Shanghai Stock Exchange officially launched the Star Market (the Science and Technology Innovation Board), with a focus on supporting high and new technology industries and strategic emerging industries.

drug
Jason Cheng
Senior Partner
Dentons

Under new policies, the two major stock exchanges both provide a springboard for new drug development enterprises, but with different focuses, and therefore enterprises suitable for listing on each exchange are different. This article provides a reference for choosing a place of listing, through a comparison between Ascletis Pharma, listed on the HKEX, and Chipscreen Biosciences, listed on the Star Market.

Ascletis Pharma is the first pre-revenue company listed on the HKEX. Its main business is development of antiviral drugs. According to the listing application documents disclosed by Ascletis Pharma, as at the date of its listing application it had not successfully launched any drug, nor had any revenue from its main businesses, let alone make any profits. It only had Ganovo, a Hepatitis C drug that was about to be launched.

Chipscreen Biosciences is one of the first companies that submitted to the China Securities Regulatory Commission (CSRC) for listing on the Star Market. Its main business is development of first-in-class drugs, such as antineoplastic (tumor inhibitors) and autoimmune diseases drugs. As at the listing date, Chipscreen Biosciences had Epidaza, its launched core product and the first oral drug in the world for treating peripheral T-cell lymphoma, and had made profits in the past three years.

Company comparison

drug
Mao Shengdi
Associate
Dentons

The differences between Ascletis Pharma and Chipscreen Biosciences, in terms of company conditions, as at the listing date included:

Profitability. Ascletis Pharma had no commercialized drugs, nor made profits, nor had any revenue, but only had a Hepatitis C drug with a relatively high rate of success and good market outlook. On the contrary, the drugs of Chipscreen Biosciences were mainly orphan drugs, with a relatively narrow market, but it had made profits as at the listing date, so it did not choose the method of “pre-revenue listing”.

Business model. Ascletis Pharma adopted the “independent development + licence in” model for its research and development, and preclinical research results of most of its drugs were granted by foreign companies. Chipscreen Biosciences adopted the pure independent development mode for its research and development, and its Chidamide was the first innovative drug being authorized by a Chinese entity for use by foreign entities. By contrast, the core research and development team of Chipscreen Biosciences had greater stability and a higher level of independent innovation.

Value and financing requirements. Ascletis Pharma was valued at approximately RMB15 billion (US$2.1 billion) on the listing date, with the current market value approximately RMB4 billion. Most of the proceeds of the RMB3.1 billion from IPO were used for research and development of new drugs. By contrast, Chipscreen Biosciences was valued at less than RMB9 billion on the listing date, with the current market value approximately RMB30 billion. Its planned financing amount was only about RMB1 billion, merely 15% of which was used for research and development of new drugs, and the remainder for investment in fixed assets.

Preferences of exchanges

There are clear differences between Ascletis Pharma and Chipscreen Biosciences in revenue, product condition, business model and use of financing prior to the listing. The authors believe that this partially reflects the different attitudes of the HKEX and the Star Market towards new drug development companies.

First, in terms of financial standards, the HKEX relaxes financial standard requirements on biotech companies, but imposes requirements as to core products, product lines, intellectual property rights and use of financing instead. Although the Star Market provides pre-revenue scientific and technological innovation enterprises with multiple optional financial requirements, its standards on operating revenue, research and development investment proportion, net cash flows from operating activities, and other indicators of an applicant are higher than those of the HKEX. Thus, it can be seen that the Star Market focuses and emphasizes more on financial requirements.

Second, in terms of policy orientation, the core competitiveness of enterprises or biotech companies listed on the Star Market lies in their research and development ability, and the potential market outlook of the products developed by them. As financial requirements of the Star Market are more stringent than those of the main board of the HKEX, the Star Market does not have excessively detailed standards with regard to product requirements, but sets higher requirements on the stability of a research and development team. On the contrary, the HKEX specifies more detailed product classification, and carries out detailed classification of medicaments, biologicals and medical devices, respectively.

It should be noted that the HKEX imposes a condition that an applicant shall obtain investments from institutional investors, while the Star Market requires price inquiry with professional institutional investors and invites strategic investors, reflecting their expectation that the market position and the market outlook of an applicant can be confirmed through market-oriented third parties.

Finally, in terms of value and financing requirements, the value of an enterprise listed on the Star Market is relatively higher, reflecting the feature that the A-share market is a seller’s market. With regard to the use of raised funds, the HKEX is more market-oriented; while the Star Market reflects the traditional preference for certain heavy asset requirements.

In conclusion, both the HKEX and the Star Market provide certain channels allowing the listing of pre-revenue new development enterprises. Since different exchanges have different value priorities, new drug development enterprises should make a choice according to their own specific conditions.

Jason Cheng is a senior partner and Mao Shengdi is an associate at Dentons. Yuan Xin, a paralegal at the firm, also contributed to the article

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