When Hong Kong last year unveiled plans to encourage biotech companies to list in the territory by loosening its listing rules, the financial industry and investors cheered.
Hong Kong was an obvious financing center for a growing number of Chinese companies developing new drugs, but as the new rules came into effect yesterday, at least one problem became evident: Hong Kong’s limited expertise in the biotech field.
Biotech companies without revenues, let alone profits, are allowed to apply for listings in the territory under the new rules.
Ten companies — mostly Chinese, including Shanghai Henlius Biotech Inc (上海復宏漢霖生技) — are already planning floats and some have dropped US initial public offering (IPO) plans in favor of a listing closer to home.
However, the result is a scramble for experts in a territory whose financiers have limited experience with science.
Just 3 percent of all Hong Kong-listed stocks, by capitalization, come from so-called “new economy” sectors — technology as well as biotech — according to a report last year by Hong Kong Exchanges and Clearing Ltd (HKEX), the bourse operator.
That compared with 60 percent for NASDAQ and 47 percent for the New York Stock Exchange.
Several bankers, investors and industry executives estimated that the territory has fewer than 20 experienced biotech and biopharma bankers.
“It’s not easy to hire the right professionals,” said Kevin Xie, head of healthcare and cofounder of China Renaissance (華興資本), a boutique investment bank. “There’s a limited pool globally who truly understand the industry.”
Leading investment banks are touting their ability to transfer bankers from the US to plug gaps in Hong Kong, but lacking local licenses, those seconded to Hong Kong can only advise their colleagues, not work on deals themselves.
“We really need sector specialist bankers to run biotech deals, otherwise everybody will say we don’t know how to do the due diligence,” CLSA head of Greater China equity capital markets Li Hang said.
Difficulties around talent go beyond the banks.
HKEX chief executive Charles Li (李小加) said last month that it was tough to hire biotech professionals.
“All financial institutions in town have been seeking such talent,” he said.
Nonetheless, Li said on Tuesday last week, when announcing the finalized rules, that HKEX had found a dozen experts, primarily scientists or employees of pharmaceutical companies, to serve on a board advising a listing committee that approves each IPO application.
Hong Kong’s appeal to would-be IPOs rests largely on its familiarity with Chinese firms, its convenient timezone for mainland executives and its new rules.
“On NASDAQ, the main investors for biotech stocks are mainly US funds, but in Hong Kong we can better tap Chinese and Asian investors as we are closer to them,” Ascentage Pharma chairman Yang Dajun said.
JPMorgan analysts forecast that China’s biologics industry will double in size to US$52 billion by 2021 compared with a global growth rate of 60 percent.
Biologics are the products produced by biotech and biopharma firms.
CFA Institute Asia-Pacific head of advocacy Mary Leung questioned the ability of average investors to evaluate such companies.
“Given how long it will take for pre-revenue companies to demonstrate whether they are successful, for retail investors, it’s almost like investing in bitcoin,” she said.
This is a particular issue for Hong Kong, where retail investors often expect to be protected by regulators.
Until now, the territory’s rules have been strict, requiring three years of profitability, or a certain level of cash flow, before any company can apply to list.
About 20 percent of daily trading in Hong Kong is undertaken by small investors, compared with about 2 percent in New York.
“Will we have the courage to stay with it because 30 to 40 percent of these biotech companies will fail and they may crash spectacularly?” Leung said.
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