Hong Kong stock exchange sets sights on overseas biotech after Chinese success

➤ A total of 31 China-focused pre-revenue biotech companies have listed in Hong Kong under a scheme the city launched in 2018 to entice the sector.

➤ The stock exchange now plans to attract biotech companies from overseas to go public in Hong Kong.

➤ In response to retail investors' interest in the sector, biotech exchange-traded funds and other structured financial products are on the rise.

Hong Kong has positioned itself as a regional fundraising hub for biotech since Hong Kong Exchanges and Clearing Ltd., the parent company of the city's stock exchange, implemented a listing scheme in April 2018 to allow pre-revenue biotech companies to go public in the city.

A total of 31 pre-revenue companies have listed in Hong Kong under the scheme, raising $10.5 billion on their debut and an additional $8.1 billion in follow-on financing rounds, according to Christina Bao, head of market development and global issuer services at the stock exchange. The 31 companies all have their headquarters or primary operations in mainland China.

Bao recently spoke to S&P Global Market Intelligence about the outlook for Hong Kong's biotech capital market, investor composition, and the exchange's efforts to attract overseas biotech companies, including a stock connect scheme that allows eligible companies listed in Hong Kong to be traded by investors in mainland China and vice versa. Hong Kong-listed cancer therapy developer Antengene Corp. Ltd., for example, was included in the stock connect scheme in March.

The following is an edited transcript of the interview.

S&P Global Market Intelligence: When will Hong Kong see the first overseas biotech companies list in the city? What will the stock exchange do to attract them?

Christina Bao: We are really expecting an international issuer relatively soon. But to some extent Hong Kong is already an international hub for biotech fundraising for a few reasons.

The investor composition, for instance, is very well diversified from overseas to Hong Kong to mainland China. Secondly, a lot of these so-called Chinese companies are very internationally oriented partly thanks to the licensing in and licensing out deals of their products.

We have also acknowledged that not many jurisdictions have the capacity to do their own research and development in biotech. Instead, they would actually depend on the U.S., Europe, or these days the Chinese technologies.

We have indeed seen some interest from places like the EU and even the U.S. Of course, the U.S. market can pretty much satisfy the domestic need but I think some companies will be very interested in either a dual listing or IPO in Hong Kong.

For example, if they already have a business plan or market outreach in China, they would like to be present in the capital market in this time zone. Hence, a unique advantage of Hong Kong listing is that a lot of mainland Chinese investors can also invest via the stock connect scheme. So far, we have seen 18 biotech companies included in the stock connect.

To attract them to list in Hong Kong, we have been hosting events to provide policy and market updates and doing small group discussions involving stakeholders in these markets like bankers, auditors and lawyers.

What's the outlook of the Hong Kong healthcare capital market? Has Hong Kong got enough talent to fuel the growth of the biotech market?

The market capitalization of the overall healthcare sector in Hong Kong is about HK$3.5 trillion as of the end of 2020, and the CAGR growth is more than 50% since year-end 2017. We expect the growth rate to be very strong in the next few years at least.

We have a very strong pipeline this year. Twelve re-revenue biotech companies filed listing applications as of April 12, and another 11 healthcare companies also applied for listings outside of the biotech scheme. I hope this pace will continue for the rest of the year.

We are also seeing more diversity in terms of the types of investors, subsectors, and stages of therapy development. Going forward, we are seeing more listings from companies focusing on areas like infectious disease, autoimmune disease and diabetes.

There are also many treatments and services to aid the aging population. In addition, we are seeing more companies working on AI-based drug development, where many investors will focus on.

I think the talent shortage issue has been partly addressed. The majority of the biotech companies have already been covered by research analysts and a number of investment banks have established their healthcare teams. We have also seen specialist investors, index providers and product issuers, so the ecosystem is there.

But I think we still have some way to go, partly because it's a relativity question: how quickly the market is growing versus how quickly the support system is growing to support the growth. I think it's going to be a dynamic process on a continuous basis into the next few years.

What's the makeup of the investor base in Hong Kong's biotech market? How will you cater to the growth of retail investors?

In terms of investor compositions, Hong Kong's biotech market is still very institutional investor-oriented if you look at the price setting of IPOs and the subscription amount. We also saw huge interest from retail investors especially in 2020.

To enable a better environment for retail investors, we have seen that the Hang Seng Index developed a biotech index, and an ETF product based on that index was issued in March. A number of ETF products tracking biotech stocks or indexes are also quite prevalent in Hong Kong. I think in terms of diversification and mitigation of the risk for retail investors, these products are quite key in future development.

I think it's very likely that some retail investors will pick individual stocks, but more of them down the path will probably select portfolios through vehicles such as ETFs.