China’s IPO-Inducing Gamble
Surveying China’s landscape
The story of China’s race to attract global investment into home-grown biotech begins in the USA. Since 2012, capital has flooded into the sector at unprecedented levels. Fueled by low interest rates and demand for high growth, USA biotech has experienced an explosion in private investment. Over the last seven years, venture funding has increased between three to four-fold. In 2018 alone, venture funding in the space exceeded USD 5 billion.
The wellspring of resources catalyzed innovation and led to increased excitement around new therapeutic. Look no further than CAR T products or CRISPR technologies, breakthrough science developed during the biotech’s bull run. The Department of Health and Human Services Secretary Alex Azar’s regulatory campaign has also augmented drug development by prioritizing and accelerating the review of new products.
These have, in-part, been enabled by NASDAQ listing standards which allow for well capitalized, pre-revenue biotech’s to fundraise publicly. To try and facilitate and promote similar grassroots growth in domestic biotech, the East has taken a page out of the USA’s book by loosening regulations in their own financing environment.
China’s ambitions for its domestic biotech industry are well known, as CBPartners has explored in previous analysis. These ambitions are driven both by a desire to move their economy up the value chain and by the growing expectations of the Chinese people for a high standard of healthcare. The Chinese government has pursued its goals with initiatives like “Made in China 2025” and “Healthy China 2030”.
These have helped spur further growth in the pharmaceutical sector by significantly easing drug approval and launch regulations. As market players begin to put their money where their mouth is, Chinese venture capital and private equity funds raised USD 45 billion for investment in life sciences between January 2015 and June 2017 alone.
This demonstration of liquidity is a strong sign for the future of Chinese domestic firms, but the next hurdle could prove a complicated one: translating private capital into IPO success.
Hong Kong & China: Opportunity Emerges
- Anticipating this hurdle, the Chinese government announced another aggressive move in February 2019, when the Shanghai exchange shared a crucial rule change. Moving forward, companies will be allowed to conduct IPOs in Shanghai before they have shown a profit margin – a significant shift.This will make it easier for firms to go public earlier, bringing in funding for promising firms that have yet to turn their cash flow positive. In the world of biotech, this transition to profits can be especially challenging, given the significant costs of commercializing and distributing a product. Of course, this change also invites greater risk – firms that aren’t profitable yet may be less able to maintain their value and offer returns to public investors.By letting firms IPO before profit, Shanghai is signaling they are comfortable with greater risk in their pursuit of their broader goal of bringing biotech domestic.
- This rule change may shake things up in Shanghai, but from a global perspective it is more a chance for CHN to catch up with the rest of the world. The NASDAQ in America has long allowed pre-profit IPOs, with rules being tied more to company valuations more broadly defined.More recently and regionally, Hong Kong adopted this same pre-profit change last year, and so far there has been a marked increase in the number of biotech IPOs. From the beginning of 2019 to late April, nine biotech’s launched in Hong Kong raising a total of $3.6B, making the exchange the second most active in the world in terms of dollars invested.In mainland CHN, however, Shanghai’s Stock Exchange has yet to approve its first biotech IPO under the new innovation board.The question now becomes, will this change really make the Shanghai market more attractive for launching new firms, or is it a signal of Chinese regulators trying (and failing) to catch up to their more popular rivals?
At this stage CBP believes that Hong Kong’s loosening of its IPO listing criteria will result in material growth for the local biotech market; however, in mainland CHN, infrastructural obstacles remain (e.g., insufficient industry talent) which may slow biotech development regulatory incentives. As we continue to monitor this IPO evolution, the following key questions should be kept in mind:
- How will innovation in the Hong Kong and Shanghai exchanges impact the attractiveness of USA or EU markets in terms of biotech funding?
- Will initial public offerings in CHN provide biotech an advantage in terms of the CHN regulatory process?
- Will Shanghai or Hong Kong make any other regulatory changes?
- How will ongoing trade disputes between the USA and CHN affect the attractiveness of an IPO in CHN?