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 U.S. funds, but, in Hong Kong, we can better tap Chinese and Asian investors as we are closer to them,” said Yang Dajun, chairman of Ascentage Pharma, a Chinese biotech company.
JPMorgan analysts forecast that China’s biologics industry will double in size to $52 billion by 2021 compared with a global growth rate of 60 percent. Biologics are the products
produced by biotech and biopharma firms.
While U.S. companies have been the largest capital-raisers, accounting for 44 percent of industry funds raised through IPOs in the past five years, Chinese groups were next, accounting for a fifth, according to Thomson Reuters data.
All that has sparked interest in Hong Kong. Last June, shares in the drug developer Wuxi Biologics rose 39 percent on their debut and now stand 167 percent higher.
However, industry insiders and market participants warn of risks in the sector, saying that many biotechs are reliant on a handful of early-stage new drugs, making them vulnerable if one fails.
Mary Leung, the CFA Institute’s Asia Pacific head of advocacy, 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 city’s rules have been strict, requiring three years of profitability, or a certain level of cashflow, before any company can apply to list.
About 20 percent of daily trading in Hong Kong is undertaken by small-time 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?” Ken Hitchner, Asia-Pacific chairman and chief executive of Goldman Sachs, said at a conference last month.
“We will have spectacular successes — we will have future Tencentsacross tech, across biotech. But there will be front-page headlines of really spectacular implosions and that’s the nature of dealing with the bleeding edge of innovation.”