It has been an extremely challenging couple of years for Hong Kong’s financial sector, including for the wealth of biotech companies listed in the city, but fundamentals remain strong, and the green shoots of recovery are starting to be seen.

While biotech has historically been a high-risk, high-reward sector, the current global financing environment has become increasingly risk-averse. Interest rate hikes, recession fears, and geopolitical tensions have all impacted stock performance, and many biotech indices were down over 20-30 percent from their highs in 2022. There was, however, some mixed recovery in 2023.

The same was true in China and Hong Kong, where stocks collectively lost USD 4.8 trillion in market capitalisation since 2021. IPO proceeds declined for the third year in a row in 2023, falling 33 percent from USD 8.5 billion in the previous year to 5.7 billion. Hong Kong’s Hang Seng Index dropped by almost 14 percent in the same period and in January 2024 Hong Kong even suffered the ignominy of having India briefly overtake it in terms of stock market capitalisation.

These funding difficulties have been keenly felt by the healthcare and life science firms listed on HKEX. This includes a host of pre-revenue biotechs, predominantly from mainland China, which have been able to launch IPOs on the exchange under the ‘Chapter 18A’ mechanism since 2018.

However, an improving economic landscape in China, cheaper valuations, and a flurry of mainland investors putting money into Hong Kong to protect their portfolios from a weakening Chinese currency have combined to resuscitate the market in recent months. Moreover, there are hopes that a more realistic market is now emerging, one that is better placed to identify true value, unlike the bullish period of inflated valuations leading up to the outbreak of the COVID-19 pandemic.

A Difficult Moment

Nevertheless, as co-founder of life science-focused venture capital firm Silver Dart Capital, Chuen Yan Leung laments, “It is certainly a challenging time right now, especially for biotech companies that are strapped for cash,” he adds. “Many are caught in a kind of death spiral where difficulty in fundraising makes them less attractive to investors, which in turn makes it even harder for them to secure the necessary capital.”

“A big factor is the rapid rise in interest rates,” continues Leung, “The recent hikes, which reached an unprecedented 5.25 percent in a short period, are the steepest we have seen in 40 years, and are putting a lot of pressure on capital allocators. When risk-free returns are sitting around eight percent, it makes people question why they should take on the high risks of biotech.”

Over at HKEX-main board listed and Suzhou-headquartered Alphamab Oncology, CEO Xu Ting is similarly concerned. “The liquidity of HKEX Chaper 18A is running out, and US funds have offloaded almost all their Chinese investments, which is a problem,” says Xu. “Additionally, the specialty funds that drive growth are based in the US, and most of the liquidity is from them. Moreover, due to the COVID-19 pandemic and supply chain issues, the overall financial situation in China is not great.”

Xu points to the market conditions in mainland China as another key issue. Investors are increasingly unwilling to take a gamble on Chinese biotechs targeting their local market with innovations that reap scant financial reward, at least compared to the US. “The pricing model for medicines in China is a problem,” says Xu, whose company developed and marketed the world’s first subcutaneously injectable PD-L1 inhibitor. “The national reimbursement system is a major player, and the bulk purchasing system is not sustainable for innovation. The lowest price for a domestic PD-1 for annual supply is barely USD 3,000 while in US the costs are close to 200,000 for the same product.”

Reality Bites

There is, however, a case to be made that the bull market of the late-2010s, when Chinese biotechs rushed to list on HKEX was – in the words of Hong Kong-based asset management firm VMS Group’s Andrew Ng – “hype-driven and unsustainable.”

“The current normalisation phase reflects a re-evaluation of risk and reward, prompting investors to adopt a more cautious approach,” says Ng. “At VMS, we have deliberately moderated our investments in healthcare since 2020 due to inflated valuations that do not align with intrinsic value. While these conditions pose hurdles, they also offer an opportunity to recalibrate the industry. Investors are recognising the importance of specialist fund managers, and entrepreneurs must adopt realistic expectations regarding funding availability and company valuations. Ultimately, sustainability in fundraising and product development is paramount amidst these evolving market dynamics.”

This sentiment is shared by Tom Lau, director of corporate finance at HKEX-listed HIV-focused outfit Immuno Cure. “Raising funds has been challenging due to increased competition and a more sluggish capital market,” admits Lau, but has no regrets about avoiding the peak investment rush in 2021, especially for COVID-19 vaccines. “Many companies invested heavily and are now seeing more commercialisation burden than success, with only a few winners globally. Our prudent financial plan meant we did not chase the spike, which turned out to be a blessing in disguise and allowed us to stay focused on our core product, a therapeutic HIV vaccine, which remains our primary value driver.”

New Routes

The challenging situation is leading mainland Chinese biotechs to reconsider their internationalisation strategies. The more established financing routes followed by Chinese biotech since 2018 are no longer a given, as Nisa Leung of Qiming Venture Partners, a pioneer in China that has backed over 530 fast-growth companies, notes. “Over the past few years, Chinese biotechs tended to initiate clinical trials in China, and would list under Chapter 18A in Hong Kong once they had phase II clinical data,” she explains. “Those who raised more funds would also start clinical trials in US in parallel. Now companies prefer to engage international investors early on. Companies that are doing this, if truly innovative, can then choose to go public in either Hong Kong or the US.”

Transcenta, a HKEX-listed biotech that has advanced its first-line gastric cancer treatment into phase III trials, is one such example of how the funding situation is forcing firms to look beyond Hong Kong. “We are considering a dual-listing strategy for the long-term benefit of the company,” says CEO and co-founder Xueming Qian. “This approach allows us to appeal to both Asian and US investors, leveraging our robust pipeline. For instance, clinical trials for an osteoporosis treatment we licensed from Eli Lilly have shown promising results, but the Chinese market, focusing on near-term profitability, has not fully recognized its potential yet. On the other hand, in the US, investors typically recognise and appreciate the potential of innovative drugs like ours.”

Investor Perceptions

The Hong Kong investment community’s frequent inability to grasp the true potential value of the biotech propositions presented to them is a common lament among PharmaBoardroom interviewees. James Xue of CANbridge, the first company in Asia to be squarely focused on rare diseases at the time of its HKEX IPO, tells a similar story. “Hong Kong’s financial industry, which is primarily retail-oriented, excels in conventional metrics like revenue and profit, but often lacks expertise in niche scientific fields,” he says.

“Enhancing training and marketing efforts could help elevate understanding of companies like ours beyond traditional financial evaluations. There is, for example, a prevalent misconception regarding orphan drugs in China, where government reimbursement rates are low. This dissuades interest despite these therapies’ potential viability.”

However, as Silver Dart’s Leung counters, “Hong Kong’s investors are becoming more discerning. This shift might be due to various factors, such as geopolitical concerns or a move away from investing in “Me-Too” assets, which were very popular a few years ago but are not performing as well now. While better communication and marketing are important, it is also clear that the investment landscape here is evolving and becoming more refined.”

Reasons to Be Cheerful

Indeed, there are in fact multiple causes for optimism about the financial prospects for biotech in Hong Kong today, rolling back against the doom and gloom of recent years. In February, Paul Chan mo, Hong Kong’s Financial Secretary, anticipated a stock market rebound this year, which has come to pass, as the territory aims “to seek progress amid stability.” There has been a notable increase in M&As in the past 12 months and Hong Kong has managed to attract 45 life science companies to set up or expand in the city, investing USD 832 million, in line with the SAR’s goal of becoming an innovation and technology hub.

Those companies with a truly differentiated offering, able to provide first- or -best-in-class candidates continue to be targets for global pharma. As Qiming’s Nisa Leung points out, “Many China-based companies have developed best-in-class drugs and, due to the faster turnaround and better cost effectiveness than those of their US or European counterparts, many multinationals feel there are cost benefits to licensing them.”

VMS Group’s Andrew Ng offers a more long-term perspective on current woes. “It’s crucial to recognise that the current downturn cycle being experienced by Chapter 18A biotechs is the first real downturn cycle in the region,” he proffers. “Building a robust biotech community takes time, especially in attracting specialised investors who understand the nuances of the industry. In the long term, I remain optimistic that Chapter 18A will serve as a successful platform for Asia-based biotechs to raise capital.”

“Despite Chapter 18A taking a beating in recent years, Hong Kong continues to have something special to offer to biotechs from mainland China,” adds Da Liu, managing director of the CR-CP Life Science Fund. “More and more Chinese companies are using Hong Kong as a steppingstone in their expansion and those choosing to IPO here benefit from an easy and predictable listing process as well as Hong Kong’s numerous advantages for global business development.”

Strong Foundations & Untapped Potential

Others are similarly sanguine on Hong Kong’s continued viability as a funding hub for biotechs. “I do not have any major concerns about Hong Kong or China’s stability becoming a significant issue for our future investors,” says Mark Lotter of Nuance Pharma, a company not currently listed on HKEX but about to open its Asia headquarters in Hong Kong. “From our perspective, Hong Kong remains an extremely attractive destination, especially for potentially taking our company public. Additionally, while there may be fluctuations in sentiment from time to time, China retains its status as the world’s second-largest market,” notes Lotter.

There is also significant untapped potential in Hong Kong, which could be realised through regulatory reform and expanding the number of services offered. “To address the current challenges, we could look at regulatory changes such as allowing onshore investors in mainland China to access Chapter 18A companies, regardless of market cap restrictions,” opines Ng. “This could enhance liquidity and investor participation. By fostering greater engagement and understanding among investors, we can create a more resilient and dynamic biotech ecosystem in Hong Kong.”

Former Hong Kong SAR Chief Executive CY Leung is even more optimistic. Leung oversaw the implementation of Hong Kong’s Financial Services Development Council (FSDC) while in office, a body that advises the SAR’s government on how to fully leverage Hong Kong’s potential as an international financial centre, and is keen to see even more change occur.

“Hong Kong is part of a sizable and growing economy, serving as China’s only true international financial centre,” he states. “When compared to international financial hubs like London, New York, Frankfurt, Tokyo, or Osaka, our list of services is short, focusing on IPOs and daily stock trading. However, there is untapped potential in other areas like the bond market, wealth management, and maritime insurance. We have barely scratched the surface.”