Global economic development, population growth and an aging society have given new impetus to the biomedical industry . Compared to traditional sectors, biomedical companies are characterised by having substantial investment, high-value outputs and high risks, and being technology-intensive.
Biomedical companies usually adopt equity financing rather than debt financing as an important source of financing during their growth period. Financing by different methods at different stages of development of a biomedical company according to development characteristics provide strong financial support for the sector’s development.
Major global stock markets have in recent years developed the new listing regime specifically for the biotechnology (biotech) sector to facilitate effective allocation of venture capital and private equity funds, completing the “input-output” cycle of capital deployment and optimise resources allocation.
The Mainland China’s biomedical industry thrives largely because of policy support, increasing capital inputs, accelerating industry consolidation and other favourable factors. In April 2018, the Hong Kong Exchanges and Clearing Limited (HKEX) introduced a new listing regime and opened up a new listing channel for pre-revenue or pre-profit biotech companies creating a sound environment for the financing of, and investment in, this dynamic and promising sector.
Since the introduction of the new listing regime, 12 biotech companies have listed on the HKEX Main Board, raising HK$36.6 billion ($4.6 billion) in total, of which HK$23.5 billion was raised by eight pre-revenue biotech firms (as of May 2019).
Relevant indices and financial products have been rolled out across major global capital markets to broaden investor access to the biomedical sector, among which are the NASDAQ Biotechnology Index and the S&P Biotechnology Select Industry Index, and a series of exchange traded funds (ETFs) based on these indices.
Unlike in the US and Europe, the biotech industry in Asia is in its infancy. There are few large biopharmaceutical companies in the region while the world’s top 10 medical companies, such as Roche and Novartis, are in Europe and the US. Neither does Asia have world class biotech R&D centres such as the Sanger Institute in Cambridge in the UK, which can commercialise biomedical findings. Hence, biotech R&D clusters cannot easily be formed in Asia to attract knowledge and skilled talent.
Asian investors and analysts are also eager to build up experience and expertise to assess pharmaceutical companies. Hong Kong’s new listing regime will no doubt attract more quality biotech companies to the region and instil new energy into the region’s biomedical industry.
Biotech stocks are prone to be volatile as most of the products of biomedical companies are still at R&D stage and their stock prices are to a large extent subject to the progress of clinical trials. Therefore, there is a need for an industry benchmark to help investors diversify the risk of investment in individual biotech stocks.
For this purpose, China Exchanges Services Company limited (CESC), a joint venture of the three stock exchanges in Shanghai, Shenzhen and Hong Kong, launched the CES HK Biotechnology Index (“CES HK Biotech” with the index code of CESHKB) on 14 November 2018 as the benchmark that measures the performance of Hong Kong-listed biotech stocks.
During the period of January 2019 to 6 March 2019, the annualised volatility of CES HK Biotech was close to that of the NASDAQ Biotechnology Index and higher than that of the NASDAQ Composite Index. Its annualised return was 42.41% in the past three years, surpassing the performance of the Hang Seng Index and the NASDAQ Biotechnology Index in the same period (see Figure 1 and Table 1).