The U.S. securities watchdog has set the countdown timer for the delisting of three leading Chinese biotechs from the Nasdaq as a newly installed foreign audit law threatens to banish more Chinese firms from the U.S. stock market.
The U.S. Securities and Exchange Commission (SEC) has identified BeiGene, Hutchmed and Zai Lab among five companies with their roots in China for potential delisting. The three firms are well-recognized Chinese biotech leaders with commercial products and collaborations with Western pharmas such as Novartis, AstraZeneca and GlaxoSmithKline.
The SEC compiled the list after finalizing its rules to implement the Holding Foreign Companies Accountable Act (HFCAA), which became law in December 2020.
The law mandates that any foreign companies listed in the U.S. must allow the nonprofit accounting watchdog, the Public Company Accounting Oversight Board (PCAOB), access to perform audit reviews. Failure to comply for three consecutive years would trigger delisting from any of the U.S. stock exchanges. The window may get narrower. The Senate in June 2021 passed the Accelerating HFCA Act, which, if signed into law, would cut the time period to two years.
The countdown has started for the five companies on the SEC’s “provisional list,” although they have 15 business days to contest the inclusion.
In a statement to Fierce Pharma, BeiGene said it’s “working to be compliant with the HFCAA” and “fully” expects to maintain its listings on the Nasdaq, HKEX and the Shanghai Stock Exchange. The company has “invested significant efforts to evaluate and design additional business processes and control changes” to come up with a solution ahead of the deadline, BeiGene said. BeiGene has signed licensing deals with Novartis on two immuno-oncology drugs and has a broad strategic collaboration with Amgen on multiple drug candidates.
Zai Lab, in its own statement, noted that it’s devising and implementing new processes to meet the HFCAA’s requirements before the deadline, be it three years or two years. The company said (PDF) the new protocol will allow it to “engage an independent public accounting firm that satisfies the PCAOB inspection requirements.” Zai is the marketer of GSK’s PARP inhibitor Zejula in China.
The list will likely grow longer. As the SEC noted, it will “promptly add” companies as the PCAOB pinpoints accounting firms that it couldn’t inspect in a foreign country.
For its part, Hutchmed was added following the filing of its annual report with the SEC last week, the Hong Kong-based company said in a statement (PDF).
“We anticipate that other similarly situated U.S.-listed companies with operations in Hong Kong and other parts of China will be added once they file their annual reports with the SEC,” Hutchmed said.
Other notable U.S.-listed biotechs with Chinese background include Johnson & Johnson’s CAR-T partner Legend Biotech, Sanofi antibody tech collaborator Adagene, I-Mab, BeyondSpring, Gracell Biotechnologies and more. The SEC has previously estimated that about 273 companies might be identified under HFCAA based on the agency’s review of U.S.-listed companies in 2020, Hutchmed noted.
Although the HFCAA covers all foreign companies, it’s widely viewed as targeting Chinese firms amid rising geopolitical tensions between the two economic superpowers. China has its own laws that prohibit local auditing firms from turning over accounting records to foreign regulators. In addition, the HFCAA also requires companies to make certain disclosures about their ownership by foreign governmental entities and their relationships specifically with China’s ruling political party.
There’s hope for a possible resolution between securities watchdogs of the two countries.
In a statement Friday, the China Securities Regulatory Commission said it stands “firmly against politicizing securities regulation.” But the Chinese regulator also said it has made “positive progress” in discussions with the PCAOB. “We believe the two sides will be able to jointly work out cooperation arrangements that comply with the legal and regulatory requirements of both countries in an expedited manner,” the agency said.