The uncertainty of the commercialization of cutting-edge technology companies means that ubiquitous risks and incalculable premiums can usually only be driven by venture capital institutions. However, under the principle of cautious secondary market access in China, it is difficult for venture capital institutions that can accept hard technology innovation companies to find a suitable exit mechanism and have to seek listing in Hong Kong, New York and other markets. Under the lack of mechanism, the equity of many high-quality enterprises is thus diluted outward.
Under the circumstances, the Science and Technology Innovation Board has laid a new path for institutions investing in hard technology enterprises, effectively alleviating the current situation of high-tech equity outflow, but applicant enterprises will also face extremely strict approvals.
Statistics show that behind the 392 bell rings so far, 84 come from the life science field; at the same time, 150 companies terminated in the listing application process, with a termination rate of 38.46%, and a total of 32 medical-related companies, with a termination rate of 38.10%.
Of the 31 medical companies whose listings were terminated, a total of 26 companies terminated their inquiries and 5 failed to pass the Listing Committee meeting. Simply inferred, the interrogation link is the most difficult level to jam the bell of the enterprise science and technology innovation version.
How to make a breakthrough for successfully registered enterprises? What happened to the unfortunately terminated business? Arterial Network conducted a survey of the previous inquiry letters submitted by nearly half of the enterprises on the Science and Technology Innovation Board, and sorted out eight questions in four sectors.
Core technology segments
The so-called science and technology innovation, one is the frontier, the other is innovation. Specifically, enterprises need to meet the core technology and main business income of the invention patents (including national defense patents) a total of more than 50, and need to form a core technology and main business income that meets the attributes of science and technology innovation. The lack of a prospectus with "scientific content" cannot be recognized by the Shanghai Stock Exchange.
However, in practice, it is not easy to accurately measure the subjective "subject content", except for a few technologies that can be fairly accepted by practitioners, more often, the reporting enterprise needs to find corresponding evidence to prove it. In other words, through the inquiry of core technology, on the one hand, it is necessary to determine that the positioning of the technology meets the requirements, on the other hand, it is necessary to analyze the industry, compare domestic and foreign competitors, and convince the regulator with evidence.
Question 1: Foreign brands have controlled the market for a long time, do domestic breakthroughs have unique technologies?
Sitting on the huge potential of import substitution, the pharmaceutical and equipment industry has been the first priority of pharmaceutical investment for many years, and a large number of enterprises rely on the second set of standards required by "revenue & R&D" and the fifth set of standards required by "national standard & clinical" to go public. The biggest common denominator between these two sets of standards is the word "innovation."<
Medical imaging equipment manufacturer Besta submitted a prospectus in March 2019, and its main source of revenue is magnetic resonance systems (MR), accounting for more than 60% of revenue, and superconducting magnetic resonances accounting for about 30% each. In the prospectus, Besda will "rank first in the permanent magnet market share" as evidence to prove the company's leadership and innovation.
However, from the perspective of the development of magnetic resonance technology, although the purchase cost and maintenance cost of permanent magnet MR are low, the super strength of no more than 0.5T means that it is difficult to meet the current demand for image quality in precision medicine, and Siemens, GE Medical, Philips and other head companies have successively abandoned the permanent magnet MR production line.
Based on this background, the Shanghai Stock Exchange has questioned the leading position of Bestar's technology three times in succession, asking it to provide peer comparisons. In the third round of inquiry responses, Besda acknowledged the risk of declining sales of permanent magnet products and explained the strength gap between its own technology and its international counterparts. A month later, the company applied for termination of its listing.
Weigao Orthopedics, the leader of domestic orthopedic medical devices, has encountered the same type of problem.
Weigao Orthopedics has 14 core technologies in the four major fields of spine, trauma, joint and sports medicine, but because Johnson & Johnson, Medtronic, SYK, Sanyou Medical and other enterprises have been in the leading position in the industry, in the first round of inquiries, the Shanghai Stock Exchange raised questions about the uniqueness of weigao orthopedic core technology.
Q&A: The issuer has 14 core technologies in the spine, trauma, joint and sports medicine categories. The issuer is requested to explain whether the same industry competitors Johnson & Johnson, Medtronic, Syke, Sanyou Medical and other companies have the same or similar technology, compare the data and indicators of the issuer's core technology with other technologies, and further explain the advanced nature of the core technology.
In the reply, Weigao Orthopedics focused on proving that "the core technologies of Weigao Orthopedics are independent research and development", made a detailed list of each type of technology and patents, compared the parameters of imported and domestic manufacturers, and gave background explanations and use of various common patents, giving evidence that they did not involve the core technology of the issuer.
With the semi-open elastic arm transdermal minimally invasive technology, Weigao Medical gave the following chart, indicating that the issuer's related technology has achieved a relatively small extension of the arm working area diameter compared with other importers, which proves the uniqueness of the related technology and highlights the advanced nature of the technology. The other 14 technologies are illustrated using similar means.
Semi-open elastic arm percutaneous minimally invasive technology Weigao Orthopedics compared with domestic and foreign enterprises (Data source: Shanghai Stock Exchange)
After the first round of inquiries, the SSE did not raise further questions about the core technology of Weigao Orthopedics in the follow-up inquiry. In December 2021, Weigao Orthopedics was successfully listed.
Question 2: The source of the core technology is in doubt, and does the enterprise have any intellectual property disputes?
The core technology is necessary, but as far as supervision is concerned, what needs to be considered is whether the technology is firmly in the hands of the company itself.
Haihe Pharmaceutical is an anti-tumor innovative drug research and development enterprise, and Ding Jian, an academician of the Chinese Academy of Sciences, who was once the director of the Institute of Drugs, is the actual controller. With a strong founder background and the joining of many academicians, in the past era of innovative drug investment founders, it is a rising star that has been surrounded by the limelight.
With the endorsement of high-quality R&D personnel, Haihe Pharmaceutical did not arouse too much suspicion during the inquiry stage - the problem was in the Listing Committee meeting.
Although the excellent background of R&D personnel has endorsed the scientific and technological strength of enterprises, because 18 of the 19 projects of Haihe Pharmaceutical are authorized to introduce or cooperate in research and development, almost all of the R&D pipelines are license-in. It can't help but make people wonder whether Haihe relies too much on a third party to lack the independent research and development capabilities required by the science and technology innovation board.
At the Listing Committee meeting, the SSE rejected Haihe's listing application on the grounds that it had "failed to accurately disclose whether it had made substantial improvements independently and autonomously to the core products authorized to be introduced or cooperatively developed, and whether it constituted technical dependence on the partners".
The follow-up of the termination of Haihe Drugs has caused a lot of discussion, and the mainstream believes that compared with the innovative license-out, the corresponding "buy, buy, buy" model of license-in does not seem to be welcomed by the science and technology innovation board.
Similar intellectual property disputes also appeared in Anhan Technology's listing inquiry. Although the subsequent three-year patent litigation ended with "all the claims of Chongqing Jinshan were rejected", this had a profound impact on the listing process of Anhan Technology.
For enterprises, such problems are not possible to be corrected in the short term. This means that if an enterprise intends to land on the Sci-Tech Innovation Board, it must consider the self-development of the company's core capabilities as soon as possible.
Core business segments
In the context of profit-oriented to market-oriented, the sci-tech innovation board does not require the declaration of corporate profits, but it has extremely strict requirements for the market value of enterprises, and the important element of maintaining market value is business.
In each round of inquiries, the SSE will put forward detailed requirements for the core business of the enterprise, confirm that the business itself meets the requirements of the science and technology enterprises of the Science and Technology Innovation Board, and ensure that the composition of operating income is legal and sustainable, helping investors to eliminate potential operational risks and market risks.
The vast majority of companies applying for the Star Market have sufficient gold content to circumvent the data disclosure requirements of regulators. The question is, is the source of corporate data inherently legitimate? Can legitimate data confront regulatory issues?
Question Three: Is "violation" the sword of Damocles for business?
On June 17, 2020, Zesheng Technology, an innovative drug research and development enterprise, applied for listing on the Science and Technology Innovation Board, planning to raise 1.5 billion yuan for new drug research and development projects and supplementary working capital.
According to the prospectus, the company is mainly committed to the study of major diseases in the field of organ function decline such as heart failure, digestive system smooth muscle failure, and nervous system failure, and currently has 6 research projects of 4 drugs under development, of which the core drug in research is fine cardadine (recombinant person for injection) is the potential international first drug (First in Class) for the treatment of chronic heart failure.
During the inquiry period, Zesheng Technology received a total of three inquiries from the Shanghai Stock Exchange, and in the third round of inquiry, the regulator mentioned the violation of Zesheng Technology's procurement of sodium pentobarbital from Haring Company, and Zesheng Technology admitted that it violated the provisions of the Regulations on the Administration of Narcotic Drugs and Psychotropic Substances (State Council Order No. 666), constituting the procurement of controlled drugs through informal channels.
After replying to the inquiry, Zesheng Technology chose to terminate the listing.
Question 4: Can the subdivision industry really be industrialized after the competition has been acquired successively?
Although the domestic orthopedic surgical robot enterprise Tianzhihang is in the domestic leading queue, due to the late start of domestic surgical robots, it is facing the squeeze of overseas orthopedic leaders. In the case of the monopoly of overseas giants, do the late entrants have the opportunity to break the market pattern? The SSE raised the following questions:
Q: According to the Prospectus, MazorRobotics was acquired by Medtronic in 2018, Medtech by Zimmer Bumy in July 2016 and MAKOSurgeical by Stryker in 2013. Please explain whether the acquisition of the above three comparable companies indicates that the business itself is difficult to marketize, whether there are potential technical flaws, and whether there are obstacles to market promotion and large-scale application of the company's products in light of the sales situation in the first half of 2019.
In the reply letter, Tianzhihang regarded the acquisition as the affirmation of the head enterprise to the startup, and the enterprise said: If there is already a technology or product with a certain maturity in the new field, and the international medical giants have not yet formed self-developed technologies or products, usually the international giants will choose to merge, quickly enter the new field, complete the technical curve overtaking, and combine their own mature product system to produce a coupling effect and achieve monopoly profits. For the problem of scale obstacles, Tianzhihang directly replied to the inquiry of the Shanghai Stock Exchange with the 25.23% increase in sales revenue in that year.
After as many as five rounds of inquiries, Tianzhihang was successfully listed and became the first surgical robot enterprise on the Science and Technology Innovation Board.
Shareholding structure sector
In terms of institutional innovation, the Science and Technology Innovation Board draws on the dual shareholding structure of the United States and establishes "special voting rights" to protect the rights and interests of small and medium-sized shareholders as much as possible. However, despite this, many enterprises still have remnants of VIE and red-chip structures when submitting prospectuses, or present more complex equity structures due to the participation of various funds. Therefore, when inquiring, the SSE will first guide the enterprise to sort out the equity structure, clear the relevant agreements, and let the equity of the prospectus "understand".
For this sector, the SSE's attitude towards enterprises is relatively mild, as long as it can clearly explain its own equity, there are no related parties to important business, and can give solutions to residual structures, it can usually get the acquiescence of regulators.
Question 5: Can the company successfully list the company after the emergency suspension of the VAM agreement?
Listing with VAM agreements is common among innovative technology companies, but can the Star Market tolerate companies listing at risk?
IvD leader Shengxiang Bio made a total of four bets at the time of filing, and the parties to the agreement included Suzhou Reedy, China Cinda, Anhui Zhidao and many other enterprises. For the inquiry of the Shanghai Stock Exchange, Shengxiang Bio said that there was no agreement trigger during the betting process.
Besda, the "king of VAM", signed eight VAM agreements in seven years, covering a variety of VAM types such as performance VAM and listed VAM. In the process of development, Besda has compensated for two performance failures, and there are still agreements that have not been cleaned up.
Judging from the results, Shengxiang Bio did not receive multiple rounds of inquiries because of the existence of the VAM agreement, and the subsequent successful listing; while Besda, despite the existence of multiple VAM bets and the emergency suspension of some bets before the listing, Besda did not continue to ask relevant questions in the second round of inquiries after Besda truthfully disclosed the details of each VAM and the performance of the contract. Therefore, although Besda withdrew the application in the follow-up, from the content of the inquiry letter, Besda's withdrawal had little to do with the VAM agreement.
In this way, the SSE has not interfered too much with the existence of the VAM agreement, as long as the company can fully understand the risks of investors, the existence of the VAM agreement may not be harmful.
Question 6: Can "three types of shareholders" be recognized by the Sci-Tech Innovation Board?
The difficulty of penetrating and verifying the "three types of shareholders" is easy to produce problems of share holding and interest transmission, and it is easy to conflict with the review requirements of "clear equity and stable equity structure" of IPO, which once became a problem that many enterprises must deal with before IPO.
The attitude of the Shanghai Stock Exchange towards the three types of shareholders is relatively mild, gradually changing from "strict prohibition" to "gradual liberalization", but the company has raised multiple rounds of inquiries about the three types of shareholders of Besda, Shengxiang Biological and other enterprises, and still hopes that the company can eliminate the three types of shareholders as much as possible.
Question from Besda: There are contractual funds among the company's existing shareholders, with a total of 303 shareholders. The issuer is requested to disclose the transitional arrangements related to the "three types of shareholders" and the impact of the relevant matters on the issuer's going concern.
In response to the above problems, Besda disclosed the situation of five "three types of shareholders", indicating that 1 fund will be converted into a closed fund, and 4 funds that cannot be converted into a closed fund will no longer increase capital, and promised that the 5 funds will exit through the secondary market reduction after the issuer is listed. Shengxiang Bio was also questioned about the three types of shareholders, but its liquidation has been completed during the operating period, which has not triggered questions from the Shanghai Stock Exchange.
Financial Information Section
In the inquiry session, about 20%-40% of the SSE revolves around financial information. Therefore, applying for the Science and Technology Innovation Board puts forward higher requirements for accountants, sponsors and other capital market "gatekeepers".
Nokonda, a pharmaceutical technology enterprise, was one of the two enterprises that launched the on-site supervision of the sponsorship business of the Science and Technology Innovation Board on the Shanghai Stock Exchange in the early stage, and because it did not disclose the related party transaction of 105 million yuan between Nokonda and Yijia Xinchuang (the legal representative of the issuer's spouse's mother), its Debon Securities sponsor representatives Liu Taotao and Deng Jianyong were given regulatory warnings for failing to perform their duties.
This incident is likely to affect Nokonda's trip to the science and technology innovation board. After the round of inquiries, Nokonda voluntarily terminated the listing application.
The Sci-Tech Innovation Board cannot tolerate financial fraud, fraudulent issuance, etc., and in the financial information section, the most detailed questions are usually given. In addition, without true, accurate and complete financial information, even if it passes the inquiry stage, it may be rejected at a listing committee meeting. Therefore, investors will pay attention to the strength of the sponsor, the reputation of the reporting accountant in the capital market and the ranking of the China Certified Public Index Association, the audit experience in the TMT and other science and technology innovation industries, and the ability and qualification in IT auditing.
A total of 112 medical companies have submitted prospectuses since the opening of the Star Market, and the sponsors and accounting firms have chosen as shown in the figure above (Data source: Arterial Network; finishing time: March 8, 2022)
Question 7: With the same revenue but huge differences in production capacity, is there a possibility of data fraud?
Keqian Bio is a company focusing on the research and development, production, sales and animal epidemic prevention technical services of veterinary biological products, and is one of the first enterprises to submit a prospectus on the Science and Technology Innovation Board. However, after the prospectus was made public, it was questioned by the media due to doubts about production capacity data, major customer data, and gross profit margin. In response to the above questions, the SSE raised the following questions:
Q: During the reporting period, the revenue contribution of the issuer's live vaccine and inactivated vaccine was roughly similar, which was the main source of revenue for the company's business. However, comparing the production capacity, the capacity utilization rate of live vaccines in 2018 was 98.93%, while the capacity utilization rate of inactivated vaccines was 65.84%. Issuers are requested to disclose the specific reasons for the large difference in capacity utilization rate of the two vaccines in light of the difference in market demand, the difference in the number of production lines, the difference in production capacity, the difference in sales volume, etc.
For this problem, the production capacity of pre-science bio for live vaccines and inactivated vaccines is divided into poultry and pigs, and in terms of market share, the market size of live vaccines and inactivated vaccines in the pig market is similar, while the inactivated vaccines in poultry are roughly twice that of pigs. Therefore, although Keqian Bio is selling well in the pig market (capacity utilization rate of 98.93%). However, in order to further occupy the market, an additional poultry inactivated medical production line has been introduced, and this part of the newly introduced production line has not yet found a buyer, so the capacity utilization rate of inactivated vaccine is lower than that of live vaccine.
Question 8: What is the reason for the difference between the gross profit margin and the same industry?
The difference between gross margin and peers is a problem that many companies face. Gross margins that are too high or too low compared to their peers often raise questions. In the previous question, the gross profit margin of the vaccine company Keqian Bio was increasing, as high as 80%,while the gross profit margin of Jiahe Meikang, which had newly entered the science and technology innovation board, sold medical IT software, but the gross profit margin fluctuated only around 40%. In this regard, the Science and Technology Innovation Board has raised the following questions.
According to the reply of Pre-Keqian Biologics, the innovative veterinary vaccine product technology developed by it is still in the patent protection period, and there are fewer companies that can produce such vaccines. Therefore, the protection of the patent period and the gradual increase in the size of the market, the gross profit of pre-science bio has also increased.
Jiahe Meikang did not carry out any packaging when answering this question, directly took out the gross profit margin data of Maddy Technology, bluntly said that the hospital has improved the acceptance standard for electronic medical records, in order to improve the implementation quality to meet the hospital acceptance standards, the external procurement of technical services led to higher costs and lowered the gross profit margin.
In addition, the smart medical new additions from January to March 2020 are also high-cost projects, such as the electronic medical record project of Hainan Cancer Hospital Co., Ltd. (gross profit margin -222.64%), and the electronic medical record project of the Department of Psychology of Beijing Chaoyang Hospital affiliated to Capital Medical University (-5.06%) further reduced gross profit. For medical IT companies, the investment in the landing of new products is indeed necessary.
Jiahe Meikang, Maddy Technology Electronic Medical Record Gross Margin Data (Data Source: Science and Technology Innovation Board)
It is worth noting that Maddy Technology has long been at the forefront of gross profit in the medical IT industry, and compared with the same industry, the gross profit margin of Jiahe Meikang is not high. In this case, the company can reply to the question as long as the data is truthfully given.
Under the fine inquiry, how do enterprises respond?
For enterprises, the science and technology innovation board is a double-edged sword. Success in ringing the bell naturally means victory, but if the bell rings fail, the company will pay a high cost of listing, face possible financial difficulties, and be questioned by the general public. Therefore, before applying for listing, it is best to think clearly about the purpose of listing, the timing of listing and the possibility of listing.
Judging from the many requirements of the science and technology innovation board at this stage, the attributes of science and technology, patent situation and other issues have touched the core of the enterprise, and these problems cannot be solved immediately and need time to pile up. Therefore, if a company wants to apply, it is best to set goals 1-2 years in advance and start the preparation of core issues early.
The imperfection of the information disclosed in the prospectus usually brings a large number of small and cumbersome problems in the inquiry process, and while aggravating the inquiry work of the auditors, it also pushes the 2-3 rounds of inquiry to 4-5 rounds, resulting in some companies having an inquiry period of more than one year. In other words, as long as preparations are made, most of the problems mentioned in the inquiry process of the Sci-Tech Innovation Board can be effectively avoided.
Therefore, in the current situation where the declaration of the science and technology innovation board is not mature, a good sponsor institution, a good law firm and a good accounting firm can help enterprises bypass many detours.
*Cover image source: 123rf