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  5. Release of the Revised Version of Ito Review 2.0: Biomedical Edition

Release of the Revised Version of Ito Review 2.0: Biomedical Edition

Report of the Study Group for Encouraging Dialogue between Biotech Venture Businesses and Investors compiled

July 16, 2019

The Ministry of Economy, Trade and Industry (METI) established the Study Group for Encouraging Dialogue between Biotech Venture Businesses and Investors in November 2017, aiming to provide new medical treatments to patients around the world as early as possible through creating biotech venture businesses playing a leading role worldwide. The study group compiled Ito Review 2.0: Biomedical Edition (Report of the Study Group for Encouraging Dialogue between Biotech Venture Businesses and Investors) in April 2018. METI hereby announces that following on from the compilation of Ito Review 2.0, the study group continued discussions and revised the report based on the contents of its discussions.

1. Background and purpose

Fundraising, a foundation of research and development, is a critical matter for the successful commercialization of new medical products by venture businesses in the drug development industry. The United States has a fundraising environment in which venture businesses in the industry are able to achieve a string of new successful results. These venture businesses have been raising funds from stock markets, mainly from institutional investors, of about 35.0 billion yen on average per business and have been growing, despite posting initial losses for about decade on average per business even after having become listed. Meanwhile, in Japan, the total market capitalization of listed venture businesses in the drug development industry in the emerging markets is smaller than that in China and the ROK, as well as that in Europe and the United States. As listed venture businesses prioritize investment in research and development and tend to not record their sales or profits at an early stage, many institutional investors in Japan face difficulties in assessing such businesses, and this is considered one of the factors hindering venture businesses from succeeding in flexible and faster fundraising.

The goals that Japanese venture businesses in the drug development industry should aim for relate to commercialization of their new medical products as quickly as possible and provision of appropriate medical treatments to patients, not necessarily listing at an early stage as has been the norm. The report explains future directions for improving the fund-raising environment in Japan, including the phases following such venture listing, focusing on two key points: [i] formulating a common language to promote dialogue between venture businesses in the drug development industry and investors, and [ii] presenting the current situations of emerging markets and challenges therein.

2. Guidance for Collaborative Value Creation between Venture Businesses in the Drug Development Industry and Investors (summary)

Based on the Guidance for Integrated Corporate Disclosure and Company-Investor Dialogues for Collaborative Value Creation, which METI released in May 2017, the study group examined the characteristics of the biomedical industry, reconstructed them, and formulated this Guidance for Collaborative Value Creation between Venture Businesses in the Drug Development Industry and Investors. The study group formulated this guidance, aiming to: [i] clarify key points that venture businesses in the drug development industry should present to institutional and other investors so that the businesses will be able to obtain the investors’ understanding and [ii] provide institutional and other investors with criteria for assessing key points offered by venture businesses in the drug development industry, taking into consideration the industrial characteristics of such businesses.

This revised guidance newly provides ideal approaches to information disclosure, an area where differences are seen in dialogue topics between Japan and the United States (see Part I, Chapter 7, Section 4: Ideal approaches to information conveyance to investors).

3. Current situations of emerging markets and challenges therein (summary)

To improve the environments in which listed businesses raise funds, Japan needs to encourage businesses to achieve healthy growth in emerging markets and become attractive investment targets for institutional and other investors, and at the same time, encourage dialogue between businesses and those investors. Meanwhile, as Japanese emerging markets involve listing systems based on criteria consisting of financial indices, expanded passive management, and asset management by institutional investors associated with the Tokyo Stock Price Index (TOPIX), biotech venture businesses in the drug development industry work hard to secure short-term sales and profits, and face mid- to long-term losses in corporate value caused by early licensing-out to pharmaceutical companies and other factors. In light of these points as well, the report presents the current situations of emerging markets, challenges therein and future directions thereof.

The revised report explains activities toward the market reform in Hong Kong and the market structure reform by the Tokyo Stock Exchange (TSE) and based on this, it offers revised articles and additional information to show METI’s opinions (see Part II, Chapters 1, 2 and 5). Moreover, the revised report also provides additional information on: the importance of investors, e.g., EIR venture capitals and crossover investors, who support venture businesses in the drug development industry before and after listing; and the conveyance of information by non-listed venture businesses in the industry (see Part II, Chapters 3 and 4).

Three facts revealing the current situation of emerging markets

  1. The total market capitalization of listed venture businesses in the drug development industry in Japanese emerging markets is smaller than that in China and the ROK, as well as that in Europe and the United States.
  2. The criteria for delisting businesses from emerging markets cause many U.S. venture businesses in the drug development industry to delist.*
    *Note: Approximately 80% of such businesses were delisted from the JASDAQ market based on the earnings criteria, while approximately 35% of them were delisted from the Mothers market based on the sales criteria.
  3. The ratio of individual investors is high among the investors in venture businesses in the drug development industry in Japan. This causes institutional and other investors inside and outside Japan to avoid such businesses.

Three challenges in emerging markets and recommendations for overcoming them

  1. Designing a listing system contributing to the healthy growth of businesses that need prior investment, such as those in the drug development industry
    - Japan should embark on designing of a new system, e.g., listing criteria and delisting criteria, as quickly as possible.
  2. Promoting dialogue between businesses and institutional investors inside and outside Japan that support emerging markets and direct such investors’ attention toward such businesses
    - Japan should hold discussions as quickly as possible on: key points of information disclosure by biotech venture businesses; and enhancement of investment functions, e.g., EIR venture capitals and crossover funds.
  3. Enhancing functions for connecting emerging companies with institutional investors inside and outside Japan
    - Japan should promote discussions on: establishment of a bio index system; and ideal approaches to assessing analysts.

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