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Interview

Paul Boltz
on Current Legal Issues in Chinas Healthcare Space
n this issue, GBI talks with Paul Boltz, a partner at the Hong Kong office of Ropes & Gray. Paul shares his insiders perspective on recent transactions and listings in the healthcare space including Microport and Sinopharm. He also discusses a variety of current legal and regulatory issues in the sector such as FCPA and IP considerations and discusses the healthcare business environment and outlook going forward.
GB: Paul, thank you for joining us. Perhaps, you might start by giving us a little bit of your background as well as that of your firm and what type of activity you focus on. PB: Thank you. Im very glad to be here and join you to have this talk. Im a US securities lawyer and based out of the Hong Kong office of the law firm of Ropes & Gray. I work mainly with Chinese companies in the life science and tech areas in their offshore listings- be it in Hong Kong or US listings. GB: Is that something that the firm is also focused on or thats your particular area? PB: Ropes is a US firm, based out of Boston. I think due to its Boston history, we actually have a very deep life sciences bench- both on the IPO side as well as licensing, joint ventures, patent defense and related IP matters. The firm has a large presence in pharma as well as medical devices, and that is actually one reason I joined. It is just a good fit with my practice, working a lot with life sciences companies out of China in conjunction with their expertise globally in this area and the relationships they have with people like Pfizer and other big multinationals as well as the smaller companies such as Genzyme, one of the original biotech companies in the United States. GB: So obviously, this is the China Pharmaceutical and Biotechnology Review. Our listeners and readers have a particular interest in healthcare, pharmaceutical and the medical device area. Can you comment on what the sectors are looking like from a transaction/ deal activity perspective these days? PB: Thats a good question. I think we are still in a period where the markets remain volatile. It goes month to month, quarter to quarter. We have seen many deals closing recently in New York in the life sciences area and in Hong Kong as well. For example, there was a UBS-led deal for a medical device manufacturer just recently that went off successfully. So the markets, I think, are at this moment definitely open for these kinds of companies to go out. In China, generally speaking, the sectors and sub-sectors that get hot change over time. A lot of it is momentum. One company/one area will go successfully and everybody says, Who are the other companies in this space that we can take public? Bankers will descend on these companies; private equity money will find them and say (for example) Everybody is really into minimally invasive medical devices. Lets find who the players are in that space. Its been that way ever since I came in 2000. It started with the internet companies, then the wireless companies got out, and then solar companies got hot. So I think we are seeing different companies in subsectors within pharma, medical devices, medical services, and distribution all going through

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The advantages of the Hong Kong market are: youve got an investor base that is very China focused. They get China; they follow it very closely.

these phases to some degree with the biggest players getting out first. Now people are scratching their heads, Who are the smaller players that could also come out? A good example would be pharma distribution, which is a fragmented industry in China. One of the biggest players there is, SinoPharm, recently listed in Hong Kong. It was a very big deal- over a billion dollars with UBS taking the lead. There are also some companies in the distribution space who went to the US like China Nepstar which listed in New York; its mainly a regional player. So in this fragmented industry, we see a lot of private equity money looking at different companies in this space, saying Who could be the next one that is good enough to get them out the door? GB: Do you find that if there are listings within China either on the Shanghai or Shenzhen GEM board, etc. does that also fuel excitement in a similar fashion or are you talking mostly about successful foreign listings? PB: Actually, its both. You are absolutely right. These feed on each other- the different markets. It ebbs and flows over time. A couple of years ago, it was quite popular for everyone to talk about listing on the AIM market in London. AIM representatives were coming out to China and joining with local governments to promote small companies, and it was seen as a way for smaller companies to get a chance to exit even if they couldnt get the attention of the big investment banks like Goldman Sachs or UBS. But in fact the popularity of AIM as a market for Chinese companies seems to have peaked because its seen not to have great liquidity or great analyst coverage. Its not really the kind of exit a lot of people want. Now ChiNext (Shenzhen GEM board) steps in; it has quickly become a very legimate market on which a Chinese life science company could list. Traditionally, life science companies would consider the U.S. markets to be a first choice, and there are a number of reasons for that, which remain true today - (the US markets are) perceived to have better valuations for life science companies, more specialized institutional investors who really follow these companies not just life sciences generally but the individual subsectors of companies specifically and listing in the U.S. can raise the profile of companies.. But then we see a good recent example going the opposite direction: there is a medical device company that primarily focuses on stents- Beijing Lepu, which interestingly enough had received a significant investment from an offshore private equity firm. It was not only onshore money, but also an offshore private equity investor was one of the primary drivers. They took them to Shenzhen to list, which was somewhat novel and it got peoples attention. Thats the kind of an interesting trend that I think we are going to see more and more of. That they could list successfully and receive a high valuation signaled that a life science company in China doesnt necessarily need to list outside the country. Of course, the flipside is if you are able to do an offshore IPO, you dont have to go through the CSRC government approval process in Beijingwhich is seen to be a bit of a black box who gets approval, who doesnt, how/where are you in the queue and when is queue is going to end? Those are very fundamental issues that make a lot of companies pause and say, Well, if I could get offshore and list offshore, Im going to do it because I can control the timing more so than waiting on the government to say green light - now you can go. So basically, what I perceive right now is: still the US is a popular market for Chinese companies in this area although we are seeing recently that the deal sizes are getting smaller. It used to be that in the United States an IPO that raised less than USD 100 million would be considered a small deal. Now we are seeing US IPOs by Chinese companies that are regularly under USD 100 million, even under USD 75 million- smaller deals but nonetheless successful. Companies are getting out and getting the analyst coverage they want and they seem to be doing well. Hong Kong has really taken a big step forward in this area also. Most people know that historically, Hong Kong was mainly real estate, manufacturing, and traditional industries. It was not perceived to be a place where companies would get the kind of reception that they would want if they were on a high growth trajectory. That is evolving quickly and SinoPharm Group is a good example. That is a large company with a parent company which is also listed in Hong Kong. Accordingly, going to Hong Kong with their background makes sense given the involvement of their parent company who is also listed in Hong Kong. But now, one IPO that we had led was a smaller company that I think in another market in earlier years would have definitely gone to the US but chose to go to Hong Kong- which was Microport Scientific. I thought that was a good example of showing that big banks and big investors are just as happy in many respects now to invest in a Hong Kong listing as they are in a New York Stock Exchange listing. I think Microport is indicative of the pipeline that we are going to see. Some of the advantages of the Hong Kong market are: youve got an investor base that is very China focused. They get China; they follow it very closely. I am always impressed when we meet bankers and investors who really understand the ongoing healthcare reforms in the China market, which is a key driver for a lot of these companies. A big part of their story is the healthcare reforms; how does this affect your industry? How does it affect your company? And investors here,

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they know this. They follow it and they keep track of it and ask questions like Is it really being implemented? Is that money being spent? How are you seeing it? How is it affecting your relationships with hospitals? For many companies, that kind of interest and support is really very valuable whereas in the US, you might have some investors who are very attuned to that, but by and large its going to be more a little more distant and blurred view of the market here. GB: I think thats an excellent point. Something that we have observed over the past is that quite often the set of expertise required for life sciences and healthcare investments and the set of expertise for China often were two completely non-overlapping circles, and its only more recently that youve seen investors sophisticated in both. I dont know if its a chicken and egg thing as you appropriately point out- I think there is a lot more interest and activity in recent days. I think thats a very valid point. PB: If I can make one more point on that while we are on this subject- One other development, which I think is a great development for this industry and should get everybody more excited, is that historically the investment banks who are really to a large extent the drivers of these offshore listings and the onshore listings too- they didnt have big specialist groups focusing on life science companies here. The groups would be in New York and San Francisco and few other places around the world. Maybe there would be sprinkling of few people here, but there was no commitment to having an industry-focused banker support group of people who just work with these companies and can sell these companies. Now, at this point in time, we work with healthcare groups of half a dozen different banks. Theyre based here and staffed by Chinese speakers who know Chinese companies. That is a huge development in the market and will really benefit companies here because theyll get the attention and the support that they need as they prepare for and execute on their IPO. For example, giving these companies a really good, granular idea of what their valuations should be, which is such a key thing when you think about an IPO. You are not doing the IPO for fun; obviously youre raising money for your business and valuation is the key component of that. How do you stack up against other people in this market and other markets worldwide who are in similar businesses? We have very sophisticated groups now who are tracking a large number of Chinese companies and really understand that information very well. GB: Let me, if I may, focus a little bit more on MicroPort which you mentioned. I think thats a company, at least in my experience when I first came to China about 5 years ago now, was one that was already very much on peoples radar screens. I think it took a little bit longer than most people were expecting for that IPO to occur. Were there strategic reasons why they waited or is there anything that you can share with us about the timing of that? PB: Definitely. Much of this has been publicly disclosed, so we can talk about it freely. Its an interesting situation and I think its emblematic of the challenge life science companies face-whether its multinationals coming to China or home-grown domestic businesses. They were a business on a fast growth trajectory. They had a management team in place, products in place, revenue coming in, a distribution network, relationships with hospitals. They had all the pieces in place for future growth and a business model- a sustainable model for offshore listing, and they had support and attention of large investment banks, who were ready to bring them out. It was at that point when I first became involved in the company. Really, it was sort of a classic China story, you might say, this was a couple of years ago- during the period when they (China) were first starting to tackle again the issue of the SFDA and how was it operating internally, which has been a persistent problem for some years now. During the really first big top-down clean-up that was publicly done by the Chinese government, the top official at the SFDA was arrested. His right hand, who handled the pharma division, and his left hand, who handled the medical device division, were also arrested. As it turned out, in the trial of the medical device chief (for lack of a better word), the court record shows that he did take bribes and it provided a list of companies that paid them. It was a wide ranging list. There were quite a few companies on the list, including a very high profile, large market cap Hong Kong listed company that had already listed. MicroPort was also on that list. Its interesting because from a lawyers point of view- in the United States we have the Foreign Corrupt Practices Act, which regulates corruption and corrupt activities. With the FCPA, the penalty is applied against the person who pays the improper payment, the bribe- whatever form it takes. But in China, its a different arrangement: its the person who asks for the bribe, who coerces the bribe out of the company that ordinarily wasnt planning to pay a bribe that is actually legally responsible. So in this case, for all these companies that were listed, none of them to my knowledge was ever prosecuted. MicroPort certainly never was. It was actually the SFDA official who was sent away, along with his wife and many other officials.

Now, at this point in time, we work with healthcare groups of half a dozen different banks. Theyre based here and staffed by Chinese speakers who know Chinese companies. That is a huge development in the market.

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Even if you do have compliance problems, it is possible to actually fix it and move on with life.

I think life science companies in China face this all over the country- whether its the central SFDA, the provincial (FDA) office, or the hospital you are selling to. The hospital administrator may say If you want your products in here or if you want your products included in the pricing tender we are doing for the province thats going set the prices (and if youre not in that tender, then you cant participate), then you need to do X, Y and Z. Weve come across companies that are put in this situation. Unfortunately, for companies like MicroPort, theirs was publicized in this trial. But at the end of the day, what happened was they suffered no legal ramification because here (in China), they have actually not broken the law. So, the decision was made that their business was really quite sound and after dealing with that whole situation, the company was actually able to relaunch their project. And it turned out to be extremely successful- very over-subscribed and quite popular with the investors. I think that shows two things: one is that even in MicroPorts case, the payment that was mentioned in this court trial happened years before any kind of listing. So that is a reminder that even things that happened in the past can still come back to affect your business. You just need to be mindful about thinking ahead. If you are working with a company that may have had compliance problems in the past- just the fact that its in the past doesnt necessarily get you off the hook. You really need to think about How am I going to deal with this? When it becomes scrutinized, and these things more often than not become scrutinized when you bring in lawyers like ourselves, auditors, bankers and their lawyers, and the public, the company is looked at very carefully. The second point is that even if you do have compliance problems, it is possible to actually fix it and move on with life. A lot of it has to do with simply making a good hard examination of the company to make sure Are our internal controls solid? Is our management team robust? Do we have a culture of compliance in this company? and in making sure all those pieces are in place and ensuring that the public disclosure makes all these very clear so that investors could say We feel comfortable. Maybe you had a blip in the past, maybe youre in an industry that is tough to deal with, that has endemic compliance problems. But we can see youve made a great effort to really do the right thing and put the controls in place. In many cases, there is no such thing as fatally tainted company or tainted industry. Thats what weve seen from these experiences. GB: Thats fascinating. You speak of the fact that the investors, if you do come to them with clean hands, the investors are willing to let you move on. How about the US Department of Justice? Obviously, youve mentioned the FCPA. Were hearing a lot about it and I believe the statement was made by the Department of Justice that the pharmaceutical industry in particular would be targeted and was put on notice. Can you give us some comments on that from the China/healthcare perspective? PB: Thats an interesting topic - you could go in 52 directions with this. Let me say this. I think these days, more so than ever before, everybody is talking FCPA all the time. I know a lot of companies are getting a little tired of being lectured constantly- a sort of FCPA fatigue. People are saying to us, We are trying to run our business. We dont want people constantly lecturing us about not doing certain things. We know we are not supposed to do them. For example, if I am the CEO of a company in Shanghai, I cant guarantee what all 200 of my distributors are doing. Its unrealistic for you to expect that so why is everybody lecturing me about FCPA? Thats a common attitude we come across and frankly, I cant blame people for thinking that way. Were not in an ivory tower here. At the same time, youre exactly right that the FCPA enforcement is really going up and they have specifically targeted pharmaceuticals. The Department of Justice and the Securities and Exchange Commission, which have co-authority for enforcing the FCPA, have both come out with at least one list of companies theyre really looking at hard. Several of them have big operations here (in China). In fact, at least one of them has almost all of its operations here. So companies that are operating here are on their radar screen. Theyre not stupid. These government agencies know where the problems are worldwide. Theyre very interested in companies being forthright about what their business operations are really about. Common questions we frequently receive are: Does FCPA compliance mean you can never do anything wrong? Or is there some wiggle room? Or if its a common practice in the industry, do we get a break? How much flexibility do we have here? It is really about people having an intention to comply but the reality is that theyre operating in this industry and the industry dictates that certain things happen like doctors may say Wed love to be promoting your product. How about a laptop? Even small gifts including red packets can constitute an FCPA violation. I wish I had the silver bullet. I dont have any magic answers for companies, but I can say the more prophylactic measures you put in place, the easier life is going to be if the spotlight ever comes to shine on you. That means, again, take the time to put some controls and procedures in. Write down

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some policies about how sales people are supposed to interact. Write policies about what your distributors can and cannot do. Make sure they are in Chinese and they are shown to these people. Make sure they are read to everybody and that employees actually get some training. It sounds a little formulaic but the more you can show that you took good faith steps to at least do your best, the easier it will be when somebody comes knocking saying Have you had a problem? Somebody comes knocking when you have that nexus, that connection, with the United States. We have now several hundred Chinese companies listed in the United States- a big chunk of them life sciences companies. By listing in the United States, you automatically become subject to FCPA. A nexus can also arise just by having US citizens in your management; for example, you may have returnees in management who might have studied in the US and obtained citizenship, which is quite common in a number of life sciences companies with which we work. The last thing you want is the founder of your company to be arrested entering a United States airport because of some allegations of improper conduct. GB: How about one more aspect, if I could coax a little more out of you- How about the whistle blower aspect of it? From my limited understanding, it seems like it rewards, dare I say entices (I guess thats the point) but rewards whistle blowers quite generously. Some have said that it actually may sort of spawn a whistle blower industry, if you will, people who go around looking for this type of thing. Is that a figment of my imagination or is there danger of this particular type of activity? Is it not really an issue? PB: Thats an interesting question. Youre right that the US regulatory set up is now (it didnt used to be) designed to reward whistle blowers. If you have something to say, then you come forward and if the government finds that there is a sustainable claim to be made against the company for some kind of wrong doing, the whistle blower can be personally rewarded. Theres money on the table for these people. You can see from the governments point of view that they are just trying to incentivize people to root out wrong doing. Ok, thats fair enough. Who could argue with that? On the flip side, weve seen in China, it spawned this very strange, negative environment where there is frequent anonymous whistle blowing going on- where its unclear who is doing it and often its even unclear that there is actual wrong doing in the company. Often, these things are motivated by personal grudges like ex-employees or competitors who get wind that youre trying to have an IPO so they lob in a complaint letter alleging all kinds of outrageous conduct including perhaps falsifying books or paying bribes. These complaint letters are sometimes sent to the stock exchange and perhaps also to your auditors, and your project stops. That can be very, very challenging. I feel sorry for companies who get into this situation because they are not getting their project done and the clock is ticking. The bill is running for all these expensive advisers. It costs real money. Theres not a lot that you can do with it unless you can prove the negative- prove that these anonymous letters -- that often come in without any supporting evidence -- are false. Youd be surprised how often weve been working with what appear to be quite solid companies- really doing well, management we feel very comfortable with, and the company is proceeding smoothly with the IPO review process in the US or Hong Kong. Then, in the middle of the review process, a letter comes in and auditors, by nature, are nervous these days they get one of these letters and its not uncommon for them to say something to the effect that Were not signing off with the audit until we get a little more comfort from somebody that this letter is false. So then the pressure is on the company to prove a negative- How can we prove that this letter is false? We dont even know who sent it. The allegations might be quite vague. (For example:) You cooked the books; your sales are false; your distributors are doing bad things. So we end up doing this exercise- it might take a few weeks or months, where you have lawyers and often also forensic accountants running around interviewing people saying Have you done anything wrong? Have you followed internal procedures? Youre interviewing distributors and customers. It can potentially be very time-consuming. The take away from this is that companies have to be on guard for this because it can happen at any time. In the competitive environment in China, I found especially in the pharma area, competition is intense, with many personal rivalries among the people who lead a lot of these companies. And people are really not shy about cooking up one of these letters, and who knows where it comes from. We have had the experience of having to conduct an internal corporate investigations in the middle of the IPO process that stops everything for a month or two or longer. If youre listing in Hong Kong, the regulators will scrutinize you extremely heavily when they see complaint letters about an IPO candidate. They give credence to anonymous letters. The SEC, which regulates this in America, frankly does not give so much credence to anonymous letters.

Weve seen in China, it (FCPA) spawned this very strange, negative environment where there is frequent anonymous whistle blowing going on.

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To the extent that one of these distributors is preparing for a private equity investment or an IPO, they really need to think about what they can put into place to make sure their network is organized and proper contracts are in place.

GB: You mentioned SinoPharm before- youve mentioned distribution as well. Thats just one area that strikes me.. you say there are regulatory difficulties across the board, but in the distribution area, in particular, we recently had a large, very large, American listed company buy a distributor here in China. I often thought that day would never come, particularly for a US-listed company because it would be very difficult to deal with a lot of the practices that occur in the distribution industry. Is this changing because companies are more bold? Or is it because there is more transparency? Or is it case-by-case particularly in the distribution industry? Even local pharmaceutical manufacturers or retailers often have a distribution component. So it seems like this is a particularly difficult area, but it seems like its happening. PB: Definitely and youre right. That part of the industry is inherently tricky. Its extremely difficult to do due diligence because the distribution networks are so broad and often there are so many layers. Its often not just one distributor from a manufacturer to end-users. There are layers and layers in between and how you diligence all these different layers that can get very fragmented. Moreover, the hospitals are state-owned and it is their physicians and administrators who make making of the buying decisions. They usually dont want to talk to outside lawyers or bankers or accountants about what their business is. So the challenge is how do we know whats happening in all these steps through the chain from this company we are investing in all the way down to the hospitals and patients. And the answer is often you just simply cannot find out. There is just no way to drill into it. But, as you said, there is a lot of interest in this space at this time. We have done, in addition to the public offering work, several private equity investments for some of the larger offshore private equity investors real name brands who take seriously things like FCPA and compliance. Those have just happened recently so theres definitely a lot of interest in the area despite the inherent issues in this industry. I would say that to the extent that one of these distributors is preparing for a private equity investment or an IPO, they really need to think about what they can put into place to make sure their network is organized and proper contracts are in place. Often, between distributors, sub-distributors, sub sub-distributors etc., the paper work between them is thin to non-existent. They dont really have a formal legal relationship in place. Maybe its not necessary in the industry, and perhaps nobody feels that as a business matter that they need much. Maybe they have a basic 2-3 page framework agreement saying Ill buy from you. Youll sell to me when I send you a purchase order- thats all about all it says. But even though its more legalistic than a lot of companies would want, think about putting in a little more robust contract that says, We believe in these principles. And we expect our distributors and sub-distributors to believe in them also, and youre not going to make illegal payments. The point is not to be hyperlegalistic or to be hectoring your distribution network thats sending out products across the country but again, its sort of a clean hands approach. How am I going to show private equity investors or the investing public in an IPO that Ive taken reasonable steps to make sure that my business is well-run? GB: Well, first of all thank you. I think youve covered a lot of interesting topics that Ive asked you about and youve responded to them quite in depth. Is there anything, in a more general sense or in a different area that you think youd like to share. Many of our listeners are executives in pharma/healthcare companies that are doing business in China or contemplating coming here to China, perhaps with a certain amount of trepidation. Is there a general advice that we havent touched on that you care to share? PB: Well, its not a surprise that a looming issue throughout all this is IP protection. It typically comes up- not so much in the area of life science distribution companies. Those companies typically dont have much proprietary IP. Their value is really the network itself. But for medical device and pharma, obviously, thats a big component. We have seen IPO projects get slowed down or derailed due to unclear IP rights. Often theres a blurring of ownership rights among several different companies or perhaps half the patents in China are registered under the name of the founder of the company. In those kinds of situations, we need to look at who really owns the IP rights. Its complicated further with the new patent laws that went into effect that now require companies to actually pay employees specifically if they make an invention in order for the company to own the patent. Our experience is that some companies are not complying as robustly as they might, and when the spotlight gets shined on the company as it always does during the IPO process, this can

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become an issue. You dont want to be in the position where youre trying to get an IPO done and find out that two or three key employees have invented most of your products and its not clear that their inventions have been assigned over to the company. You dont want them holding the company hostage- at that point its too late because they can see the leverage they have. Weve also seen a growing trend - not of IP disputes between Western pharma and Chinese companies, which used to be a classic type of concern (that Chinese or Indian companies were somehow infringing on IP and MNC pharma would have to come here and enforce their rights) but a new trend, which I find very interesting, is domestic companies vs. domestic companies in IP battles. The court system in China for complex IP disputes is not as developed as it is in the US and these are very esoteric disagreements- very technical in nature. So when you have a patent dispute in China between two domestic companies it is difficult to predict how it will play out. If you have a complex IP dispute like that and you are trying to list offshore (and probably relevant to a domestic listing in China) it can make for a very messy situation. Investors may say This is the stereotypical life science company in China. Their IP rights are very messy, they must have stolen something, they have all these lawsuits we dont want to invest in this. It makes people have a knee-jerk reaction, even if it is not necessarily true. It may be a bona fide IP dispute and both companies may not have any criminal intent to steal IP. But, for Chinese companies, I think they are susceptible to being scrutinized unduly for that, even in a bona fide situation. So it will be interesting to see if we have more of these domestic company vs. domestic company disputes and what kind of effect that will have on the offshore listing process. Also there is one trend, probably more relevant to domestic companies than multinationals operating here, which is incentivizing your workforce- a big issue relating to motivation, retention, etc. For life science companies in China, and technology companies as well, employees have become really quite sophisticated about getting equity compensation like stock options, which were once more of a novelty and rank-and-file staff did not really understand what they were. Now were seeing more sophistication among at least mid-level managers and more senior staff. This has led to a lot of equity compensation grants by companies, sometimes over a course of years, as they do their Series A round of financing, Series B round of financing, etc. they give grants to keep key employees tied to the company with the promise that there will be an eventual IPO and they are going to get the big prize of the ability to cash out their options. In the volatile markets we are now having, for some companies IPOs are getting delayed far longer way more than management or staff expected, and this makes employees not too happy. Conversely, were seeing some companies that IPO successfully, but the stock price sinks quite quickly, which has happened to quite a few companies. Bearish markets can lead to disgruntled management and staff because you have options priced at a certain levels and if your stock price is tanking, their options will be underwater. So we see a number of companies struggling with these kinds of issues now, which I suppose on some level shows that the industry is really maturing because these are all issues that have been going around the life sciences industry in America for a long time. But were just now dealing with them for the first time (in China). For some of the companies with which I work, they had been in a habit of granting options month-in and month-out forever- it was a way of printing money. But with underwater options or grants of restricted shares whose value has declined dramatically, it forces the board and management to ask questions such as Should we redesign our compensation structure? or Should we cancel the options and regrant them a lower price? I would emphasize strongly that for pre-IPO companies, if you get this wrong- if you handle your equity compensation in the wrong way, not only can it disincentivize your employees but you may also end up with significant equity compensation charges on your financial statements. These are non-cash charges on the income statement. In particular, if you are listing in the US, the Securities and Exchange Commission loves torturing companies over the way they are handling their stock options. Its not just options back-dating that people are afraid of- it can be issues as simple as that you IPOd on December 1st at USD 10 share and the month before you gave options to management at one dollar a share. In that case, the SEC will often take the position that the company should reflect an equity compensation charge on its income statement to reflect the delta between the IPO price and the grant price. Companies can get stalled arguing with the SEC over issues like that. So it affects the IPO process; it affects your exit; it affects how you are going to retain your employees.

For pre-IPO companies, ... if you handle your equity compensation in the wrong way, not only can it disincentivize your employees but you may also end up with significant equity compensation charges on your financial statements.

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Coming to Hong Kong actually does make a lot of sense. It is a deep liquid market and compliance costs are quite a bit reduced.

GB: Interesting. And on the point of buybacks- weve had Tongrentang and companies like Sihuan that have delisted from Singapore and are trying to come back to Hong Kong as well. PB: Thats right. We get contacted often by companies listed in the US talking about doing dual listing or immigrating their listing to Hong Kong. That is a popular topic and has been for about the last year or two. Few companies seem to want to pull the trigger as there are some concerns about the cost and delisting from the US. Its actually quite a complicated process. Its not something that you can snap your fingers and make it happen. We havent seen a lot of companies actually do it, but it is starting. For example, there is a specialty chemical company here in Shanghai who sells to the pharmaceutical market and listed in New York in 2009, and thats exactly what is happening. The founder of that company has announced that he intends to privatize the company using funds from private equity sponsors. GB: I can understand that. I think if there is a feeling that theres a better understanding, visibility, and attention closer to home, whether its for a traditional Chinese medicine company, or a healthcare delivery company or other companies that may not have received the focus or attention that they would have expected in the US PB: Thats right. The stories you hear the stereotypes that the US is an expensive place to list yourself, that there is a high liability risk, risks of class action law suits being filed, or the risk of the SEC or Department of Justice coming after you. On some level, that risk is real. Your audits cost more money if you are in the US compared to Hong Kong. You probably will pay more legal fees over the long run (in the US). As mentioned earlier, there are some countervailing advantages- it is not all negative, but those considerations are real for companies that are feeling their valuations are quite low in the US or a market like Singapore, which is so much smaller. Coming to Hong Kong actually does make a lot of sense. It is a deep liquid market and compliance costs are quite a bit reduced. We work with many Hong Kong listed companies such as MicroPort and others. There is a whole set of concerns that public US companies would have that disappear when you are coming into the Hong Kong market just because there are different regulatory regimes, different approaches. GB: This has been a very fascinating talk and I really appreciate you sharing your time and certainly your expertise of yourself and firm with us. Thank you for coming. PB: Thank you for having me. I hope its helpful.

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