About the Index's Methodology
The Loncar China BioPharma Index (LCHINA) seeks to track the performance of a basket of companies that are leading China’s biotech revolution. With a focus on innovators, the index contains China-focused pharmaceutical companies, biotech companies, drug manufacturers, diagnostics companies, wholesalers, distributors and service providers. China’s biopharma industry is on the cusp of a global revolution as regional companies develop innovative new medicines that will benefit patients both at home and abroad. The goal of the China BioPharma Index is to give investors a better understanding of the region by highlighting major companies involved and providing a metric to track their progress.
The index was designed to capture contributions from companies both large and small. It utilizes a modified equal weighting methodology that gives modest extra credit to larger companies for their size and stability but also has substantial exposure to smaller innovators. We believe that having a wide mix of companies, but not doing so in a way that concentrates too much on giants and minimizes smaller companies, provides the best way of measuring the region's growth. The index aims to capture both the significant potential of the industry as a whole and the entrepreneurial spirit of innovators that are transforming it today. The total number of components is based solely on the number of companies that qualify for inclusion and will vary each time a semi-annual reconstitution and rebalance occurs.
The index provider believes that most innovators in the region will list either on Nasdaq or the Hong Kong Stock Exchange going forward. These markets have the deepest pool of sophisticated biopharma investors and high corporate governance standards. Nasdaq and HKEX's global presence and ease of access also make them well suited for investors who want to track an index. We believe it is regional leaders with global ambitions who choose to list on these exchanges that will power China’s biopharma revolution ahead. Therefore, we have limited LCHINA inclusion to companies on Nasdaq and HKEX at this time.
The process for reconstituting and rebalancing the index is as follows:
First, companies listed on Nasdaq or the Hong Kong Stock Exchange are filtered for their focus on growing China's biopharma industry (biopharma is a term that means innovative pharmaceutical or biotech medicines). This can include pharmaceutical companies, biotech companies, drug manufacturers, diagnostics companies, wholesalers, and distributors. Since our index is focused on the innovative side of the biopharma industry, those that focus strictly on manufacturing active pharmaceutical ingredients (API's) are not included.
Second, companies are screened for their roots in China and focus on this territory. If a company's principle headquarters is not located in China, it must be determined by the Index Provider to have at least 51% of its product revenue and pipeline value tied directly to the China market. The index is meant to chart the growth of China biopharma leaders so only companies that are sufficiently focused and active in the region are included.
Third, the Index Provider excludes from the underlying index companies with any of the following characteristics:
The company’s market capitalization is less than $200 million.
The company's equity liquidity threshold does not surpass $300,000 in average daily trading volume for Nasdaq listed companies
The company's equity liquidity threshold does not surpass $500,000 in average daily trading volume for Hong Kong listed companies.
The company is currently under investigation by a government or regulatory entity.
Once the list of eligible companies has been finalized, the rebalance occurs. All companies are given equal weight and then weighting factors are applied based on market capitalization categories. Companies with a market capitalization greater than $10 billion are given a weighting factor of 1.4, companies with a market capitalization between $1 billion and $10 billion are given a weighting factor of 1.0, and companies with a market capitalization between $200 million and $1 billion are given a weighting factor of 0.7. This modified equal weighting methodology is used because we believe larger companies should be credited for their size, stability, and contribution to the economy of China's biopharma industry, but not in a way that overshadows important advances made by smaller innovators.
The provider of the LCHINA index is Loncar Investments, LLC., which was founded by independent biotech investor and analyst Brad Loncar. Mr. Loncar regularly provides his unique insights and analysis on biotech to the investment community via a variety of publishing platforms. Through Loncar Investments LLC, Mr. Loncar incorporates his extensive research into biotech companies and technologies to develop indexes focused on precise investment opportunities. He previously worked in the financial services industry at Franklin Templeton Investments, and was appointed to serve in a Senior Adviser role at the U.S. Department of the Treasury.
Each day the index’s prices and returns are calculated independently by Indxx, LLC. Quotes can be found under the symbol “LCHINA” on the Bloomberg Professional service, Thomson Reuters Eikon, www.LoncarIndex.com, and other financial data providers. The inception date for the index was February 13, 2018.
We believe that China's biopharma industry has significant potential ahead. Consumer demographics, regulatory reform, and the high quality of science being conducted by Chinese companies today are all converging together in a positive way. Our index is designed to be a global standard benchmark that the financial markets can use to quantify and track this exciting story going forward. It is our hope that highlighting China's biopharma industry in this way will create more awareness of the important biotech revolution happening there that has the potential to benefit patients worldwide.
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