Exploring Biopharma's Dealmaking Terrain, Roadmap in China

Adam Zhang Yu, Founder & CEO, Collabrium Partners

I was asked recently to share my thoughts on the rise of Chinese biotech out-licensing deals and to predict what may happen next. Ahead, I summarize emerging market trends impacting China's biotech sector and outline a potential roadmap for the industry in the near future.

What has happened to the Chinese biotech innovation society?

For many years, China has been the second-largest pharmaceutical market in the world, trailing only the US market. China is now considered the second-largest drug innovation market in the world, next to the US.

There have been three main stages in which Chinese biotech has evolved, all of which have been broadly acknowledged.

Stage I: Before 2010, China’s pharmaceutical market was dominated by generic drugs, with international companies having significant influence over the entire market. Few Chinese biotech companies were in the market.

Stage II: From 2010 to 2020, there was a significant transformation toward an innovation-driven ecosystem, from generics to novel drugs. More Chinese biotech startups appeared.

Stage III: Since 2020, the Chinese biotech sector has experienced a notable trend toward developing first-in-class treatments, leading to a rapid increase in licensing transactions.

Why has there been a sudden influx of out-licensing deals occurring?

The nature of the market determines the form of business. Thirty years ago, when international companies first entered the Chinese market, they chose joint-venture cooperation with local companies due to a lack of understanding of the market. Twenty years ago, those international companies moved to give up joint ventures in favor of wholly owned businesses in China to enjoy 100% of the profits. Five to six years ago, a trend emerged in which international pharma companies either left the Chinese market or shifted their strategies due to changes in policy and the competitive environment.

The following principles also explain why Chinese biotech companies choose to out-license their R&D pipelines, which is one of the few options they have for surviving and growing in the current market.

1. The global shortage of innovative drugs, patent cliffs, and the pressing need for improved therapies to cure diseases, especially in biology.

This is a global issue, where we are at a stage of fading efficiency and effectiveness of last-generation medicines. Yet, a new generation of medicine is on the horizon, but has not yet fully matured. We’re in a gap age. Pharma companies are seeking next-generation therapies, especially those facing patent expirations for their notable originator products.

2. Recognition of Chinese biopharma companies' R&D capabilities by international organizations is also one of the key drivers.

Thirty years ago, China lacked sufficient high-quality researchers for drug development. Today, however, the profiles of the founding teams of Chinese biotech companies contrast that sentiment. Many are well-educated at renowned universities and research institutes across the world and have years of experience in the research departments of international pharmaceutical companies, with some even hailing from those organizations' core research teams. There are no general communication barriers; they speak the same language in science and share a mutual understanding of the development vision. Hence, their research works are recognized by peers as assets in paving the way to a transaction.

3. Lack of fundraising channels to complete development works.

Although China has the second-largest capital market in the world, it is much smaller and less flexible than the US capital market, particularly in the biotech sector. For example, the downside of the macro economy results in reduced investment in early-stage biotech companies. The suspension of IPO approval lessens the chances of biotech startups seeking funds from the public market. Biotech companies are forced to license out some of their assets to support their pipeline developments.

4. High pricing power and strong go-to-market capabilities by international companies lead to the greater success of the pipeline.

The pricing space in international markets such as the US and the EU is larger than that in the Chinese market. As a result, Chinese biotech companies going global are likely to achieve higher investment returns. By leveraging their existing sales networks, drug registration teams, and marketing capabilities, and considering that there is, basically, not a single global pharma company from China, it seems that this is an easy way to gain a global return without global operations.

What will possibly happen in the near future?

This licensing business model between Chinese companies and international companies will last for some time. However, a trend is emerging in which Chinese biotech startups are pursuing IPOs in either the Hong Kong or US capital markets. Eventually more biotech companies, whether publicly listed or privately owned, will be acquired by international firms. Therefore, in the next few years, we can expect an increase in M&A deals in the Chinese biotech sector.

At some point, large Chinese pharmaceutical companies will join the bid to acquire R&D pipelines or take over the entire business. This will increase the valuation of Chinese biotech startups, and more funds from Chinese private equities will flow into this sector.

Adam Zhang Yu is the founder & CEO of Collabrium Partners