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Text｜Hu Xiangyun

Editor: Hai Ruojing

On August 4, Tasly announced that it would transfer 28% of its shares to China Resources Sanjiu, which became its controlling shareholder, with a total transaction price of more than 6.2 billion yuan. While the outside world was impressed by the change of ownership of the leading Chinese medicine company to the national team, the topic of pharmaceutical mergers and acquisitions has once again attracted attention.

At present, a stage-by-stage consensus in the industry is that the asset value bottom line of the medical track has basically appeared, and the time for some biotech companies to be acquired and integrated is coming: in the middle of the year, Haier Group acquired Shanghai Laishi for 12.5 billion yuan, and Boya Bio bought Green Cross Hong Kong for nearly 2 billion yuan. These two large-scale mergers and acquisitions are still vivid in our memory; earlier this year, Sinopharm and Gracell Bio were successively acquired by multinational pharmaceutical companies at high prices. MNCs such as Johnson & Johnson, Sanofi, and BMS have also announced on different occasions that they are paying attention to M&A opportunities in the Chinese market.

Is the Biotech M&A Wave Really Coming?

Recently, 36Kr and Guo Xiaoxing, a partner of the investment and mergers and acquisitions department of Zhide Law Firm, talked about this topic. Since around 2019, Guo Xiaoxing has shifted "half of his energy" to emerging tracks such as life sciences, and has provided transaction structure design, legal due diligence and other services for hundreds of investment, financing and mergers and acquisitions transactions. The pharmaceutical companies served include China Resources Pharmaceutical, Xiantong Pharmaceutical, Jinfang Pharmaceutical, Huahui Anjian, and Vitalon.

Unlike many people's predictions, Guo Xiaoxing is very calm about the "Biotech M&A wave". He believes that from the practical dimensions of integration costs and cash flow pressure, M&A is more difficult, "there will be cases, but they may not represent the entire industry."After a decade of capital pursuit, China's Biotech has seen a large amount of homogeneous construction in some areas, and the valuation premium is relatively high (there is even a situation of price inversion between the primary and secondary markets). M&A exit may not necessarily be a way out for many companies.

In contrast, product licensing will still be the mainstream form of cooperation; non-cash mergers and acquisitions and company mergers-style "grouping for warmth" may gradually increase; companies going overseas to build financing structures has also become a direction for many pharmaceutical companies to explore, such as Jiahe Biopharma's nearly US$500 million licensing of core bispecific antibody products, Hengrui Medicine's US$6 billion split of three GLP-1 pipelines, and Conoya selling the overseas rights to two bispecific antibodies for nearly US$200 million.Many Chinese biotech companies are choosing to spin off some product pipelines in a spin-off mode to tell a more "pure" American new drug story.

Among the various paths, every sub-track may mean opportunities.

The market is short of money, and the "big fish in big water" market is unlikely to reappear

Statistics from China Renaissance Capital show that although M&A transactions in the domestic healthcare sector have been decreasing in the past two years due to factors such as repeated epidemics, economic pressure, and the international environment, mergers and acquisitions in this field continued to grow during the period of 2019-2021 when the market was hot and funds were abundant, reaching a peak of 243 in 2021, with a disclosed amount of RMB 89.9 billion.

During that period, Guo Xiaoxing's clients were "mainly medical device companies, and at least half of their founders had investment banking backgrounds." They knew that the capital market favored large-scale, high-income companies, so they formed technical teams, quickly obtained evidence and sold, and continued to carry out multiple rounds of "financing-mergers and acquisitions", and even went overseas to Southeast Asia and South Korea to acquire companies. "After they acquire equal or smaller companies as buyers, their size can often achieve geometric growth."

But such rules of the game are difficult to replicate in the current innovative drug market.

First, in the field of innovative drugs, integration is more necessary and difficult. Guo Xiaoxing mentioned that when acquiring a medical device company, both parties have a tacit understanding: after the buyer has basically mastered the R&D work, production links, and supply chain of product improvement, the management team of the acquired company will gradually withdraw from the company.

"At that time, the transaction structure we made was mainly based on a 2/3 cash consideration and 1/3 equity consideration model, but the equity held by the seller would basically be bought out in the form of old shares in subsequent financing and other links, and the participation of the seller's management in corporate management would gradually decrease. There were no particularly serious problems in team integration, such as hiring lawyers to sue after a few years."

However, unlike the simple logic of medical device companies to acquire products and expand the market, in terms of the timing of mergers and acquisitions, the product pipeline of Biotech is often in the early stages when it is acquired, and it will usually take 2-3 years before it can be put on the market. "The original team needs to maintain a certain level of R&D investment to promote pipeline registration, indication declaration, and clinical planning at home and abroad, etc."

On the other hand, money is also an issue.

Biotech acquisitions are often quite large. For example, in April this year, the acquisition price of ADC company Pufang Biopharma was as high as 1.8 billion US dollars. At present, although there are some central state-owned enterprises with strong financial strength in the market, many multinational pharmaceutical companies have also expressed their willingness to acquire in China this year, such as Johnson & Johnson, Sanofi, BMS, etc. However, "in terms of payment mechanism, there are still very few companies that can afford to pay hundreds of millions or billions of cash for acquisitions at one time.I estimate that there are no more than 20 domestic and foreign buyers in the Chinese market.”。

In an absolute buyer's market, "everyone either has no way to find a buyer, or they all look for the same one"This directly affects the valuation and price. Some of the shares that are swapped may not be able to cash out immediately.

In addition, if an acquisition transaction is conducted in the form of a share swap with an overseas listed company, the target company generally needs to build an overseas red chip structure before exchanging shares. This also means a large amount of shareholder communication costs and tax costs for some Biotech companies whose current holding companies are in China.

Objectively speaking, after 2022, although the scale of equity financing in the medical field began to decline, there were indeed some complementary acquisitions made by both parties under the premise of matching goals. "But in the context of such a large market scale in China's biopharmaceutical field, it is not very representative, and it is difficult to call it a clear M&A peak. These acquisitions that took place in 2024 might not have attracted as much attention as they do now if they were placed in the period from 2019 to 2021," Guo Xiaoxing believes.

Judging from the data, if RMB 500 million is used as the threshold, there will be only 22 domestic medical mergers and acquisitions cases above this threshold in 2023, accounting for less than 17% of the total, a decrease of nearly 40% from 2022.

Therefore, both shareholders and start-up companies need to be prepared to not be acquired and to find more diverse ways of cooperation.

Buyer: Greater opportunities with less investment

According to Niuke Research Institute, in 2023, the total number of cross-border license outs in China's biopharmaceutical field reached 53, with a disclosed transaction amount of US$42.59 billion; in contrast, there were only 21 license in projects, with a disclosed amount of US$4.28 billion. Product licensing and cash flow have become a recognized way for the industry to "survive the cold winter."

Guo Xiaoxing believes that compared to the corporate mergers and acquisitions that have been highly discussed in the industry this year, product licensing will still be a more mainstream transaction method. "It's not that many companies don't want to be acquired, but they don't dare to think about it. Many of my clients, especially those that have reached the C and D rounds, have valuations of a few billion or more. Everyone knows that there is actually no place to find acquisition buyers. Using BD to recover blood and prove to the capital market that the product is recognized by the industry may be more helpful in achieving its goal of continuing to raise funds and going public."

An interesting phenomenon in many BD transactions is that the ways of cooperation are becoming "more and more diverse." In the past, BD transactions often required a down payment and the establishment of an "exclusive cooperative relationship." But now, the options are becoming more diverse. For example, if it is believed that the subsequent commercial value of an early pipeline is uncertain, the down payment will not be paid first, but "a small amount similar to a deposit, such as 10-20 million RMB, will be paid in the form of an agreement to buy an option." When the pipeline produces clinical data later, the two parties will sign a BD cooperation agreement.

In the license-out transactions of Chinese pharmaceutical companies that took place this year, the exclusive global licensing option agreement for the "third-generation BCR-ABL inhibitor olerbatinib" reached between Ascentage Pharma and Takeda, and the option clause for "preclinical projects to submit IND in early 2025" in the transfer agreement reached between Anrui Biopharma and Avenzo Therapeutics both reflected the above principles.

“Essentially, this is buying an opportunity for less money."The seller can get a fee for advancing clinical trials; the buyer, with limited funds, can cast a wider net because the advance payment not only locks in the option, but also the price. For example, if the data is very good, the market price may be 100 million, but the licensee has already locked in a price of 50 million when paying the deposit, and the licensor cannot raise the price any further."

In some BD transactions involving equity, demands have also become more diverse. For example, the buyer will require the seller to invest a certain amount of the down payment back into his own company. While reducing the buyer's capital costs, the two parties can also become closer and further achieve synergy. "The overall idea is to use various innovative terms and transaction arrangements within the traditional transaction framework to try every possible way to meet the commercial demands of both parties," said Guo Xiaoxing.

From the perspective of the authorized entity, being bought by an MNC naturally means that Biotech has obtained the strongest industry endorsement. However, in the current market environment, wealthy central state-owned enterprises are also becoming the target of many Biotechs. Guo Xiaoxing revealed that the team is helping some central state-owned enterprises to acquire innovative products, or to cooperate with mainland and Hong Kong universities in the transformation of scientific and technological achievements.

He mentioned that in this type of cooperation, the buyer basically only looks at the "latest and most cutting-edge research results". Therefore, from the perspective of a legal advisor, he and his team will focus on due diligence on intellectual property and patents to ensure that "the patent can really be applied for" and sort out problems and flaws in the compliance process, such as whether the equity structure of the start-up company is reasonable and whether the division of intellectual property with universities is clear.

Telling the "American Story", another new direction for going overseas

Compared to the peak period in 2021, the current valuations of pharmaceutical companies in Hong Kong and A-shares have mostly dropped to 30% of the original level; in contrast, although the Nasdaq Biotechnology Index has also declined, it can still maintain 70-80% of its peak. "We have observed that, for the same type of biotech products, the valuation calculation methods and logic in China and the United States are indeed different."

Therefore, against the backdrop of an overall tightening of domestic IPOs, “overseas financing” is becoming a new direction for some pharmaceutical companies to explore.

In the past, when doing overseas business, Chinese pharmaceutical companies’ thinking was to directly set up subsidiaries, transfer technology and rights and interests to them, and carry out commercial operations under their names. However, currently, affected by geopolitical issues, a new “parallel structure” has begun to attract attention:That is, there is no equity relationship between overseas companies and domestic companies. The management, shareholders, and teams are all localized structures, allowing "Chinese Biotech" to be completely transformed into "American Biotech", thereby enjoying the higher valuation of biopharmaceutical companies in the US capital market and a wider range of financing channels.。

Simply put, it means telling an "American story." Guo Xiaoxing first sensed this sign when "the financing market completely cooled down last year." Today, this tendency has become particularly evident among founders who "have overseas backgrounds, especially those who have worked and studied in the United States for many years."

This year, similar successful deals have gradually landed. On August 5, Jiahe Bio just announced that it had established TRC 2004 in the United States with two US dollar funds, Wo River and Third Rock Ventures, and licensed its core CD3/CD20 dual antibody pipeline GB261 to it. The total transaction price reached US$442 million;

In mid-May, Hengrui Medicine split three GLP-1 pipeline assets for a total price of US$6 billion and authorized them to Hercules, which is also a typical case. The latter was newly established by veteran PE Bain Capital and others in early May. Hengrui holds a 19.9% ​​stake, but does not constitute the actual controller. An investor once told 36Kr that if Hercules continues to follow the development path of US Biotech, it means that it is expected to become Hengrui's "half investment platform" in the future, and it can also enjoy its benefits through pipeline asset authorization and acquisition/IPO by MNC.

The company's "parallel structure" for going overseas

Compared with the subsidiary model, the advantage of such a "parallel structure" is that the overseas business entities have a higher degree of international recognition, because most of the shareholders have overseas backgrounds, the financing/IPO exit path is smoother and less affected by political factors.

In the context of a sluggish domestic market, this will become an important way to alleviate the operating pressure of enterprises.

Objectively speaking, the exploration of this overseas business model is still in its early stages, and there are still some questions to be answered. For example, for domestic investors, after the assets are split, how can they, as related parties, enjoy the benefits of overseas business? In addition, for the founding team, this also means that the degree of coordination between its domestic and overseas businesses will be relatively low and management will be more difficult.

Guo Xiaoxing also mentioned that client companies that try this structure must consider how to balance the interests of domestic and foreign investors. "At present, many biotech investors, especially early investors, are facing the problem of fund maturity. They hope to get some returns first, such as distributing some cash after BD to shareholders first. Otherwise, the enthusiasm of companies to agree to this attempt may not be high."