news

Economic Observer reporter Zhang Ying and Zhou Yue After experiencing a heyday of less than 10 years, China's innovative drug industry has entered a period of great trials and tribulations.

existIPOAgainst the backdrop of tightening and conservative primary market investment, many companies in financial difficulties have been forced to sell their rights to drugs under development in exchange for cash flow.

According to statistics from the Economic Observer, as of August 10, there were 59 projects that had license-outs in China's innovative drug industry by 2024, a year-on-year increase of 47.5%. 40% of these transaction projects were in the preclinical or early clinical stages. Under the rule that the later the clinical stage, the more expensive it is, the large number of early projects being traded reflects, to a certain extent, that companies are becoming increasingly distressed.

In mid-June, Mingji Biopharma, a Beijing-based innovative pharmaceutical company that broke the global transaction record with a preclinical drug, originally planned to push the project to Phase 1 clinical trials before selling it, but due to financial pressure, it had to conduct the transaction ahead of schedule.

Business development (BD transactions) including license-out is a normal cooperation model in the biopharmaceutical industry. It can give full play to the respective advantages of different companies. For example, a company that is good at R&D and innovation sells product rights to large multinational pharmaceutical companies that are good at sales. This is very common around the world.

The current BD wave in China has a different meaning. It has become a way of financing under difficult circumstances, rather than helping innovative pharmaceutical companies maximize their own interests.

In addition to granting product rights, some innovative pharmaceutical companies have chosen to "sell themselves" directly. Since the end of 2023, four Chinese innovative pharmaceutical companies have been acquired by multinational pharmaceutical companies.

This has caused a concern in the market: now that good drug seedlings have been bought up, can China's innovative drug industry still grow bigger and stronger?

Chinese MedicineSong Ruilin, president of the Innovation Promotion Association, believes that such concerns are not without reason, but from another perspective, it also proves that China's innovation capabilities are constantly improving and have been recognized internationally.

He said that the current Chinese innovative drug industry has reached a point where reform is necessary, and it is necessary to establish an institutional environment that is inclusive and supportive of innovation. In particular, in terms of the payment system for innovative drugs, the medical insurance system based on generic drugs should no longer be completely continued.

A deal in trouble

In mid-June, Mingji Biopharmaceuticals granted the rights to a preclinical drug molecule to multinational pharmaceutical company AbbVie, which will have the potential to obtain a total transaction value of more than US$1.71 billion, including an initial payment and recent milestone payments of US$150 million.

Founder Jin Zhaoyu described the feeling when signing the contract as "a ray of hope after a dark period". In the previous months, the company was in deep trouble due to tight cash flow on the books. In order to control expenses, Jin Zhaoyu has stopped receiving salary from the company and has stopped financial reimbursement since 2023. The company's team building, annual meetings and other activities have also been suspended.

Like most companies in the industry, Jin Zhaoyu also sought financing from many investment institutions. The investment conditions proposed by most institutions were to maintain the valuation of the previous round or to be significantly lower than the previous round.

Mingji Biopharma's Series A financing was completed in 2018 byEli LillyAsia Fund invested 100 million RMB exclusively. The 2021 Series B financing was led by CICC Qide Fund under CICC Capital, followed by Eli Lilly Asia Ventures, Sinopharm Capital, Deyi Capital and Heyu Capital, with a financing amount of 300 million RMB.

From 2018 to 2021, China's innovative pharmaceutical companies are advancing by leaps and bounds. The speed of application and approval of innovative drugs in China is unprecedented, and a large amount of capital from home and abroad is pouring into the innovative drug market.Science and Technology Innovation BoardThe fifth set of standards paved the way for unprofitable, cash-burning biopharmaceutical companies. A total of 75 companies successfully went public in the past four years, raising a total of US$25.75 billion.

However, after 2022, the capital market gradually cooled down. In 2022 and 2023, the amount of funds raised by companies listed on the Hong Kong Stock Exchange 18A fell by 90% compared with 2021, and many companies fell below their IPO prices after listing. The cooling of the secondary market has also led to a cooling of the primary market.

After the B round of financing, Mingji Biopharmaceuticals has advanced a gastrointestinal tumor pipeline to the Phase III clinical stage. Its R&D progress ranks among the top three in China for the same target. Phase 1/2 data show that this drug has the potential to become Best-in-class. In addition, Mingji Biopharmaceuticals also has a bispecific antibody product that has entered Phase 1 clinical trials and two preclinical First-in-class ADC (antibody-drug conjugate) products. With these achievements, Jin Zhaoyu believes that it is unreasonable for the company's valuation to remain the same as in 2021.

In the eyes of investment institutions, gastric cancer, the target of Mingji Biopharma's core drug under development, is a major tumor in China, and the overseas patient population is not large. In the context of medical insurance negotiations and centralized procurement in the domestic market, there is limited room for imagination. In addition, its target Claudin18.2 is a star target with fierce competition. Investment institutions are worried that this target will experience "involution" similar to PD-1 in the future. Many domestic institutions have suffered losses in the "involution" of PD-1.

Jin Zhaoyu tried to convince investment institutions: Claudin18.2 is different from PD-1, and it is more difficult to make Claudin18.2 into a drug. Products made from different technology platforms have essential differences in efficacy and safety, and the Phase 1/2 data of its products under development are amazing enough; although the products of the leading Japanese pharmaceutical company Astellas are about to be launched, due to the high cost (the pipeline was acquired for 1.28 billion euros), most domestic patients may not be able to afford the drug prices it sets, and Mingji Bio's future pricing can make it affordable for most patients.

These value points were widely favored by investment institutions in 2021, but by 2023, no institution would pay for his judgment, so he tried to seek support from banks for loans. He found that most banks refused to lend to biopharmaceutical start-ups, even if some banks (such asIndustrial BankandBank of Ningbo) Special loans are provided to technology-based bio-pharmaceutical companies, with the amount basically in the tens of millions of yuan.

When all financing channels are blocked, BD is the best emergency channel Jin Zhaoyu can think of.

Jin Zhaoyu fought a desperate battle and entered the autoimmune disease track where multinational companies were actively developing, hoping to obtain cash flow through license-out. He was lucky that his autoimmune drug molecule was successfully selected before he was about to spend all the cash on the books.

Jin Zhaoyu originally planned to sell the drug molecule after it reached Phase 1 clinical trials, because clinical data is very valuable in BD transactions, but due to tight cash flow, he had to sell it as soon as possible. He believes that if it can be pushed to Phase 1 clinical trials, the transaction amount will increase several times.

However, compared with many successful BD peers, Jin Zhaoyu believes that Mingji Bio is lucky. It sold a preclinical drug molecule that took less than a year and invested no more than 20 million yuan, and the company's core pipeline that it had invested in for a long time was not sold.

This is not easy to replicate, and requires the right time, place and people. "We have the strength, but luck also played a role. Our technology platform happened to be mature at that point, so we could improve the defects of the first generation of products. Some of our peers were actually very good, but they may not have hit the mark, and without investors to help them, they went bankrupt before the opportunity came because of cash flow depletion."

Jin Zhaoyu did not consider large domestic pharmaceutical companies as the trading partner for this preclinical drug molecule. He believes that if this drug under development is used to raise funds in the domestic capital market, the possibility of raising money is very low. On the one hand, domestic companies have relatively limited financial strength and it is difficult to offer an ideal price. On the other hand, multinational companies have more accumulation and advantages in understanding inflammatory diseases and related innovative products.

In his opinion, the current BD transactions in the innovative drug industry are similar to the "processing on supplied materials" in the early days of reform and opening up, and the bulk of the profits are still in the hands of multinational companies.

In the company development blueprint he planned, Mingji Bio will be a company that can steadily launch good drugs and sell them on the market in the future, and can obtain long-term, sustained, high-quality returns.

BD Club

There are many transactions similar to Mingji Bio.

According to the data from Pharmaceutical Cube, since the second half of 2023, the total down payment for the sale of drug rights by Chinese innovative pharmaceutical companies has exceeded the total amount of IPO funds raised, becoming the main funding channel for Chinese innovative pharmaceutical companies. This trend has continued since the beginning of this year, with a significant increase in the number of transaction projects and transaction amounts.

From January to August 2024, the disclosed down payment amount for license-out projects was close to US$1.5 billion, a year-on-year increase of 35%, and the potential total amount was US$22.8 billion, a year-on-year increase of 88%.

According to the Economic Observer, among the sellers of pipelines sold since 2023, there are 28 startups, accounting for more than 40%, of which nearly 20 are in rounds A and B. Most of these startups were founded in 2020, and their last round of financing was basically concentrated around 2022, but the amount of financing was low, even lower than the down payment of license-out projects. When the wind disappeared and the cold winter came, their sense of crisis also intensified, so they chose to sell their early project rights.

Ten Hong Kong-listed 18A/C companies have also chosen to sell their pipelines, of which five companies, including Conoya (2162.HK) and Ruike Bio (2179.HK), have less than 1 billion yuan in cash on their books by the end of 2023. If the R&D investment of these companies remains at the 2023 level, most of them will not be able to survive for two years.

In the BD boom, many people have become extremely busy, and Dai Youwen is one of them. More and more innovative pharmaceutical companies are looking for him, and most of them are entrusting him to find license-out opportunities.

Dai Youwen is the founder of Meibobidi. At the end of 2023, when BD transactions in China's innovative drug industry were hot, he separated the cross-border BD transaction investment banking business from the original company and operated it independently. Since its establishment 8 months ago, his team has taken over more than 20 projects from more than 10 companies.

In the BD club established by the institution, there are more than 3,500 active members. The club members include BD leaders of many multinational companies, but more are BD, secretary to the board, CEO, etc. of Chinese innovative pharmaceutical companies. In addition to daily communication, the club also offers BD training courses, corporate visit salons, BD social receptions, etc.

Dai Youwen has been in the innovative drug industry since 2017. At first, his company mainly helped biopharmaceutical parks to attract overseas returnees. He remembers that many overseas returnees would talk about how great a company they wanted to build and how they wanted to form a sales team of several hundred people, but now he rarely hears such voices. In his BD club, people don't talk about mission and vision, but often get straight to the point - how much the pipeline wants to sell, whether there can be cooperation, and the commercial results orientation is very clear.

During these conversations, he found that most companies were more concerned about the down payment than the total transaction amount because they were in urgent need of money.

In this wave, many innovative drug bosses have not had time to understand what BD is. They often tell Dai Youwen to "sell to the world", as if it can be sold to any country. In fact, due to the different characteristics of each product, its buyer may only be a specific region or a specific company.

Some companies have also proposed potential buyers. For example, a company that is benchmarking a drug of a multinational pharmaceutical company has designated Dai Youwen to contact the other party. However, in Dai Youwen's opinion, this idea is not necessarily the best choice. "This multinational pharmaceutical company generally does not think that this product has an absolute clinical differentiation advantage. It may also think why it should let a competitor replace it. Moreover, understanding the information of competitors is also conducive to optimizing its strategy to protect market share and hinder the listing of competitors."

Dai Youwen usually only picks one out of 10 innovative pharmaceutical companies for cooperation. On the one hand, he knows that only a few projects can be truly recognized by multinational companies; on the other hand, many companies have high expectations for the transaction price, and the first thing these companies say is often "Xiaoyang company sold for XX money, so I want my product to sell for that much."

Selling medicine and selling yourself

While waiting for BD, some companies turned to M&A. Dai Youwen said: "Last year, the chairman of a company told me that he wanted to do BD and asked if I could do it for free first and pay after success. I said that was not possible. Two days ago, he told me that the company had held a board meeting and the investors wanted to sell the entire company. He asked me if I could accept the M&A request."

Some people regard 2024 as the first year of mergers and acquisitions in China's innovative drug industry.

By the end of 2023, Gracell Biopharma will be sold for US$1.2 billionAstraZeneca, becoming the first Chinese biotech company to be acquired by a multinational pharmaceutical company. Since 2024, three Chinese innovative pharmaceutical companies, Xinrui Pharmaceuticals, Baoyuan Pharmaceuticals, and Pufang Biopharma, have been acquired. Among them, Xinrui Pharmaceuticals sold for the highest price of US$3.5 billion.

Chen Mingjian, founder of investment institution Oriental Gaosheng, has come into contact with many innovative drug companies that have M&A needs. He believes that the hot BD transactions are just a stopgap measure, and many companies will eventually move towards M&A. "There are many ways to survive. Selling pipelines is nothing more than pawning things at home. How many things are left at home that are worth pawning after two days of eating? It is not a fundamental way out."

In July, he communicated with founders of several Hong Kong-listed 18A companies in Suzhou, and he found that many people's mentality had changed significantly. He still remembers that a few years ago, a company CEO told him that he wanted to make the company one of the world's top 500 companies in the future. The CEO was originally an official of the US Food and Drug Administration. After returning to China, he worked as a senior executive in several large biopharmaceutical companies. He then started his own business and made the world's first subcutaneous injection of Pd-L1.

The company's market value once reached HK$30 billion, but has now fallen to HK$1 billion. Now the CEO told Chen Mingjian that although he cannot "lie flat" but must "squat down", abandon many pipelines and do some potential preliminary research instead.

Chen Mingjian said that few companies today would reject his M&A intentions. At the same time, after he posted several M&A communication videos online, the chairman of an A-share listed company took the initiative to call him to express his willingness to acquire.

“Although there have been no blockbuster local enterprise acquisitions of innovative pharmaceutical companies, they will certainly appear in the future, becauseChina Resources Pharmaceutical、Shanghai PharmaceuticalsFor giants such as pharmaceutical companies, innovative transformation is their strategic direction. Chen Mingjian believes that there will be multiple mergers and acquisitions in the innovative drug industry in the second half of this year, and many of them are already in the works, but because they are still under the surface, people don’t know about them.

Will continue

"The reason why BD transactions are relatively concentrated now is that it has become a form of financing." Song Ruilin told the Economic Observer that many companies cut pipelines and traded the market development rights and commercial benefits of certain pipelines. In fact, this is a means of financing under unavoidable circumstances, and it certainly does not belong to the conventional BD model of maximizing one's own interests.

A senior pharmaceutical analyst said in an interview with the Economic Observer: On the one hand, the IPO channel has not been relaxed, and now even companies with good fundamentals will be reviewed multiple times when applying for listing on the A-share Science and Technology Innovation Board; on the other hand, with the US dollar interest rate hike, when the risk-free rate reaches four or five points, few people are willing to invest in equity. He believes that in such an environment, BD is something that innovative pharmaceutical companies have to do because it is almost the only way to make money.

Over the past year, Wang Haijiao, deputy general manager of GATEJIA Investment Group, which focuses on the pharmaceutical industry, has also been helping invested companies find excellent BD talents and related BD opportunities. From his perspective, the A-share market has tightened the IPO channel for unprofitable biopharmaceutical companies, and companies cannot obtain financing through listing, which has also led to the primary market investors not daring to invest again in the absence of an exit channel. "Any funds have an exit deadline. Even if there is a willingness to be patient capital, it is necessary to abide by the investment cycle agreed upon when the fund was established."

He stressed that to solve the current problem, the IPO channel should be kept open first. "As long as the IPO is successful, investors will accept it even if the stock price drops below the issue price, because a drop in the issue price only means that the target is not good enough, and they can choose a high-quality one next time."

The above-mentioned pharmaceutical analyst believes that the current way of being bought out by the industry or being acquired by the industry is not necessarily a bad thing, but to a certain extent, it is also an opportunity for the industry to clear out. "Industrial capital is more knowledgeable."

The cooperation between innovative pharmaceutical companies and multinational companies is an opportunity for Chinese innovative drugs to go overseas, and innovative drugs that have been bought by multinational companies also have the opportunity to enter the global market. This means that the value of the same innovative drug in the hands of local capital and foreign capital may be very different.

Song Ruilin said that the reason why some projects can be bought by multinational companies but cannot be favored by domestic capital is related to the capital preferences shaped by the local market.

He said that the capital market needs not only the innovative value of the product itself, but also its future profitability. Capital is concerned about what kind of products can generate returns. "Look at the Chinese companies that can really make a lot of money. Are they all innovative companies? What kind of market determines what kind of company can survive."

Song Ruilin believes that China’s current industrial system related to innovative drugs has reached a point where reform is necessary.

He said that products with real clinical value should be better applied to patients, while at the same time they should be able to get reasonable returns. If innovation is not rewarded, no one will innovate. There is an urgent need to establish a sound market environment that can carry innovative drugs and demonstrate their value. "China's medical insurance system is based on generic drugs. At present, different medical insurance reimbursement systems should be established for generic drugs and innovative drugs. The payment dilemma facing China's innovative drugs now is because China lacks commercial insurance, so our entire insurance system needs to undergo major reforms. Shanghai has clearly proposed to strengthen commercial insurance. Because basic medical insurance alone cannot support innovative drugs." He suggested that medical insurance should act within its means and leave a channel for commercial insurance in supporting innovation. In this channel, innovative drugs are no longer paid at the current fixed rate.

Song Ruilin believes that only by replacing the current fixed reimbursement ratio with a dynamic one, giving concessions to patients, charitable organizations, and businesses, and leaving more room for commercial insurance, can we truly establish a mature innovative drug market.

The "Decision of the CPC Central Committee on Further Deepening Reform and Promoting Chinese-style Modernization" issued in July proposed deepening the reform of the medical and health system, including promoting the coordinated development and governance of medical care, medical insurance, and medicine, and improving the mechanism to support the development of innovative drugs and medical devices. Song Ruilin said that the first step in implementing the spirit of the Third Plenary Session of the 18th CPC Central Committee should be that all departments use a ruler to measure what can be done in the linkage of medical insurance, medicine, and medical care, and whether a more friendly and inclusive policy has been adopted for innovation.

Many industry insiders believe that the current trend of Chinese innovative pharmaceutical companies selling drug rights or even directly "selling themselves" will continue in the next one or two years.