Chinese Biotechs Aim to Clear High Hurdles with Overseas Spinouts

MoFo Shanghai Managing Partner Chuan Sun has recently been interviewed by Bio World, where he discussed the evolving trends and transaction strategies of Chinese biotechs. According to him, Chinese biotechs are increasingly seeking deals with multinational companies, and those deal structures are getting more creative.

Chuan explained that several factors—China's slowing economy, the low period of financing environment in the life sciences industry, and stricter listing regulations—have driven a sharp rise in out-licensing deals in recent years. These deals offer a quick way for startups to secure much-needed funding.

On the M&A side, some of the investors or founders wanted a clear exit, and M&As are a good way to use first-in-class innovations to strengthen their position in the market in certain strategic areas. For asset acquisitions, the driver is to get more value out of existing products. 

"The newco in particular is a new way to look for more value for the company compared to the out-licensing model, because there are more upshots in the newco structure compared to out-licensing deals where the only certainty is the up-front payment," Chuan said. 

The newco structure is a combination of an out-licensing transaction plus a financing structure where there's a core pipeline or early-stage clinical assets supported by patents developed by the Chinese biotech that will be spun off into a new company that is incorporated in a tax- and corporate-friendly jurisdiction like Delaware. 

The newco structure facilitates participation by investors without any regulatory hurdles in China, and the license takes the form of an exclusive license. "And then outside of China, you would have leading nominees led by global funds or venture capitalists that provide the financial backing in the newco and take a majority stake in the company," Chuan noted. 

However, newco structures require PE or VC to have deep experience and connections in both the Chinese and U.S. pharma markets, along with strong lead investor backing, and experienced leadership, making them high-barrier opportunities. Chuan expected to see more newco deal structures over the next year, but the entry barrier remains high. 

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