Summary of Key Points
The current biopharmaceutical industry is facing significant uncertainties due to changes in policies in both China and the United States, as well as geopolitical factors. The previous business model, which relied on China for clinical trials and cost-effective production while the United States was responsible for selling assets and listing companies to earn dollars, has been disrupted. Domestic regulations require companies planning to list on domestic markets to dismantle their red-chip structures, and there are rumors of restrictions on the export of core technologies. The United States has also introduced legislation to limit the use of Chinese clinical data and has tightened review processes. Companies and investors are in a dilemma: dismantling their red-chip structures may cause them to miss the IPO window, while not doing so could block their path to listing. Business development deals (selling early-stage research projects for cash) have become more cautious due to these policy risks. As a result, companies are adjusting their structures (such as setting up entities in multiple locations and isolating assets) to hedge against these risks. The development of the industry is shifting from being primarily driven by market forces to being closely aligned with national policies and the trends of the times.
Detailed Analysis
1. The traditional profit model is no longer viable
The traditional approach in the biopharmaceutical industry was straightforward: China, with its large patient base, fast clinical trial capabilities, and low labor costs, provided a favorable environment for research and development, while multinational pharmaceutical companies (MNCs) from the United States and Europe had mature international operations and capital markets. Chinese pharmaceutical companies would sell their early-stage research projects to MNCs or use red-chip structures to list on U.S. or Hong Kong stock markets, earning substantial premiums (for example, investing $10 million and selling for $100 million).
However, this model has been completely altered. The United States has enacted the Biologics Safety Act, which may prevent the FDA from using Chinese clinical data. In China, the Securities Regulatory Commission recommended the dismantling of red-chip structures in March, and the Foreign Investment Law came into effect in July, with rumors that core technologies such as cell and gene therapy (CGT) will not be allowed to be exported. It is clear that the issue is no longer about whether products are marketable but whether policies permit such transactions, and companies must prepare for potential crises.
2. The dilemma of dismantling red-chip structures
What are red-chip structures? Simply put, they involve registering a company overseas (e.g., in the Cayman Islands) and using that company to list on Hong Kong stock markets to raise funds. This was the primary source of foreign capital for Chinese biopharmaceutical companies.
Now, the SEC is urging companies planning to list to move their registration back to China and dismantle their red-chip structures. Companies are concerned about the time it takes to complete this process and the possibility of missing a favorable IPO opportunity (such as a market recovery). If they do not dismantle the red-chip structure, their IPO path may be blocked (as Deng Lingquan stated, “Not dismantling the red-chip structure is essentially blocking the IPO route.” For instance, Anlingke Bio immediately dismantled its red-chip structure after seeing the new regulations. Investor Xiao Fei lamented the lack of transparency in the rules and the case-by-case approval process, noting that the Hong Kong stock market had just started to recover but was hindered by these regulations.
3. Business development deals have become more difficult
Business development deals involved selling early-stage research projects to larger companies for cash, which helped companies manage financial pressures and allowed investors to exit their investments. This was a crucial strategy in the past few years.
However, these deals have become riskier due to U.S. restrictions and rumors of restrictions on the export of core technologies. Some companies are now creating “pre-NewCo” entities—selling non-core assets (e.g., technology platforms that are not subject to domestic regulations) before any formal transactions to reduce policy risks. Xiao Fei believes that selling early-stage projects can still be beneficial for Chinese companies, as it demonstrates their competitiveness, but the current policy environment makes such deals more cautious.
4. How to hedge risks? Building a “safe structure” has become the consensus
To mitigate these risks, investors and companies are taking the following steps:
- Asset isolation: Keeping core technologies in China and moving other assets (such as research project rights) to neutral jurisdictions like Switzerland or Singapore, so that if policies change, at least part of the assets remain unaffected.
- Setting up multiple entities: Companies are establishing research and development centers in various locations (e.g., in Suzhou and Shanghai in China, with laboratories in Boston, USA, and branches in Rotterdam, the Netherlands) to leverage local advantages (e.g., cutting-edge technology in Boston and fast clinical trials in China).
- Leveraging the Hong Kong stock market: Although red-chip issues have created obstacles, the Hong Kong market remains an important channel for Chinese pharmaceutical companies to access international capital. There is hope that regulators will adjust policies to provide companies with flexibility.
5. The future depends on national and global trends
Everyone in the industry believes that China will eventually produce international-level pharmaceutical companies. However, it is uncertain whether companies with domestic or overseas registration structures will emerge first. Deng Lingquan noted, “We are just small participants in this wave, but we could also become creators. Ultimately, the direction of the industry is determined by the trends of the times and national choices.” Current decisions by companies and investors are no longer purely based on business calculations but on closely following national policies and international developments.
The entire industry is walking a tightrope of policy changes, striving to survive while planning for the future. Although the situation is challenging, there is still confidence in the potential of Chinese pharmaceutical companies. With our advantages in cost, efficiency, and market presence, we believe that if policies and the international environment stabilize, we can develop truly international pharmaceutical giants.