Summary of Key Points
On May 28th, rumors that "domestic regulations for the review of innovative drug BD (License-out) transactions would be tightened," combined with concerns about the potential restrictions on biotechnology posed by the U.S. COINS Act, led to a significant drop in the A-share market's innovative drug sector. The industry generally believes that these rumors may have been exaggerated. However, BD transactions are considered a "lifeline" for domestic innovative drugs, as they represent the most critical source of funding (often described as "selling young crops" – transferring overseas rights in exchange for cash). There are also practical considerations such as technical security and the risk of loss of state-owned assets behind these rumors. Experts suggest that a one-size-fits-all approach should not be adopted, and the solution lies in refined management and reform of the domestic payment system.
I. BD Transactions: The Lifeline for Innovative Drugs – Why Is There Concern About Blocking This Path?
BD transactions essentially involve selling the overseas rights to new drugs to foreign companies in exchange for cash. For domestic innovative drug companies, this is currently the primary source of funding:
- Limited Financing Channels: The primary market (investing in unlisted companies) has limited funds, and IPOs and additional offerings do not cover the costs. For example, in the first quarter of 2026, BD transactions generated $3.4 billion (about 23.8 billion RMB), while A-share and H-share pharmaceutical IPOs and additional offerings only amounted to around 14 billion RMB (6.4 billion RMB + 8.5 billion HKD), indicating that BD transactions are 1.7 times more lucrative.
- Small Domestic Market: Healthcare insurance imposes significant price pressures; a drug may sell for at most 3 billion RMB domestically, but a similar foreign drug could fetch 30 billion USD (a 100-fold difference). Without selling overseas rights, new drugs might remain unmarketed.
- Impact on Investor Confidence: If BD transactions are blocked, capital will withdraw, causing the already tepid primary market to cool down further. Therefore, the saying "you must go global or you will be out" is not an exaggeration but reflects a real dilemma.
II. The Controversy: Is It About Selling Drugs or Technological Platforms?
The core concern in the rumors is whether China will sell its key technological platforms to foreign entities. Both sides argue fiercely:
- Opponents: Some collaborations involve not only the sale of drugs but also the transfer of entire research and development platforms, potentially turning China into an overseas R&D hub, with foreign companies holding significant shares.
- Supporters: The platform and the drug are inseparable; selling the platform alone would be unattractive to buyers. Most BD transactions involve the transfer of rights to specific new drugs, not general-purpose technologies (such as ADC or bispecific antibody technologies). Broad restrictions could effectively block all paths for innovative drugs to go global, which would be counterproductive.
III. The Rumors Are Not Baseless: Three Practical Concerns Behind Them
Although the rumors may have been exaggerated, the regulatory authorities' concerns are valid:
1. Risk of Technological Outflow: Critical technologies like new-generation ADCs and gene editing could fall into foreign hands if multiple core products rely on the same platform and are continuously sold to the same foreign company.
2. Risk of State-Owned Asset Loss: Some new drugs are funded by the state (e.g., through major innovation projects) or local governments. Selling them at low prices to foreign entities (with only a portion of the upfront payment and uncertain future returns) could lead to the loss of state assets.
3. International Competition: The U.S. is using the COINS Act to restrict Chinese biotechnology, and both the EU and Japan have their own export regulations for biotech products. China's previous lack of restrictions is now being addressed as part of a strategic effort to counter these measures in negotiations.
IV. The Way Forward for Innovative Drugs: Refined Management and Strengthening Domestic Capabilities
Experts agree that a one-size-fits-all ban on BD transactions is not appropriate. The right approach includes:
1. Encouraging Product Exports While Being Cautious with Core Platforms: Normal license-out agreements are beneficial and should be promoted, but only those involving the transfer of core technologies and control rights need to be regulated.
2. Reforming Healthcare Insurance Payments: Current insurance policies undervalue innovative drugs, forcing them to seek overseas markets. A reasonable profit margin must be ensured to sustain domestic companies.
3. Differentiated Policy Enforcement: Not all BD transactions should be restricted; most are commercial activities that require differentiated treatment.
4. Maintaining Stability: A complete ban on BD transactions is unlikely due to technical (the interdependence of technology and drugs) and economic (companies' survival) reasons.
Conclusion: A Critical Strategic Choice for the Industry
China's innovative drug industry faces a delicate situation. On one hand, the increasing number of BD exports demonstrates the recognition of Chinese scientists and engineers worldwide. On the other hand, domestic payment system limitations and geopolitical tensions create challenges. Should China continue to rely on overseas sales or focus on nurturing domestic capabilities? This is not just a technical issue but a strategic decision that will shape the future of the industry. In any case, completely blocking these transactions is clearly not the solution.