Year of the NewCo? China’s emerging impact on global drug development

In 2024 biotech venture funding in Europe and the US saw a promising increase, reaching a total of $28.1 billion up from $21.2 billion the year before. While funding is trending upwards, innovation is trending eastwards from the traditional hubs in Europe and the US, and in the last 5 years China has become the second-largest developer of new drugs. As recently as 2020, China was involved in only 5% of large pharmaceutical transactions of $50 million or more upfront. That figure in 2024 has increased dramatically to 30%. 

Factors contributing to this larger role in biotech innovation include a growing STEM workforce (aided by the return of scientists who have studied or worked abroad) and reforms in the Chinese regulatory system from a decade ago that have dramatically decreased the timeline for getting a new drug approved in China. A recent study found that the time to approve first round human trials in China has decreased over the last 10 years from 501 days to 87 days. 

Traditional commercialisation: the licensing route

The United States accounts for 44% of world’s total pharmaceutical revenue. Accessing the US market is absolutely crucial for any pharmaceutical innovator, but Chinese biotech companies rarely sell their products directly in the US. The most common route for Chinese biotechs to access overseas markets has historically been through licensing deals where the drug developer licences the right to market their drug to an overseas company in return for consideration which may include an upfront fee as well as milestone payments and royalites based on future sales. 

For a prime example of the competition arising from China’s biotech companies, look no further than the world’ s best-selling drug, Keytruda. Sold by Merck, Keytruda is a cancer immunotherapy drug used to treat lung cancer, among various other types of cancer. In September last year, American biopharma company Summit Therapeutics published data showing that its drug Ivonescimab had significantly outperformed Keytruda in a late-stage trial. This competitor to the world’s best-selling drug had been licensed by Summit from Akeso, a Chinese biotech, in 2022 for $500 million up front and up to $5 billion in additional payments and royalties. 

While Chinese companies such as Akeso have traditionally licensed out their IP to commercialise drugs in global markets, the prolific rate of new pharmaceuticals coming from China has coincided with a new and innovative model of commercialisation. 

A new method: the “spin-off NewCo” route

The success of Chinese companies in producing competitive drugs has also prompted innovation in how these drugs are commercialised. Despite some eye-catching licensing figures, such as the one paid to Akeso, there are limitations with the licensing model. After the upfront payment is received, the licensor’s royalties and milestone payment are dependent on the drug coming to market and producing revenues, which is far from guaranteed. Combine this with a lack of operational control over the drug after it has been licensed, and you can see why other methods of commercialisation are being explored.

One such alternative method is the “spin-off NewCo” model, which involves the Chinese company incorporating a new offshore (e.g. American) entity (NewCo) which will hold the  right to further develop and commercialise a certain drug. The NewCo is a joint venture in that it is part-owned by the Chinese company and part-owned by US or other foreign investors. A leadership team is generally appointed with experience in the local US market. Under this model, the NewCo avoids legal and regulatory hurdles China-based companies face with attracting foreign direct investment. Once the NewCo has been set up, the Chinese company’s equity stake means that the upside it can expect is not restricted to royalty and milestone payments, as it would be under a licence agreement. As an investor, the Chinese company can exercise operational control over the newly established NewCo. It can also cash in on an exit via either a sale of the NewCo to a pharma company, private equity investment or an IPO, making its financial return less dependent on the drug’s long term commercial success. This innovative model has been employed by Chinese biotechs at least a half dozen times in the past 12 months, a figure which we think is likely to increase in 2025. 

However, for all the benefits of the NewCo model, there are still many situations where the licensing model may be preferable. The NewCo model may work well for large biotech companies with multiple drug candidate pipelines, where a single asset can be discretely spun-off but may be more complicated where the asset relies on the developer’s platform technology. In addition, for Chinese companies with private equity or venture capital investors, these investors may expect to receive a significant direct equity stake in the NewCo, which may make it more difficult to attract overseas investors for the NewCo. Finally, smaller biotechs in need of immediate cash may prefer to receive upfront payments under the licensing model, rather than the NewCo model where returns come in the long term. 

Finally, there are geopolitical challenges that lie ahead for Chinese biotech companies to access the world’s largest pharmaceutical market, the US. The “America First” agenda of the Trump administration  would place restrictions on both inbound and outbound investments related to “foreign adversaries” in biotech and may curtail adoption of the NewCo model.

Conclusion

Chinese biotech companies have shown impressive growth over the last 5 years, which has prompted the development of new and innovative methods of commercialisation. Although there are headwinds to be navigated, it is clear that China is emerging as a global leader in drug development. In time we expect this will undoubtedly impact the UK’s biotechnology landscape, through a mix of competition, collaboration and inspiration. Exactly in what proportions remains to be seen.