A big order worth $60 billion in BD. US dollar LPs suddenly want to invest in GPs.

Since the beginning of this year, China's innovative drugs have continued to be in the limelight. The Hang Seng Healthcare ETF, which tracks the healthcare sector, has risen by more than 90% from the beginning of the year to now, and the Hong Kong Stock Connect Innovative Drug Index has even soared by 130%. This indicates that the strength of China's innovative drugs has been globally recognized, placing it in the first echelon.

There is a trend in the industry: investors are no longer just waiting for IPOs passively but are actively engaging in BD transactions. Recently, this trend has seen new developments - some international capitals (LPs) want to inject funds into domestic biomedical investment institutions through international cooperation to jointly explore promising new drug R & D projects in China. In simple terms, domestic GPs have the opportunity to raise US - dollar funds and are expected to enter the international supply chain for BD transactions.

A person in charge of investment in transaction down - payments revealed that currently, US - dollar LPs are looking for three types of domestic GPs, and their core goal is also clear: to take advantage of their proximity to lock in high - quality drug R & D "pipelines" in advance.

This person explained that in the past, domestic GPs mainly made money through "IPOs", and innovative drugs follow the typical "ten - year, ten - billion - dollar rule", that is, it takes 10 years and costs 1 billion US dollars. Against the background where LPs care more about "shorter return times", these two ideas are not in sync, resulting in inefficient use of funds and many redundant drug R & D projects.

But now, things are different. After the strength of China's innovative drugs is recognized, the investment model has also changed - the market has started to focus on direct investment in "drug R & D projects" and even supply - chain management, aiming to establish a new company (NewCo) to specifically operate a certain project. That's why international LPs are actively reaching out.

US - dollar LPs are looking for these three types of investors

From the beginning of the year to now, BD transactions of pipelines have become the mainstream in the industry. Especially those large BD deals worth over 1 billion US dollars, most of them are related to overseas authorizations of pipelines.

Take the cooperation between 3SBio and Pfizer as an example. 3SBio granted Pfizer the exclusive rights to its self - developed PD - 1/VEGF bispecific antibody SSGJ - 707 globally (excluding the Chinese mainland), with a potential total transaction value of over 6 billion US dollars, including a down - payment of 1.25 billion US dollars.

XianWeiDa Bio also had a similar operation. It licensed a hypoglycemic drug (GLP - 1 type) and the amylin receptor agonist AmylinRA to Verdiva Bio, with a transaction value of 2.47 billion US dollars...

Many similar transactions and the amounts achieved indicate that BD transactions have become an important way for pharmaceutical companies to obtain new cash flows.

A biomedical investor said, "In the past, BD transactions were not highly valued. The main reason was that the down - payment amount was relatively small, and it was difficult for GPs to obtain cash returns from them. They still relied more on IPOs. However, the current situation has changed significantly. In the first half of the year, the total value of China's innovative drug BD transactions exceeded 60 billion US dollars, and such a large amount cannot be ignored."

"So, international cooperation methods (BD) such as selling overseas rights of innovative drugs, packaging and cashing in the fees that can be obtained at each R & D stage in advance are the ways that international LPs most want to participate in, and this has also become an opportunity for GPs to raise funds," the above - mentioned person in charge of investment in transaction down - payments added.

According to this person, currently, US - dollar LPs want to find three types of investment institutions to jointly tap into the innovative drug projects.

Firstly, invest in US biomedical companies. Domestic GPs only make follow - up investments. The core is to promote Chinese new drug projects to them and earn a share of the cooperation profits.

Secondly, invest in foreign companies. These companies are either newly established or have obtained authorizations for Chinese drugs. GPs can make follow - up investments or participate in profit - sharing through special means.

Thirdly, lead the investment in "newly established domestic companies (NewCo)" that are specifically responsible for the overseas sales of Chinese new drugs. By selling the pipeline rights of the unlisted part, earning cash flows through international cooperation, or investing in AI pharmaceutical companies or spin - off departments, and even packaging the future earnings of new drugs into "financial products", that is, securitizing pipelines, etc.

To some extent, the purpose of these investments and cooperations is for international capital to compete with multinational pharmaceutical companies (MNCs) and large - scale pharmaceutical companies (big pharma) for pipelines in order to obtain more profits in subsequent international BD operations.

Can NewCo be a new way for GPs to enhance their voice?

Regarding these three types of target GPs, another biomedical investor said that when domestic GPs cooperate with international LPs, the key lies in whether they can do a good job in "international operation" management capabilities, "especially for the first type, investing in biomedical enterprises operating in the United States."

"In biomedical enterprises operating in the United States, overseas funds usually play a leading role. Due to the lack of experience and resources in international business development (BD), domestic GPs find it difficult to deeply participate in the transaction design between Chinese pharmaceutical companies and foreign parties, and their voice is weak," the investor said. As the financing or operation of these pure European and American new companies is adjusted, the equity of domestic GPs may be diluted, and they are likely to be eventually kicked out.

In the past, domestic GPs often suffered losses due to the issue of voice. For example, in a PD - 1 anti - cancer drug project, when selling the overseas rights to a foreign company, the foreign company only paid a down - payment of 56 million US dollars and did not clarify "how to divide the profits from drug sales in Europe and the United States." As a result, the foreign company sold the drug slowly, and the domestic side neither received subsequent shares nor was it ridiculed for "not knowing how to do business."

When it comes to international cooperation capabilities, a person who has been involved in international cooperation transactions frankly said that currently, enterprises generally believe that domestic institutions lack experience in this area and have a long learning curve. "Especially considering that the shares may be diluted and they may be kicked out in the end, many domestic institutions still have lingering fears."

On a certain recruitment website, "Business Development Director" has become a keyword for recruitment by innovative pharmaceutical companies. The core is to find someone who can "connect with large multinational pharmaceutical companies, foreign biological companies, and industry giants, promote the implementation of cooperation, and make business happen."

"Behind this recruitment, it reflects that domestic investment institutions lack international resources and networking capabilities," the above - mentioned investor said.

So, can the establishment of NewCo in China change this situation? The above - mentioned person in charge of investment in transaction down - payments believes that this model design can solve the embarrassment of "foreign institutions not cooperating with domestic institutions and Chinese pharmaceutical companies not involving domestic institutions in international cooperation."

The reason is that domestic GPs can, through the newly established company (NewCo), determine how much share they can get in the overseas rights and choose which international teams to manage, thus having much more voice.

Most importantly, NewCo is newly established with a low valuation. Domestic GPs can leverage it at a relatively low cost, which is also convenient for them to "explain" to domestic LPs.

However, some investment professionals believe that although this method can enhance the voice, the final outcome still depends on the specific design of the terms, especially the time nodes, proportions, and order of profit sharing, etc. "In essence, it is a control over the supply - chain capabilities and a test of the comprehensive capabilities of GPs."

China's innovative drug R & D needs to'match' foreign demands

From the perspective of cooperation design, the model of operating NewCo in China may solve the problems that investment institutions encountered in international cooperation in the past, but challenges still exist. For example, when the new company is just established, the first investment from international LPs may not be large, or it may just be a promised amount. To transfer the company later, further data is still needed.

Therefore, in the screening of the entire project or supply - chain management, a core issue still cannot be avoided - 'pipeline value'.

"No matter how the transaction level is designed, it ultimately depends on whether the innovative drug project is good enough and meets the demand. If there is demand and the project is good, large foreign pharmaceutical companies are willing to pay a high price. If the project is not good, no matter how much effort is made, it won't fetch a good price," the above - mentioned person who has been involved in international cooperation said.

So far, foreign LPs have realized that domestic GPs have the advantage of being in a favorable position, and only by cooperating with them to compete for good projects can they gain an edge in the competition with multinational companies and large - scale pharmaceutical companies. However, whether the innovative drug project meets the development needs of international large - scale pharmaceutical companies, such as filling the gap in the product line and gaining an advantage in the competition; and which US team is responsible for promoting the clinical trials, listing, and other links to maximize the value of the drug, are still the most core logics in the entire chain.

That's why when international LPs invest in domestic institutions, they value three capabilities at the supply - chain level of the other party: whether they can find good projects in China; whether they can find good teams in the United States; and whether they understand the development needs and competition ideas of multinational companies and large - scale pharmaceutical companies.

The above - mentioned person who has been involved in international cooperation also mentioned: Currently, Chinese pharmaceutical companies have carried out many R & D projects, but they do not match the needs of the US market. "Many Chinese pharmaceutical companies still don't understand what US buyers want and haven't designed their R & D according to the idea of international cooperation. Domestic investment institutions can't help enterprises find the right direction for the time being. These are the blind spots on both sides."

"At present, the overseas strategies of domestic GPs have just started, and in the future, they still need to conduct in - depth research on the 'ecosystem' and 'rules of the game' in the United States," the above - mentioned person added. In the future, domestic GPs need to get involved from the "project - establishment" stage of domestic pharmaceutical companies to promote their marketization and internationalization. This is a long - term process, especially in promoting the iterative thinking of scientists and entrepreneurs in domestic pharmaceutical companies.

In this regard, an industry insider revealed: AI is being used as a 'go - between' to match Chinese new drug projects with the demands of foreign buyers to maximize the success rate of cooperation.

Recently, a large - scale BD deal worth 47 billion Hong Kong dollars reached by a leading domestic AI pharmaceutical company is a manifestation of this logic. This industry insider said that this AI leader is "prescribing drugs according to demand", looking for promising innovative drug projects in China, placing "orders" for pharmaceutical companies while matching the back - end demand.

In addition, the above - mentioned person in charge of investment in transaction down - payments also said that when international LPs look for domestic GPs, there are several core directions: investing in AI pharmaceutical companies and possible independent teams and businesses spun off from them, or specific types of R & D projects; investing in platforms and affiliated enterprises that "incubate multiple projects centered around a core company"; investing in platform - type companies and spun - off new drug projects, etc.

"These demands may seem like a re - design of biomedical investment transactions, but in essence, they are all related to the supply - chain management capabilities of GPs," the person finally said.

This article is from the WeChat official account "China Venture Capital News", author: Chen Mei, published by 36Kr with authorization.