Uptick in strategic partnerships and NewCo deals
We are also seeing a rise in joint ventures (JVs) and collaboration deals between Chinese pharma companies and foreign parties, who share risk on co-development projects and cooperate to facilitate global clinical trials, among other things. When structuring these collaborations, parties would typically factor in geopolitical, regulatory and tax risks, and their impact on future supply chain stability and cost efficiency.
A third growth model involves mainland Chinese pharma companies incorporating NewCos outside the country—often in the Cayman Islands—into which they license ex-China intellectual property (IP) rights as a way to access international financing. This strategy, known as the “Spin-off NewCo” or “NewCo” model, has gained significant traction as a hybrid structure that sits between a traditional out-licensing deal and a full corporate spin-off. For companies with deep pipelines, the structure allows management to focus internal resources on priority programs while monetizing non-core or earlier-stage assets through external capital.
These arrangements often work best for larger businesses with extensive drug pipelines but can be more complicated in certain scenarios, for example if they rely on the parent company’s platform technology.
The Chinese company will often retain an equity stake in the NewCo, with foreign venture capital firms, private equity investors, or licensees funding the development and commercialization of the in-licensed IP. This model offers advantages to the Chinese company over standard out-licensing deals, where royalties and milestone payments are contingent on the successful commercialization of products over which the originator has limited control. NewCo structures also offer Chinese companies that retain equity stakes the possibility of financial upside through an eventual strategic sale or IPO.
Here, Hong Kong listings are supported by Chapter 18A of the Hong Kong Stock Exchange (HKEX) listing regulations, which provides an established route for pre-revenue biotech companies to source equity financing. HKEX is now the second largest biotech funding platform globally, with more than USD17bn raised in 80 biotech IPOs since Chapter 18A was introduced in 2018.
Panel: HKEX biotech IPOs, secondary placements and dual listings
What do parties need to consider in China-related pharma deals?
The legal and regulatory framework surrounding China-related out-licensing, partnership and NewCo deals is complex. Where substantive pipeline assets are transferred outside of China in NewCo transactions, or in co-development deals where the parties may want to export improved technologies, China’s technology export regulations may apply. Some tech exports are prohibited altogether (e.g., cell cloning and gene editing technologies applied to humans), while the export of “restricted technologies” requires a government license (though these are less relevant to biotech transactions).
Notably, while the registration of agreements involving the export of “freely exportable technologies” is voluntary from a legal standpoint and not required for technology export purposes, PRC banks may in practice require evidence of a registered license agreement with the local Ministry of Commerce (MOFCOM) to process cross-border remittance of funds such as milestone payments and royalties. The registration process is relatively streamlined, though the specific documentary requirements for foreign exchange processing will depend on the practices of the relevant bank.
Chinese ownership of equity in foreign NewCo vehicles is subject to the country’s outbound direct investment (ODI) framework, which requires approvals or filings with various government ministries, including the National Development and Reform Commission (NDRC). We have seen ODI processes suspended during tariff negotiations, while Chinese companies also need foreign exchange approvals to remit funds required for operations overseas.
Cross-border data transfers and geopolitical implications
Data transfers are another important consideration. Cross-border life sciences transactions invariably involve the transfer of data during transactional due diligence and transition services, while such transfers will be ongoing in strategic partnerships.
Here, the global legal and regulatory environment is evolving rapidly and is heavily influenced by geopolitics. Countries including the U.S., the UK and certain EU member states have designated pharma supply chains as critical national infrastructure following interruptions to the supply of active pharmaceutical ingredients (APIs) and medicines during the COVID-19 pandemic and in response to more generalized geopolitical tensions.
Against this backdrop, biotechnology, AI and health data are also now protected by many nations as a matter of national security. As a result, FDI and national security screening processes (such as that administered by the Committee on Foreign Investment in the United States) may apply, alongside other measures such as the U.S. government’s America First Investment Policy, which imposes restrictions on U.S. outbound investments into China in areas including artificial intelligence and biotechnology.
Navigating Chinese export regulations on health data and human genetic resources
In the pharma sector, parties need to navigate the Chinese government’s regulations on the export of clinical data and human genetic resources, among other things.
In NewCo deals where the intention is to eventually seek marketing authorization for drug sales in the U.S., a range of data will need to be made available to the U.S. authorities. If this information is held by the originator inside China, information sharing provisions between the Chinese company and the NewCo will need to be carefully constructed from the outset.
Exporting the personal health data of Chinese citizens requires either a security assessment arranged by the PRC’s Cyberspace Administration or for the transfers to be conducted under contracts approved by the Chinese authorities. From a diligence perspective, the consent documentation underlying any cross-border data transfers should be reviewed and validated. For example, where a PRC licensor/target has obtained only generalized consent (such as consent to share data with unspecified overseas “partners”) without expressly identifying the overseas recipient and providing the requisite information, the consent may be defective under PRC data regulations and may limit the foreign acquiror/licensee’s ability to use the data.
Where human genetic resources (e.g., organs, tissues and other genetic materials) and related data (i.e., data generated by performing processes on human genetic resources, which includes genetic information, among other things) are involved, specific approvals/filings are required for exports.
In some instances, extra security reviews may apply, while data privacy regulations may also require parties to obtain additional consents from data subjects for cross-border transfers (which could be challenging to secure where clinical trial data is concerned). The time it takes to get the relevant authorizations needs to be factored in to deal strategy.
Robust intellectual property diligence is a critical consideration
Another key area of focus in China-related pharma deals is IP. When negotiating licensing deals, it is common for parties to focus their attention on IP licensing terms and the technical and commercial aspects of the underlying assets. However, IP ownership is equally important and sometimes overlooked.
Here, licensors may have jointly developed therapies or platforms with other parties and may also have jointly registered patents. And as Chinese innovators pursue different avenues to raise financing and commercialize their portfolios, the structure of their businesses may evolve rapidly. The implications of these reorganizations on IP rights require careful scrutiny.
More broadly, as China’s pharmaceutical industry shifts from generics to innovative drugs, Chinese companies face increasingly severe challenges in IP protection and risk management. Many domestic innovators adopt a “fast follow” strategy, with products that closely resemble those of international leaders but lack sufficient differentiation. This not only weakens market competitiveness but also creates potential IP infringement risks that could ultimately prevent commercialization of products with considerable clinical promise.
As the volume of overseas deals involving Chinese innovative drugs continues to rise, disputes over new drug R&D are also on the up, with IP and compliance at the core of these challenges. Compared to mature multinational pharma businesses, Chinese drug companies lag behind in terms of patent strategy and IP risk management. This has led to frequent setbacks as they seek to expand overseas. In addition, trade secret disputes have become a major legal risk for Chinese innovators in the sector, particularly where key personnel have moved between competitors.
With this in mind, comprehensive due diligence on IP rights is vital to secure value in the deal. This analysis should be tailored to the assets and targets in question, which requires sophisticated in-market advice. Given these dynamics, it is prudent for potential investors and partners to pay close attention to patent and IP due diligence from the outset, and related risk assessments should be conducted holistically and thoroughly.
