This article is based on content from Zhou Hanshuo’s presentation in the “Commercialization Stage Project Transactions and M&As” series at the Yihong Business School, supplemented with additional insights.
The year 2024 has seen remarkable progress for Chinese pharmaceutical companies in their international endeavors. Major milestones include: Duality Biologics reached an exclusive licensing agreement with GSK for an ADC drug (DB-1324); Henlius Biotech partnered with Intas and its subsidiary Accord for the exclusive commercialization of Hanquyou® in North America; CStone Pharmaceuticals granted Pharmalink rights to commercialize Sugemalimab in the Middle East, North Africa, and South Africa; Analytical Biosciences entered an asset purchase agreement with Gilead Sciences for global rights to several preclinical oncology drug candidates; BioNTech acquired full equity in Biotheus; Jiangsu Hengrui licensed the global rights for its GLP-1 innovative drug portfolio to Hercules Pharmaceuticals in the U.S.
These cases encompass several distinct transaction models: commercial BD transactions, In/Out-licensing deals, equity or asset acquisitions, and the increasingly popular NewCo model. This article, drawing from the author’s practical deal experience, outlines some key considerations that can be a starting point for Chinese pharmaceutical companies when exploring these models.
Deal？
For China-based R&D-driven pharmaceutical companies (“Outbound Pharma”) pursuing international pipeline expansion, the following transaction models are commonly employed:
Model 1: Business Development (BD) Transactions
The partner handles regional sales, promotion, and other post-market commercialization activities for a specific country or region. Common sub-models include: (a) Distribution/dealership; (b) Commercialization licensing.
Model 2: Intellectual Property (IP) Licensing
Transactions under this model are based on IP rights and involve cooperation in development, clinical trials, manufacturing, and commercialization. Sub-categories include: (c) IP Out/In-Licensing; (d) R&D Collaboration. This article will also briefly discuss the common transaction models of forward triangular mergers and reverse triangular mergers.
If IP licensing cooperation focuses solely on the commercialization phase, the aforementioned (b) commercialization licensing under Model 1 can also be categorized under this Model 2.
Model 3: Mergers & Acquisitions (M&A)
This model involves acquiring the ownership of equity or assets of a target company, including: (e) Equity acquisition; (f) Asset acquisition.
Model 4: the NewCo Model
This model, which has gained considerable attention in recent years, can be seen as a combination of equity investment, IP licensing, and asset acquisitions/divestitures (where applicable).
Although the NewCo model is not entirely new, it has been a favored approach by multinational corporations (MNCs) for more than a decade to realize the potential value of their numerous pipeline IPs. A common strategy is to spin off a new company, transferring the pipeline IP and associated assets to the NewCo in exchange for equity.
How
Model 1: BD Transactions
Under the BD transaction model, there are two main subtypes: (a) Distribution/dealership; (b) Commercialization licensing.
Distribution/Dealership Model and Relevant Considerations
（a）Distribution/Dealership Model
Definition/Approach. Outbound pharmaceutical companies directly sell their products through distributors or dealers. Generally, Outbound Pharma acts as the Marketing Authorization Holder (MAH), and their primary responsibilities include registration, regulatory compliance, manufacturing and supply, pharmacovigilance, adverse event handling, and product recall. Distributors/dealers are typically responsible for logistics and distribution, sales promotion, channel management, and assisting the MAH holder in tasks such as pharmacovigilance, adverse event reporting, and recall coordination.
Partner Selection. First, under (b) commercialization licensing, partners are usually well-established multinational corporations (MNCs), whereas partners in the distribution/dealership model may be relatively less well-known. Thus, greater emphasis should be placed on due diligence regarding the partner’s qualifications, compliance history, financial status, major litigations, and performance capacity.
Second, the distributor/dealer’s market coverage, promotion capabilities existing distribution network, and logistical cost advantages are critical factors to assess.
Financial Perspective. In the distribution/dealership model, distributors may not necessarily provide an upfront payment (or if they do, it is often minimal). Revenue is shared based on a pre-agreed mechanism from sales, making this model more suitable for pharmaceutical companies that are not under significant financial strain.
Product IP Perspective. The distribution/dealership model typically does not involve a licensing of products, technology, or patents. If there is no patent protection in the target country/region, then there are a lot to discuss. For example, scenarios related to the pharmaceutical company going global and the overseas distributor/dealer regarding local clinical trials, registration and regulatory maintenance, and product supply arrangements need to be discussed based on the mode of cooperation, including the ownership of trademarks for the drugs in the local market. However, for reasons of space, this will not be elaborated upon here.
Key Considerations. It is necessary for parties to ensure that pricing control clauses and territorial restrictions do not violate local antitrust laws. Furthermore, agreements should include necessary commercial compliance clauses such as those addressing the FCPA. These issues have been highlighted in cases like Lipitor antitrust litigation and the 16-year antitrust case in the U.S. involving Chinese Vitamin C manufacturers.
Moreover, it is important to pay attention to the impact that special local legal provisions may have on the rights and obligations of both parties. Whenever necessary, it is recommended to consult a practicing lawyer in the local jurisdiction. For instance, certain Middle Eastern or Southeast Asian countries have special qualifications and protections for a distributor acting as a commercial agent. If the parties do not incorporate proper arrangements into the distribution/dealership agreement, local laws may classify the distributor as a commercial agent that is entitled to greater trade protections under local regulations.
Commercialization Licensing and Relevant Considerations
（b）Commercialization Licensing
Definition/Approach. An Outbound Pharma authorizes its partner (typically an MNC) to commercialize products using the Outbound Pharma’ intellectual property (such as patents, trademarks, software copyrights, etc.). Payments from the partner to the Outbound Pharma generally include upfront payments, sales milestones, and sales royalties, with the upfront payment amount usually being substantial. Under this model, the partner may become the MAH in a specific country/region, taking on overall principal responsibility, while the Outbound Pharma acts solely as the licensor and supplier of drugs or raw materials/API. Through this model, the Outbound Pharma can obtain commercial revenue in advance and leverage its partner’s expertise in regulatory approval and market promotion for commercialization to decrease risks.
IP Perspective. For the partner, the commercialization licensing model requires access to some of the Outbound Pharma’s intellectual property during the commercialization phase. In the case of pure commercialization licensing, this typically involves trademarks; while in more complex licensing models, patents, proprietary technologies, trademarks, software copyrights and data might be involved. The licensing scope generally covers commercialization and post-marketing development.
Market and Financial Perspective. Choosing the right commercialization partner can fill gaps in the Outbound Pharma’s ability and experience in local market commercialization. In addition to the upfront payment, revenue-sharing arrangements (such as sales milestones and royalties) are often structured to incentivize the partner to invest as much resources as possible into product promotion and commercialization. Moreover, mature commercialization licensing agreements typically outline mechanisms to address specific issues (e.g., decline in performance, adverse changes to the country/region’s medical insurance listings, or patent cliffs), ensuring that both parties’ interests are protected and well-coordinated. When selecting a partner, it is important to assess regulatory risks and stability of cash flow.
Key Considerations. The flip side of the coin is that the backend revenue entirely depends on the partner’s market development capabilities, team configuration, and the extent of their efforts. For an Outbound Pharma, this is difficult to control. Even if the agreement stipulates that the partner should make “Reasonable Efforts” to achieve the established commercialization goals and sales commitments, there are often disputes in practice over whether a breach has occurred. Moreover, since the MNC partner often has more leverage in such BD transactions, the dispute resolution mechanism agreed upon is typically a foreign court or international arbitration institution. In the event of a dispute, the entire process can be lengthy, and the time cost is not favorable for the Outbound Pharma, as market windows are fleeting.
Exclusive Commercialization vs. Joint Commercialization? Which path to choose? Whether to, while leveraging the partner’s strengths, develop an overseas market team and share the costs of commercialization (thus demanding a higher percentage of sales revenue), thus allowing the Outbound Pharma to transit from Biotech to BioPharma? Or whether to continue to focus on what the Outbound Pharma is better at—innovative research and development, thus refining its innovation capabilities and efficiency, and leveraging the partner’s ability for commercialization and monetization? There is no right or wrong answer; it depends on ambition and choice. In practice, circumstances often dictate actions, and the ultimate form of cooperation depends on the needs of both parties, their respective strengths, ability to collaborate, and the negotiating position determined by a combination of many other factors.
Model 2: IP Licensing
IP Licensing
Definition/Approach. IP Licensing refers to the right granted by the licensor (the Outbound Pharma as Licensor) to the licensee (the partner as Licensee) to develop, clinically register, manufacture, and/or commercialize the product pipeline or related technology within the licensed field (Field) and territory (Territory) through a licensing agreement. In terms of payment, the licensee (partner) typically pays the licensor (the Outbound Pharma) an upfront fee, R&D/milestone/clinical/registration milestones, sales milestones, and royalty shares, etc.
Option Arrangements. Under IP licensing, it is also common to include option arrangements to secure additional priority cooperation rights on top of the already authorized scope. This includes the Licensee’s right to request an increase in additional rights/regions/territories/pipelines, or the Licensor’s right to require a shift to shared clinical/commercialization costs, a transition to co-clinical and co-commercialization, and the option to renegotiate the revenue-sharing plan under the Agreement, etc.
The details of an IP licensing transaction can be quite complex, and we will only provide an overview of some common aspects related to Outbound Pharmas. Those interested can refer to the author’s previous articles on the legal risks in pharmaceutical technology licensing transactions. 七宗错丨医药领域技术许可交易的法律风险（上）[1]及七宗错丨医药领域技术许可交易的法律风险（下）[2]。
Subtypes under IP Licensing
Model 1: BD Transaction (b) Commercialization Licensing is a subtype of IP licensing, but the differences are:
A wider scope
IP licensing covers a broader range of activities, including development, clinical registration, production, and commercialization, whereas BD transaction (b) Commercialization Licensing is limited to the commercialization stage.
An earlier timeline
BD transaction (b) Commercialization Licensing typically occurs in the clinical IIb/III phase, when the product is near to commercialization. In contrast, IP licensing may include development, clinical registration, and commercialization, and is often negotiated at the early clinical or even preclinical stage.
In IP licensing, we often encounter (c)IP Out/In-Licensing and (d)R&D Collaboration. Although both can be categorized as a form of IP licensing, their goals differ:
IP Out/In-Licensing
The licensor’s goal is to realize the asset value of its intellectual property (IP) in advance. The Outbound Pharma (licensor) authorizes its partner (licensee) to share the responsibilities of product development, regulatory approval, and market promotion in the agreed-upon fields, regions, and scope, either alone or together.
R&D Collaboration
The licensor’s objective is to enhance research and development capabilities and innovation capabilities, thus its key focus is on sharing technology, resources, skills, and assets with its partner(s) in an aim to develop new technologies and products. Both parties collaborate according to their respective strengths, sharing the risks and benefits of development, which helps to reduce the risk of failure for individual projects.
The author has provided a detailed analysis of additional considerations in IP Out/in-Licensing agreements in previous articles. In R&D Collaboration agreements, extra attention should be paid to the division of labor, work arrangements, deliverable requirements and timelines, acceptance, and IP ownership provisions, etc. It is particularly important to clarify: the agreement on joint work outcomes, the right to secondary development, publication rights, patentability rights, the maintenance obligations for background and foreground intellectual property, IP ownership and revenue distribution, and the right of first refusal for shared intellectual property.
The comparison between the IP licensing and Model 4: the NewCo Model is discussed in details in Model 4 below.
Model 3: Mergers & Acquisitions (M&A)
In recent years, global pharmaceutical companies have been very active in mergers and acquisitions. Acquisitions involving Chinese pharmaceutical companies are also on the rise. Overseas, some multinational corporations (MNCs) and foreign investors are interested in the technological development and potential of Chinese innovative drug pipelines. Domestically, the Chinese government has also introduced policies encouraging mergers and acquisitions, such as the “Opinions on Deepening the Reform of the Market for Mergers and Acquisitions of Listed Companies” released in September this year.
The following is a legal overview of some common merger and acquisition models in the biopharmaceutical industry.
Equity Acquisition and Asset Acquisition
From the perspective of the target’s attributes, mergers and acquisitions can involve the acquisition of equity or assets.
(e) Equity Acquisition
Advantages: Equity acquisition is favored for its transactional convenience, rapid resource integration, and better retention of the target company’s overall structure and operational continuity.
By signing an acquisition agreement with the target company’s shareholders, the acquirer can quickly gain control of the target company, thereby achieving synergies and combining the outbound pharmaceutical company’s innovation efficiency with the commercial capabilities of a large pharmaceutical company. This enables rapid scaling and concentration of resources.
In the context of an equity acquisition, the change typically involves only the shareholders, and the target company itself remains unchanged, which theoretically should not affect the MAH certificates and other regulatory permissions already obtained or under application, various system assessments, EHS certifications, etc., unless there are special foreign investment access, export control, or special approval requirements in that country/region for this specific industry or based on the target company's situation.
For example, China’s “Special Administrative Measures for the Access of Foreign Investment (Negative List) (2024 Edition)” and the “Catalogue of Technologies Prohibited and Restricted from Export (December 2023)” involve companies or businesses related to the U.S. TID (Technology, Infrastructure and Data) and the Critical and Emerging Technologies List. These require compliance with the regulatory provisions of various countries, including approval from China’s Ministry of Commerce/Ministry of Science and Technology, as well as the U.S. CFIUS (Committee on Foreign Investment in the United States), which may also be involved in asset acquisitions.
Disadvantages: The main concern with equity acquisition is the potential for unknown liabilities or shareholder responsibilities, which may lead to hesitation from the acquirer.
(f) Asset Acquisition
Advantages: If the acquirer is concerned about hidden debt risks and is only interested in the target company’s key assets, asset acquisition is a good choice. From the perspective of risk control and capital efficiency, asset acquisition enables the acquirer to obtain the target company’s valuable assets while avoiding unnecessary liabilities.
Disadvantages: Asset acquisition is more complex than equity acquisition. For example, it is necessary to consider the scope of the assets to be acquired and the acquisition arrangements, including the transfer, change, or re-application of qualifications, licenses, and regulatory permissions, the actual and legal transfer of intangible assets such as intellectual property and data, the transfer of tangible assets such as real estate, machinery, equipment, and inventory, the transfer or change of subject and handover of personnel and business contracts, etc. Moreover, since asset acquisitions are not as "complete" as equity transactions, their synergies are also not as strong as those in equity acquisitions.
Regulatory Changes: The biopharmaceutical industry is a highly regulated industry in countries around the world, and asset acquisitions will inevitably involve changes and re-recognition of regulatory licenses and qualification approvals, which is a complex process. For example, when it comes to post-marketing changes of drugs in China, it is not just that relevant changes need to be completed according to the “Administrative Measures for Post-Marketing Changes of Drugs”. Further, notably, in the “Announcement on Strengthening the Supervision and Administration of Drug Contract Manufacturing (Draft for Comments)” publicly solicited for opinions by the National Medical Products Administration of China on November 5th, further restrictive measures are proposed for the transfer of MAHs under specific circumstances.
At the FDA level in the U.S., an IND approval can be transferred following certain procedures, but changes to New Drug Application (NDA) approvals must be disclosed or approved (including major changes requiring prior approval, moderate changes requiring general approval, and minor changes requiring to be reported annually). The U.S. also operates an establishment registration system for drug manufacturing facilities, which means that if the production facility is sold as part of an asset acquisition, the acquirer may need to re-register the facility.
Triangular Mergers and Reverse Triangular Mergers
As mentioned above, equity mergers and acquisitions (M&A) and asset acquisitions each have their own advantages and disadvantages. Important considerations in M&A also include tax planning, as well as the impact of economic, political, and regulatory requirements in various countries. Therefore, in actual transactions, the models are more diverse and comprehensive. For instance, one term that often arises in cross-border mergers and acquisitions is “triangular mergers”. This is especially common when the acquisition involves a U.S.-based company. In this context, both Triangular Mergers and Reverse Triangular Mergers are commonly used. Below is a simplified diagram to illustrate these two merger models:
As seen in the diagram, both triangular merger models begin with the same initial steps. The key difference lies in which entity continues to exist after the merger: in a Triangular Merger, the SPV B continues, whereas in a Reverse Triangular Merger, the target company continues to exist.
These two merger models are widely used when acquiring U.S. companies, due to certain advantages they provide under U.S. law, including:
Risk Mitigation for the Acquiring Parent Company
Ø These models create a “firewall” for the acquirer’s parent company, isolating and reducing transaction risks (such as breach of contract, compliance with regulatory rules in different countries, etc.) and asset risks (such as potential debt risks after acquiring the target company). This ensures that the acquiring parent company only bears limited liability based on its holdings in the subsidiary.
In the Triangular Merger, SPV B assumes the responsibility of risk isolation for both transaction and asset risks. In the Reverse Triangular Merger, SPV B bears the transaction risk in the early stages, while the target company assumes the responsibility for asset isolation post-merger.
Simplified Decision-Making Process
Under U.S. law, an acquiring parent company may need shareholder approval for a direct merger. However, if the acquirer sets up a subsidiary to conduct the merger, shareholder approval can be waived, and the parent company’s board of directors can make the decision, provided specific conditions are met. Therefore, triangular mergers help streamline the approval process by bypassing the need for shareholder approval under certain circumstances.
Lower Transaction Costs
Using the acquirer’s parent company shares as a form of payment for the acquisition allows the acquirer to avoid the need for large cash payments, which is particularly beneficial for tax planning. If certain conditions are met (including continuity of interest and business), the transaction may qualify as a tax-free reorganization under U.S. tax law, thus deferring the recognition of income and taxes.
Similarly, under Chinese law, cross-border reorganizations may be structured to avoid recognizing income or triggering immediate tax liabilities, provided certain tax-related restructuring conditions (e.g., satisfying the “cross-border reorganization” regulations) are met.[3]
Model 4: the NewCo Model
Background of the NewCo Model
Starting in 2023, many Chinese pharmaceutical companies have used the NewCo model for their overseas transactions. For example, companies like Jiangsu Hengrui vs. Hercules, Allist vs. ArriVent, Keymed Biosciences vs. Belenos, and EpimAb Biotech vs. Vignette Bio have all used this model.
Common Features of These Deals. The process can generally be summarized as follows: Establishment of NewCo (a new company, NewCo, is established in an overseas jurisdiction, with the Outbound Pharma/some of its shareholders and relevant management team holding shares in NewCo) → Exclusive IP licensing/asset transfer (the Outbound Pharma exclusively licenses or transfers the overseas regional rights/assets of its pipeline to NewCo. Early investors typically come in during these first two steps) → Independent financing of NewCo, operation and development by an independent management team (the overseas management team is responsible for financing, research and development, clinical operations, and subsequent independent development of NewCo).
The NewCo model has gained popularity recently because of its clear advantages.
For the Pharmaceutical Company: On one hand, for an Outbound Pharma, the fast-maturing pipelines are often the core assets of the company, and the impact on the company’s financing valuation and listing after BD transactions needs to be comprehensively assessed. However, it is more operationally feasible in reality to spin off secondary pipelines with high potential value but low strategic priority, or to retain the rights to the pipeline in China while licensing its overseas rights for refinancing, development, clinical trials, and monetization. In this way, an Outbound Pharma can not only receive upfront payments through IP licensing agreements to fill the gap in R&D funding, but also hold shares in NewCo to anticipate the value-added benefits of NewCo in the future.
For generic pharmaceutical companies with innovative drug pipelines, it is easier to tell a compelling story and establish a more attractive valuation after splitting off the innovative drug pipeline, as the market generally applies different valuation logic for generic versus innovative drug companies.
On the other hand, playing the timing game. In BD transactions, MNCs often prefer pipelines that have already entered Phase II or III clinical trials and can be launched on the market in the short term. Pipelines in the early to mid-stages require external financing to support further development and clinical trials. Considering the investor preferences discussed below, the NewCo approach can optimize the matching of innovative drug assets with capital needs. At the same time, NewCo conducting clinical trials in the United States and other places undoubtedly would supplement the overseas clinical data of the pipeline, which is also a favorable support for the advancement of domestic clinical trials.
For Investors: Investors, particularly in secondary markets, have faced increasing pressure for exit. Although the market is gradually recovering, they are still cautious and prefer to invest in one or a few promising pipelines. Moreover, pure US dollar funds invested in overseas projects that land abroad have fewer geopolitical entanglements. At the same time, the exit path is clear; after three to five years of nurturing to the later stages of clinical trials with sufficient profit margins, it is possible to reach BD transactions with MNCs, sell the company in a trade sale, or go public independently.
As we discussed in the context of the M&A (Mergers and Acquisitions) model, this makes it easier to complete a transaction compared to an older company with complex ownership structures, unknown debts, and multiple investors with prior rights. A newly established NewCo has a short history, a limited number of shareholders, and a simple operational structure with clear liabilities.
Examples of NewCo Success: Vignette Bio (established with EpimAb’s participation) and TRC (established with Genor Biopharma’s participation) were acquired by multiple U.S.-based funds in 2024 through a combination of mergers and financing rounds. Similarly, Candid Therapeutics, via a three-way merger and multiple rounds of financing, acquired two T-cell engager (TCE) pipelines and raised $370 million.
Considerations in the NewCo Model
In the author’s view, the NewCo model is not a novel concept. It is quite similar to the strategic spin-off approach used by large pharmaceutical companies more than 10 years ago to unlock the potential value of numerous pipeline IPs. For example, Pfizer spun off its animal health business into Zoetis in 2013[4], Abbott spun off its research-based pharmaceutical business into AbbVie in 2012[5], Merck spun off its Medco Health Solutions business in 2003[6], and Abbott spun off its drug manufacturing and medical devices business to form Hospira in 2004[7].
Compared to a Spin-off, the NewCo model is more complex, involving a multi-layered transaction structure: equity investment by the licensor or its shareholders in NewCo(equity investment transaction), licensing of overseas pipeline IP (IP licensing agreement), and related asset acquisition/divestiture(asset acquisition agreement, where applicable). This structure requires a comprehensive understanding of various factors, such as equity investment, IP licensing, tax planning, capital markets, and compliance with regulations related to biosecurity, sensitive data, import/export control, antitrust review, and foreign investment restrictions in both the pharmaceutical company's home country and the overseas jurisdictions involved.
Based on past deal experience, the author briefly highlights a few considerations below:
Licensor’s Equity in NewCo
Foreign Dismantling and Foreign Equity (Red-chip Structure Splitting Offshore Equity)
For Chinese pharmaceutical companies with overseas red-chip structures, it is relatively easy to establish or participate in NewCo through their overseas entities.
Common shareholding structure of NewCo: New Investor + Management Team + Licensor. From the perspective of the licensor, common structures include equity participation (where related entities of the licensor hold shares in NewCo., and NewCo is an equity participating subsidiary of the licensor), and parallel structure (where shareholders of the licensor hold shares in NewCo according to their relative shareholding ratio and thus NewCo and the licensor are sister companies).
Domestic Dismantling and Foreign Equity (Domestic entities dismantling foreign equity)
The common holding structure is roughly the same as the aforementioned foreign dismantling and foreign equity.
It is worth mentioning the requirements of China’s foreign exchange management. For a domestic Chinese company to hold shares in a foreign NewCo, it needs to complete an overseas investment filing (ODI). If shareholders, senior executives, and other Chinese individuals of a domestic Chinese company intend to hold shares in a foreign NewCo, they also need to complete foreign exchange registration for foreign investment and shareholding. The path and method depend on the company, individual, and financial situation, and it is necessary to consider the feasibility of the Circular 37 registration, the Circular 7 document for employee stock incentives, or even the specific ODI path.
If the domestic entity is a listed A-share company, the situation becomes more complex. The reasonableness of the asset valuation method for the split/authorized overseas equity, and whether it will be perceived as undervalued by the market, thus affecting the stock price, should be carefully considered. Additionally, the rationality of related party transactions, interim dividends, and the financial treatment of long-term equity investment when the NewCo is not listed must also be taken into account.
The integrity and distinctiveness of IP licensing.
NewCo will need to operate and finance independently after its establishment, and the IP it is licensed must be independent, complete, and meet the expected use of NewCo. Key concerns include:
Ownership Division
Is the scope/rights/priority of the exclusive license granted to NewCo, the rights retained by the licensor, and the technology development rights, IP/ regulatory applications, ownership of results, and revenue distribution outside the field of exclusive licensing clearly defined?
Improvements and Non-competition
» Do both NewCo and the licensor have the right to make improvements? Are the rights to improvements already covered by the scope of the license? How does the licensor commit to non-competition, and is such a commitment actually made?
Allocation of Litigation Rights
» Which party is responsible for suing or defending against third-party infringement claims? If the licensor is not prepared to litigate or initiate legal action, it must inform NewCo in a timely manner to authorize and allow the Newco to proceed with such litigation.
Financial and tax planning arrangements
Valuation and Consideration Linkage
How should the valuation and payment for the overseas pipeline/technology rights/assets under the IP licensing agreement and (potential) asset sale agreement be arranged in relation to the consideration that the licensor should pay for its investment in purchasing shares in NewCo under the equity investment transaction documents (if any)? If the IP licensed to NewCo is invalidated or its value is impaired, what remedial measures should be taken, and is it necessary to adjust the equity ratio? Correspondingly, when NewCo’s subsequent valuation is reduced or anti-dilution occurs, does it have an impact on the licensor's shareholding ratio in NewCo? These arrangements need to comply with the provisions of corporate law and contract law to ensure the fairness and reasonableness of the transaction.
Financial Terms Coordination
When NewCo subsequently reaches a commercialization transaction with an MNC, or in the event of equity or asset acquisition, how should the milestone payments and royalty shares under the IP licensing agreement, as well as the dividend/rights issue agreements, property distribution rights, and priority and preference arrangements of a shareholder in the event of company asset/equity sale or liquidation, be coordinated and linked?
Assessment and Cross-Border Tax Planning
What is the basis for the pricing of the rights/assets of the overseas pipeline/technology that the licensor carves out/authorizes to NewCo? Even based on asset valuation, the issue of reasonableness must also be considered.
In terms of tax planning, a comprehensive assessment is needed based on the licensor’s expected profit exit from NewCo. The main expected income sources are: royalties from the IP licensing agreement between the licensor and NewCo? Dividends to the licensor’s shareholders after NewCo reaches a BD transaction with an MNC? Waiting for NewCo to be acquired? Going public independently? Or splitting from a domestic listed company to go public overseas? Different sources of income result in different tax burdens. Considering the differences in tax systems across various countries and regions, as well as their individual tax treaties with China, the planning of the corresponding entity establishment location, shareholding, and transaction structure under the NewCo model requires case-by-case review.
Contract Termination and Other Matters
Termination with Greater Caution
Compared to the traditional pharmaceutical IP licensing model, the termination of IP licensing agreements under the NewCo model would have more complex implications. This is because the interests of the licensor and the licensee are closely intertwined in this model. Once the licensing is terminated, NewCo loses its value proposition. Therefore, under the NewCo model, IP licensing agreements are terminated only under very specific conditions, and it is necessary to clearly define the responsibilities of all parties in the event of termination. Attention should also be paid to coordinating with the equity investment transaction documents of NewCo.
Not a Panacea
It is worth noting that the NewCo model is not suitable for all innovative pharmaceutical companies. Whether it is “Foreign Dismantling and Foreign Equity” or “Domestic Dismantling and Foreign Equity” for small and medium-sized innovative pharmaceutical companies with limited pipeline reserves, if they take out their fast-moving core pipelines for the NewCo model, it will create some conflicts with the interests of the original investors. Original investors usually vote against or demand compensation for their interests due to concerns about potential damage.
Even if the spun-off pipeline does not constitute all or the vast majority of the assets, from the perspective of the licensor’s investor shareholders, they may still question the fairness of the related party transaction pricing and subjectively believe that the NewCo model has to some extent reduced the overall value of the invested company (i.e., the licensor), and exercise their veto power to block the transaction. A recent example is that last month, a Hong Kong-listed pharmaceutical company’s plan to spin off its overseas asset rights was met with strong opposition from shareholders and the company was forced to abandon the plan. In this regard, how to balance the interests of existing institutional shareholders from the aspects of commercial substance and transaction structure requires great wisdom of the licensor and the transaction lawyers.
Conclusion
In conclusion, regarding the several models mentioned in this article, in addition to the points already discussed, let's use the recently popular NewCo model as a reference point for a simple comparative summary:
NewCo Model vs. BD Transactions
The NewCo model generally targets early to mid-stage pipelines, with transaction counterparts often being investors who need overseas funds to support NewCo’s pipeline in completing clinical trials. In addition to subsequent docking with BD resources, there is also a reliance on the clinical operation capabilities of the overseas management team to generate data to support NewCo to enter into the next phase. In contrast, BD transactions typically occur during phase IIb or III of clinical trials, where innovative pharmaceutical companies have usually already raised funds for the clinical trials themselves; the upfront payment is used to replenish R&D funds, but it is not in the “waiting for the next meal” state as in the NewCo model. The transaction counterparts are MNCs or distributors, with the goal of “selling medicine”. In summary, compared to the ultimate goal of commercialization in BD transactions, the NewCo model can be considered as “half of the journey is ninety percent complete”.
NewCo Model vs. IP Licensing Model
The upfront payment in the NewCo model is lower. However, the licensor will continue to hold equity in NewCo, and when the company appreciates upon reaching the next stage of (financing) transaction, there is an expectation of sharing in the gains (although the licensor’s shareholding percentage will be continuously diluted).
The NewCo model introduces overseas funds as shareholders and is managed by an international management team responsible for the clinical operation of the pipeline products, which can gain international resources and team experience as a boost. Moreover, compared to the more detached and loose-cut JSC (Joint Steering Committee) or JDC (Joint Development Committee) in the IP licensing model, if the licensor has the opportunity to secure a seat on the NewCo board, it can also have a certain say (of course, this also depends on the meeting rules of NewCo and the rights arrangements of all shareholders).
As previously mentioned regarding (d) R&D Collaboration under the IP licensing model, where extra attention needs to be paid to the division of labor and responsibilities between both parties, as well as the ownership and profit distribution of the development work outcomes, if closer cooperation is desired, the NewCo model can also be an option to consider.
NewCo Model vs. M&A (Mergers and Acquisitions) Model
The M&A model aims to achieve economies of scale and enhance market competitiveness through the integration of resources, that is, 1+1＞2. Compared to the NewCo model, the target in the M&A (mergers and acquisitions) model offers greater certainty for the buyer; for the seller, if it involves the sale of controlling rights or core assets, the shareholders to some extent achieve an exit at that time. In the NewCo model, since NewCo typically only targets specific overseas rights of certain pipelines that have been spun off, the innovative pharmaceutical company still retains the possibility of its own development (financing, being acquired, or even IPO transactions). The spun-off NewCo will independently raise funds, conduct clinical trials, and operate overseas, allowing the innovative pharmaceutical company itself to focus more on key pipelines, diversify risks, and also alleviate financial pressure.
It is worth noting here that attention should be paid to the provisions of “deemed liquidation events” in the historical financing transaction documents of the licensor. Whether it is selling assets to NewCo or exclusively licensing IP to NewCo, if the proportion/value of the assets within the company is too large, it may be considered as the licensor disposing of all or the vast majority of its assets, thereby triggering liquidation clauses and investors may be entitled to exercise their liquidation preferences. In practice, with the rise of the NewCo model, industry insiders have already seen situations where institutional shareholders, in an effort to realize earnings and exit as soon as possible, list the pre-determined earnings obtained by the invested companies through the NewCo model as a repurchase trigger event.
As the global pharmaceutical market continues to evolve, the journey of Chinese pharmaceutical companies going global will be faced with both challenges and opportunities. Diversified transaction models provide valuable strategic references for Chinese pharmaceutical companies for them to play a more important role on the global stage. By comprehensively considering various factors and choosing the most suitable path to go global, with dual engines driving both domestically and overseas, Chinese pharmaceutical companies would have a chance to soar in future competition.
Special thanks to my colleagues Wang Xiaoyun, Liu Xinyue and Zhang Chong for their strong support in preparing the course.
注释
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作者介绍
Hanshuo ZHOU graduated from East China University of Political Science and Law and the University of Texas at Austin School of Law in the United States, earning law degrees in both China and the United States. She is qualified to practice law in the Chinese Mainland and the state of New York, USA.
Hanshuo ZHOU has been engaged in legal work for over twenty years, specializing in legal and compliance affairs in the field of life sciences and healthcare, including minority equity investment, M&A transactions, in/out licensing, BD and commercialization transactions, compliance and risk management of pharmaceutical and medical device companies and their product R&D, clinical trials, registration, and promotion.
Hanshuo ZHOU has been listed as a "Highly Recommended Lawyer in Healthcare" in the Greater China region by the internationally renowned legal rating agency "Chambers and Partners", and has been listed as a "Recommended Lawyer Life Sciences & Healthcare" for many consecutive years in the annual Asia-Pacific-Greater China region list and China's top lawyer list issued by international legal rating agencies such as "The Legal 500" and "LEGALBAND". Hanshuo ZHOU also won the "Best in Life Science" award in the Asia region at the "Women in Business Law Awards 2020" announced by the internationally renowned financial media Euromoney.
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