China biotech makes funding switch
Chinese biotech companies raised more funds from business development transactions than IPOs in 2023, the first time this has happened, but analysts expect IPOs and follow-ons to remain the more active fundraising channels in the longer term.
2023 was a dismal year for the A-share and Hong Kong IPO markets. Hong Kong struggled as international investors shunned Chinese stocks on concerns about slower economic growth and regulatory risks, while regulators slowed A-share IPO and follow-on approvals to rescue the flagging stock market. Biotech companies can often find good investor demand in the US, but political tension between China and the US made listing there difficult for Chinese firms.
Against such a backdrop, it is not surprising that biotech companies, which are normally loss-making until they develop a successful drug, and need huge expenditure for research and development, have been seeking alternative fundraising channels.
According to medical data provider Pharmcube, there were 228 biotech business development transactions in 2023 in China, with the initial payments of these deals totalling Rmb26.8bn (US$3.7bn), surpassing the Rmb11.1bn raised by 15 IPOs. (See Table.)
A business development (BD) transaction for a biotech can be a licensing transaction for a product or a merger or acquisition.
Though the BD deal amount was larger than funds raised from IPOs last year, analysts believed it was an anomaly and IPOs and follow-ons would remain a key fundraising channel.
"The initial payment of BD exceeded the amount of IPOs for the first time, which was actually due to the completion of several large BD orders in the last year," said Zhao Bing, a healthcare analyst at China Renaissance Securities.
Most of China's BD transactions in 2023 mainly came from cross-border out-licensing transactions, mainly to multinational corporations, and the downpayments for such deals were generally high.
The largest out-licensing transaction in 2023 was AstraZeneca's acquisition of Gracell Biotechnologies, with a downpayment of US$1bn (Rmb7.2bn) in cash, followed by Star-listed Sichuan Biokin Pharmaceutical's cooperation with Bristol Myers Squibb, with a downpayment of US$800m. There were eight other out-licensing transactions with downpayments exceeding US$100m.
Chen Chen, China healthcare analyst at UBS Securities, said many MNCs will see their existing patents expire in the next few years and need a new pipeline of products to fill the gap.
“But if they do in-house new drug research and development, it will take at least 8–10 years, so the fastest way for them to solve the problem is to purchase from other companies," she said.
"At the same time, some overseas biotech companies had rich returns from vaccines and Covid-19 antiviral medicines during the epidemic. When they considered the use of cash, they gave priority to buying product pipelines that were complementary to their own companies. Meanwhile, the Chinese biotech industry had experienced a valuation bubble in 2021, and now it has returned to rationality and even undervalued valuations, which is exactly the right moment to purchase for buyers,” Chen said.
China’s clinical pipelines of bispecific antibody (BsAb) and antibody-drug conjugates (ADC) are leading the world, Chen said.
Some Chinese companies are leveraging these BD deals to tap into the much bigger US market.
According to medical data provider Pharnexcloud, due to the disparity in medical expenditures and pricing of innovative drugs between China and the US, launching drugs in developed countries such as the US is the key to increasing sales volume. In 2021, US medical expenditure reached US$4.3trn, while China's was US$1.1trn.
“For Chinese biotech companies, out-licensing transactions are a shortcut to go global. If a Chinese company wants to market its drugs in the US, it will need to conduct expensive clinical trials there, which are 8–10 times more expensive than conducting trials in China. Moreover, most biotech companies in China are not familiar with how to communicate with the FDA and American hospitals and doctors. By cooperating with MNCs, these US giants can help them,” Chen said.
Key channels
In the longer term, analysts and bankers believe IPOs and follow-ons are still the key channels for biotech to raise funds.
"You won't have big BD transactions every year so IPOs and follow-ons are still the constant ways to raise funds. The biotech companies just have to wait for the market conditions to improve," said a healthcare banker.
No Chinese biotech IPO has been completed so far this year. Chinese clinical-stage biotech Qyuns Therapeutics is likely to be the first when it prices its Hong Kong IPO of up to HK$242.4m (US$31m) on March 18.
China Renaissance's Zhao believes some biotech companies may not consider fundraising via IPOs and follow-ons this year because of difficult market conditions but instead conserve cash by reducing costs and increasing efficiency.
"When cashflow is insufficient, they can still survive during the cold winter just by extending the product pipeline and retaining only core personnel,” Zhao said.
However, on Wednesday a widely circulated document, believed to be from the National Development and Reform Commission, the state planner, which has not confirmed its authenticity, raised the hopes of biotech issuers. The document states that "China will support a number of high-quality pharmaceutical companies for IPOs and other fundraising channels, including retaining financing channels for unprofitable biotech companies, such as IPOs, follow-ons, and mergers and acquisitions, and encourage state financial funds to invest in these qualified companies.”
Riding on the news, Hong Kong-listed KeyMed Biosciences surged more than 17%, RemeGen 15% and HutchMed China 13% on Wednesday.