(Yicai) Oct.30 -- China's biotech industry is fast evolving from a "product export" market to a "value export" powerhouse, reshaping cross-border deal-making, valuation models, and long-term global strategies, according to industry leaders gathering for the International Biopharma Industry Week and 12th BioCentury-BayHelix China Healthcare Summit in Shanghai.

For years, licensing products out was the standard for Chinese biotech companies seeking global validation and cash. It was an essential, efficient, direct one-time deal that could quickly improve cash flow, Gao Lu, vice president for business development at Shanghai Medicilon, told Yicai in an interview on Oct. 26.

Licensing remains a dominant model. The value of the licensing-out deals signed by Chinese biotech firms in the first half of the year reached USD66 million, surpassing last year's total of USD51.9 billion, according to industry data.

However, the so-called NewCo model, where Chinese biotech firms establish new entities to manage and develop their assets overseas, often backed by foreign venture capital, is becoming increasingly popular.

The NewCo model is an evolution from product export to value export that allows companies to share their assets' long-term value through equity stakes while retaining greater research and development control, Gao explained. For example, Medicilon's partner Hengrui Pharma has secured over USD14 billion in deals with global giants over its novel drugs as of August.

Multinational corporations are paying close attention to the development of NewCos.

These new investor-led entities can be seen as both competition and complementation, Deepa Talapade, SVP and head of business development and licensing for oncology and radiology at German pharmaceutical giant Bayer, told Yicai during the BioCentury BayHelix China Healthcare Summit that ended on Oct. 24.

The first NewCos that were established mostly focused on mature, late-stage products with abundant clinical proof of concept and relatively low risks, James Li, venture partner at Frazier Life Sciences and former chief executive officer of JW Therapeutics, said in a recent podcast.

But as these mature products were quickly secured by either direct licensing deals or VC-backed NewCos, more and more NewCos began evolving toward early-stage products in Phase I clinical trials or even in the pre-investigational new drug stage, Li noted.

The emergence of the NewCo model has increased market competition, thus making it more complex and more expensive for overseas companies to acquire Chinese assets. However, this also has some positives, as direct overseas funding can provide NewCos with more cash for clinical trials, which can help multinationals obtain clinically positive data, Talapade explained.

The industry has become very crowded, as every multinational now boasts large teams tasked with hunting for Chinese assets, Li said, adding that they are not only competing with each other but also with foreign VC-backed NewCos.

New High-Valuation Standard

Biotech deals over Chinese assets have become more and more expensive, and a debate about whether prices are excessive has inevitably arisen. "The deal prices in the last six months have gone crazy," Talapade said.

The problem is that investors are going to benchmark to these high-priced deals, and some of the smaller biotech firms might get hurt because they will ask for too much, she explained. If the deals fall apart because multinationals do not agree to the high prices, startups may not have enough funds to continue developing the assets on their own.

On the other hand, if the multinationals agree to the high prices, they would be facing high risks. In fact, while the startups would secure hefty upfront payments, multinationals would be the only ones bearing the risks of clinical trials if they miss the high expectations.

Gao was asked if she believes these valuations are too high, as some think they are actually fair or even 'bargains.' She said that these opposite views are actually an inevitable phenomenon that the market experiences when seeking a balance.

The exorbitant prices are nothing more than a fundamental shift in the market, as early-stage innovative assets with global first-in-class or best-in-class potential are now valued the same as mature products before, Gao noted.

"Valuations, high or low, are determined by the global clinical value and commercialization potential of the innovative asset," she explained.

Bayer Beyond 'Me-too' Assets

With higher prices, Bayer is being more cautious and selective in its investments in China.

"I'm impressed by the productivity of their pipelines, but some of them are just me-too pharmaceuticals," Talapade said. “Some of them are just me-too pharmaceuticals.”

She noticed that many Chinese biotech companies are seeking , such as antibody-drug conjugates and biospecific antibodies with novel payloads. "We still want to understand where the molecule actually comes from," Talapade noted.

This means scrutinizing the intentional development, chemistry, and structural biology of the assets, as data integrity is non-negotiable.

Bayer's oncology strategy focuses on precision. "If we don't understand which patients are going to respond to a drug, we will not take that therapy forward," Talapade added.

She told Yicai that she prefers simple deals like clean licenses but remains flexible if partners excel at something. For example, in a deal with Kumquat Biosciences, Bayer decided to let the partner run the Phase I clinical trials because it would have been faster that way.

Bayer's Strategy of Building Ecosystem Ties

To secure high-quality assets and build lasting relationships with Chinese partners, Bayer is adopting a different partnership model that goes beyond traditional licensing.

During her visit to China, Talapade met with her colleagues from the Bayer Co.Lab in the Shanghai Innovation Park, located in Zhangjiang Science City in the city's Pudong New Area.

Bayer Co.Lab is a pioneering global network of life science incubators focused on disruptive innovation and scientific breakthroughs. With strategic locations in Berlin, Cambridge, Kobe, and Shanghai, it connects early-stage entrepreneurs with world-class expertise, resources, and global networks, and empowers startups by providing state-of-the-art facilities, expert mentorship, and a vibrant community where they can transform groundbreaking ideas into powerful healthcare solutions.

The Bayer Co.Lab Shanghai is a "very neat incubation hub that has the ability to house up to 15 startups and give them support through a research and development network, leadership, and lab space," Talapade said.

With Bayer as an incubator, local startups can enjoy the multinational's expertise and network without tight strings. This can help Bayer establish strategic investment relationships before startups reach maturity, she noted.

"We may not make a deal with them at the end, but at least we will be on the list of those they will call [if they reach a breakthrough]," Talapade said. "It's a little bit of buyers' way to give back to the innovation ecosystem".

Global Operations, Geopolitical Hurdles

China's biotech industry is facing new, non-scientific challenges. For companies pursuing global expansion, the key to success now lies not only in scientific innovation but also in overall global operational capabilities, according to Gao.

These global operational capabilities include meeting strict regulatory requirements of the US Food and Drug Administration and the European Medicines Agency, managing cross-border clinical operations, and navigating complex market access and intellectual property rules.

Geopolitical tensions also play a part. Gao highlighted the impact of the geopolitical environment on cross-border cooperation and the importance of fostering innovation despite these challenges.

However, these geopolitical tensions also push China's industry toward "true, independent innovation and irreplaceable global competitiveness," she added.

In this regard, Talapade said that the US and Chinese governments "are going to make it work." The impact of the US Biosecure Act has not been catastrophic, as it has not stopped companies from doing some manufacturing in the US.

"Future cooperation will be increasingly based on solid scientific data, complementary technological advantages, and common market goals, rather than purely geographical considerations," Gao predicted.

Editor: Futura Costaglione