Domestic biotechnology companies forced out by VC will become the protagonist of this round of transactions?

Interface News Reporter | Chen Yang

Interface News Editor | Xie Xin

In early April, a lawyer in the field of mergers and acquisitions of pharmaceutical companies lamented, "Since April, the demand of buyers and sellers has accelerated, and we can receive requests for acquisitions or sales every day." ”

In the field of biotech, there is a precedent for such a demand and willingness to be realized. On April 3, the Danish pharmaceutical company Genmab acquired the domestic biotech Pufang Biotech for US$1.8 billion (about 13 billion yuan).

This is the fourth domestic biotech acquisition in the past six months. Previously, multinational pharmaceutical companies (MNC) AstraZeneca and Novartis acquired Gracell Biologics and SanReno Pharmaceuticals respectively, and Nuvation Bio, a U.S.-listed company, acquired AnHeart Therapeutics.

Looking further back, the list of BD transactions based on pipeline assets is even longer, including blockbuster deals with BMS totaling more than US$8 billion, and Novartis and Bowang Pharmaceutical totaling more than US$4 billion.

In fact, behind the overseas expansion of domestic innovative drugs BD and the acquisition of biotech are a series of internal and external factors such as the improvement of the level of new drug research and development, the tightening of domestic IPO policies, the sharp increase in the exit pressure of investors, and the tight cash flow of biotech.

However, BD and M&A are not universal solutions. While some domestic new drug pipelines and biotechs are being sent overseas to participate in global competition, more naked swimmers will also turn around and quit.

Investors are forced to "sell out" under the pressure of withdrawal

On April 3, as soon as the news of Genmab's acquisition of Pufang Biotech came out, the most talked-about thing in the industry was the successful exit of the VC (venture capital) behind Pufang. The biotech focusing on ADC has previously conducted a total of 4 rounds of financing, with investors including Xianfeng Qiyun, Gaorong Capital, Changan Capital, Eli Lilly Asia Ventures, Zhouling Capital, Sequoia China and other well-known institutions.

Previously, the company's most recent (Series B) funding round was completed in February this year, with a transaction value of $112 million. New investors include Ally Bridge, Nextech Invest, T.Rowe Price and others. In other words, it was paid off in less than 2 months.

The same situation is clearer in AstraZeneca's acquisition of Genxi. On December 26, 2023, the parties announced that the acquisition of Gracell was valued at $1.2 billion, including $1 billion in cash and approximately $200 million in contingent value interests. The cash portion corresponds to US$10 per ADS.

Previously, Gracell had completed a Series C financing round in October 2020 and was listed on the NASDAQ in January 2021. In August 2023, the company also completed a round of private placement. Among them, the cost of ADS per ADS in the company's A, B and C rounds of financing was US$1.516, about US$5 and US$8 respectively, and the IPO round was about US$17. In the $150 million private placement, the $100 million transaction price will cost $3.60 per ADS and the $50 million warrant will cost $5.58 per ADS. In other words, except for the IPO round, all the participating institutions in each round have made a profit and exited, and the private placement institutions can be said to have successfully bought the bottom.

In fact, before the acquisition of several biotechs, domestic innovative drugs had set off a heat wave of going overseas. According to the data of Pharmacube, in 2023 alone, there will be a total of 228 transactions in the field of domestic innovative drugs, with a total down payment of 21.021 billion yuan. In the same year, the total IPO funds raised by 15 newly listed innovative drug companies were only 11.12 billion yuan.

From the perspective of buyers and sellers, MNC frequently makes frequent moves because it does not want to miss a hot track, such as ADC and GLP-1, which have been hot in recent years, and secondly, because of its own strategic considerations, such as pipeline synergy and complementarity, to strengthen its advantageous areas. For the "fledgling" domestic biotech, reaching a deal with MNC can not only obtain cash flow, but also endorse itself, which is conducive to the company's subsequent financing.

However, when referring to the current situation of the aforementioned industry, the common feeling of many respondents is that "domestic assets are still cheap". The founder of a domestically listed biotech gave Jiemian News an example, for example, in the hottest ADC field in China, the transaction price of foreign benchmarking pipelines is more than 10 times that in China.

The most important reason for further pipeline transactions and acquisitions is also "cheap", or more accurately, "valuation inversion", that is, the deviation between the valuation of the primary market and the value of biotech assets.

Dr. Liu Dan, a senior investor in the medical industry, told Jiemian News that institutions generally have a relatively mature pricing model for biotech's pipeline assets, such as comprehensively considering the R&D success rate, market penetration rate, product pricing, and when to reach the peak sales after listing, so as to reverse the value of the pipeline.

However, the current valuation of Biotech is much lower than the value of the aforementioned assets. "So if it's much cheaper for the buyer to buy the whole company, why not do it?" Ms. Liu said. In addition, the acquiring company also allows the buyer to further manage the target.

The reason why Biotech can accept the transaction is because of its own survival pressure and the exit pressure of the investors behind it. In the cold winter of the industry, it is no secret that domestic biotech reduces costs and increases efficiency, sells assets, cuts pipelines, lays off employees, and ensures cash flow.

In addition, Liu Dan explained that since 2017, a large number of RMB funds have been established, and their fund cycles are 5-8 years, that is, they are generally in the exit period in the current few years. Previously, the most mainstream exit path in the primary market was IPO. But with the tightening of domestic IPO policies, this road will not work. As a result, although the acquisition may be a "cheap sale", it also has to choose a faster way to monetize.

Gu Yang, a lawyer at Han Kun Law Offices, also told Jiemian News that some investors are considering whether they can obtain some commercial returns from the BD transaction of the invested biotech earlier through the relevant structure design.

But obviously, the biotech that can be favored by MNC is also a minority after all. The consensus in the industry is that the pipeline is innovative, fast-paced, and aligned with MNC's strategy as important factors for selection.

In terms of quantity, Liu Dan expects that there are about 10,000 biotech companies established in China in recent years, and even if 1% of them are of the highest quality, there are about 100 or reach the level of being acquired. However, there are more complex realities involved in specific transactions, so the number of acquisitions that can be completed in the single digits may be in the single digits.

In addition, Liu Dan believes that another trend is that there may not be too many particularly blockbuster transactions in the future. Because BD and acquisitions are ultimately commercial activities, more and more biotechs will become a buyer's market when they get to the stage of "selling", and MNC buyers will have more and more bargaining power.

It is difficult for domestic big pharmaceutical companies to become the protagonists of acquisitions

However, judging from the above four transactions, the common feature of the buyers is that they are all overseas pharmaceutical companies. In other words, in this round of market, can domestic biotech and big pharma companies form a clearer division of labor, with the former leading the development of innovative technologies, and the latter handling the later development and commercialization, moving towards a more mature pharmaceutical industry ecology?

On this issue, several respondents are cautious. One of the major obstacles is that domestic big pharmaceutical companies do not have the same financial strength as MNC, and the two sides of the transaction also have valuation differences.

Research by private equity fund Fengshuo Venture Capital pointed out that the cash on hand and acquisition power of large domestic pharmaceutical companies are not enough to acquire biotech in the domestic secondary market. It screened out 30 large domestic pharmaceutical companies with a market value of more than 19 billion yuan and whose main business is mainly pharmaceuticals, as well as 48 biotechs whose initial IPOs were listed through the fifth set of the Science and Technology Innovation Board or Hong Kong stock 18A, and had a market value of less than 19 billion yuan. According to the data as of the end of 2022, the monetary funds of China's top 30 large pharmaceutical companies totaled 182.1 billion yuan, while the total market value of the aforementioned 48 biotech companies was 277.4 billion yuan.

In addition, from the perspective of evaluating the acquisition power of large pharmaceutical companies in terms of R&D investment, referring to the list of the top 20 pharmaceutical companies published by Drug Discovery Trends, the R&D investment of the top 20 pharmaceutical companies in 2021 and 2022 will be US$141.1 billion and US$118.2 billion, respectively. The value of M&A transactions disclosed in these two years was US$77.4 billion and US$84.7 billion, respectively.

In other words, the total R&D investment of the top 20 overseas pharmaceutical companies can cover the total amount of acquisitions disclosed in the same period. However, in 2022, the total R&D investment of the top 30 domestic pharmaceutical companies will be 35.058 billion yuan, far lower than the sum of the market value of the aforementioned 48 biotechs, and less than the 48.6 billion yuan raised in the primary market of domestic innovative drugs in the same period.

Another problem is that the domestic pharmaceutical payment environment means that it is not easy for either big pharma or biotech to make money. The former has to transform to innovation under industry policies such as medical insurance fee control and volume-based centralized procurement, while the latter does not have the burden of price cutting and shrinking profits of generic drugs, but it is also facing the dilemma of innovative drug pricing and hospital admission.

Therefore, even if traditional big pharma companies have the motivation to acquire biotech, the latter has more demand to go overseas. In particular, biotechs with stronger innovation attributes often plan to face the global market at the beginning of the project, but in this regard, domestic large pharmaceutical companies have no advantage.

The founder of the above-mentioned domestically listed biotech analyzed to Jiemian News that most domestic pharmaceutical companies actually want to buy out biotech. If the company is making a mature product, there is no problem in this way, and the seller can take the money and leave. However, for innovative drugs for the global market, biotech needs to continue to open clinical trials, do combination drugs, expand indications, and do overseas development. If the pipeline is handed over to a domestic pharmaceutical company that is only good at selling drugs, once it does not do a standard job in product development, it will affect its development progress and value throughout the world.

Due to the difficulty of realizing the value of overseas markets, it is also difficult for domestic big pharmaceutical companies and biotech to reach a consensus on valuation.

In addition, many interviewees mentioned that although large pharmaceutical companies are also continuing to innovate and transform, their mentality and habits are more inclined to self-development rather than acquisition. Liu Dan said that after years of development, the overseas biomedical industry has formed a clear division of labor, and big pharmaceutical companies are also willing to pay for IP (intellectual property).

But the situation at home is different. Domestic pharmaceutical companies still prefer the fast-follow model. Although it is difficult to make first-in-class or best-in-class products, it is considered by big pharma to be a more cost-effective way to narrow the gap between the benchmark pipeline and the benchmark pipeline by investing manpower and investment sources. As a result, it is difficult for domestic companies to make acquisitions.

What cannot be ignored is that in the case of the failure to improve the domestic capital market, Biotech cannot raise money and is difficult to sustain, and there will inevitably be a round of liquidation. In fact, such cases have already appeared. In September 2023, Reistone Biotech announced its dissolution. Since 2024, Boji Biotech and Landun Biotech, which focuses on CAR-T therapy, have also entered bankruptcy liquidation procedures.