A growing phenomenon: The rise of biopharma NewCos in China

A NewCo is a new, blank-slate company housing a drug candidate that attracts venture capitalists (VCs) as investors.

NewCos are similar to outlicensings: both find partners to raise money for China drug developers. There is a major difference, however. In an outlicensing, another biopharma acquires the candidate. In a NewCo, the new owners are a group of VCs.

In addition, the NewCo offers an important advantage over outlicensings: “The structure of NewCos allows the originator company and financial investors to continue to participate in the asset(s). An outlicensing generally means that the licensee now owns the asset(s),” said Helen Chen, a greater China managing partner and health care co-head of L.E.K Consulting in an exclusive interview with BioXconomy.

For Chinese biopharmas, the problem is money. Many companies now have more drug candidates than cash to develop them. Partly, this stems from the difficulty in finding financing in China, where biopharma valuations have tanked and investors have largely disappeared. 

“Traditional exit paths for investment in [the] China biopharmaceutical industry have become less clear,” said Han Kun Law in a statement that highlights the difficulty of finding financial support in China.

Consequently, over the last few years outlicensings have become the best (and sometimes only) way for cash-strapped Chinese biopharmas to raise capital. NewCos offer an alternative. 

The NewCo Structure

To develop a NewCo, a Chinese biopharma forms a new company in the US then spins out a drug candidate into the NewCo. It then partners with VCs and finally builds a management team. Investing in a single asset may be more attractive to VCs than supporting the entire company, allowing VC investors to make large commitments. So far, the largest NewCo financing is $400 million.

While the new capital might be the most important feature of NewCos, they have three other key attributes that outlicensings do not:  

• The structure allows the biopharma to continue its involvement with an asset rather than handing it over to another company. 

• A NewCo’s only priority will be the candidate: the asset will not get lost in a multinational pharma’s large portfolio of clinical stage assets. 

• The China biopharma will continue owning its IP, sending an IP license to the NewCo. 

In fact, the original donor biopharma is usually more involved at the beginning of the NewCo’s life, with later participation limited to a board seat. Additionally, the biopharma’s involvement may not extend to authority over major financial decisions because the VCs own the majority of the NewCo and retain control over the money.  

Morgan Lewis, a global law firm with an office in Shanghai, China believes that a biopharma should keep its best assets and sell off the less promising ones: “Spinning off less-prioritized pipelines for external funding maximizes their value while extending the company’s cash runway for core products,” the company said.  

Han Kun Law took a different stance, urging companies to offer candidates with “promising market potential.” While this does not necessarily mean lead candidates, it does stress that the asset must be enticing to investors. 

According to Chen, NewCos follow the basic rules of investing: “The attractive candidates for NewCos are the same as attractive candidates for outlicensing – innovative assets that will meet significant unmet needs in their target markets,” she said. However, she does see one special case: “assets that require large Phase III programs.” A typical pharma licensee might not be able to raise the funds for these assets, but “financial investors for NewCos” might.

It’s the latest best thing 

The NewCo concept is new, viable, and interesting, and it has become a hot topic among China’s biopharmas. Han Kun Law reported they have had conversations with 10 biopharmas about NewCos in the past few months. 

Chen agrees: “With the eye-opening deals that [have] been announced, even those who weren't thinking about this previously may now be approached by those putting together the deals,” she said in a Bloomberg article.

Trouble in paradise 

Money was the issue that surfaced in the first announced NewCo, a Hengrui Medicine asset. 

In October 2023, Hengrui outlicensed global rights (ex-China) for a Phase II asthma drug candidate to Aiolos, a NewCo, for $25 million upfront in a deal that raised $245 million from four VCs. 

In early January 2024, just three months after the company announced VC backing, Aiolos sold the rights for the asthma candidate to GlaxoSmithKline (GSK) for $1 billion, plus $400 million in earn-outs, a $975 million profit, all of which went to the VCs. Hengrui received nothing from the sale, though GSK will continue to pay Hengrui’s milestone and royalty payments from the original NewCo deal.

In other words, Hengrui is not worse off after the sale. But it was not invited to share the windfall profits because it did not have equity. The upshot of this story is that VCs operate on much shorter timelines than their pharma partners, which may or may not be a negative for the general NewCo concept.  

Moreover, the story also reflects the probable role of the NewCo. In most cases, NewCo VCs have no interest in a long-term relationship. Their job is to advance the candidate and strike a deal. Of course, if you do not even have to advance the asset to make a profit, you do that.  

“I would expect the financial sponsors will be planning exits,” Chen said. “This could mean IPOs for the NewCos or trade sales to large pharmas. In that way, [NewCos are] not that different than funding a biopharma.”

Undaunted, Hengrui tries again  

Hengrui could have refused to form another NewCo, but that is not what happened. In May 2024, the company formed a second NewCo with four major VCs. This NewCo, then known as Hercules, holds three of Hengrui’s glucagon-like peptide-1 (GLP-1) candidates for weight loss, a hot but crowded area.  

The three assets are: a GLP-1 stimulator in Phase II trials for Type 2 diabetes and obesity; a dual-targeted GLP-1/GIP in mid-stage trials for the same market; and a triple-targeted GLP-1/GIP/GLP-1R candidate in preclinical development. 

Because two of Hengrui’s assets have different mechanisms than most GLP-1 candidates, the company put together a blockbuster deal for the three. However, this time around Hengrui owns a 19.9% stake in the NewCo. The VCs’ $400 million bought 70.1% of the company. and the remaining 10% is reserved for an employee stock ownership plan. 

Hengrui made it known that it gave up $113 million in cash for its near 20% stake. Development milestones were also small totaling only $200 million, less than the usual numbers for a blockbuster drug in an outlicensing, but the backend royalties could be worth up to $5.7 billion.

Hengrui launched the first China NewCo in 2023, took the biggest hit in the GSK deal, and now has the NewCo with the largest backing and three assets in the hottest sector of biopharma development. That’s a major commitment.

What’s next? 

No one is claiming credit for being the initial guru behind the NewCo idea. Other tech industries have been using variations of them, mostly spinoffs into subsidiaries.

The difference from these spinouts is that NewCos have a rigid formula: foreign market rights and backing by VCs. The genius here may be in recognizing that VCs are drawn to backing a specific asset for a relatively short time with nearby exits. As much as possible, the assets are derisked.

For VCs, the NewCos are an opportunity to operate directly in the biopharma business, instead of working with a company and its own agenda. The phenomenon also works for Chinese biopharmas, which are happy to have their assets advanced with someone else underwriting the bills.  

Taking the long-term view, Chen finds NewCos a positive force in China biopharma development: “The need and interest for Chinese biopharmas to develop assets worthy of international markets have been sharpened by the rise of NewCos,” she said. 

She doesn’t consider the overall effect to be revolutionary, but it is positive: “I don’t think anyone is rushing into the sector, that is, funding new companies, because of NewCos. But this new trend does allow existing innovators and their investors to capture some value from their time and investments.”

Maybe a stopgap, maybe a permanent feature of China’s biopharma landscape, NewCos offer something that wasn’t there before, something that brings additional novel Chinese drugs to international markets, while allowing the discovering biopharma to be a part of the journey.