The biopharmaceutical industry has shivered through a capital winter recently. Primary-market financing fell by 30% year-on-year in 2024, leaving many biotech companies short of funds, forced to slow research and development as well as business expansion.
Against this backdrop, the NewCo model has emerged as an innovative financing channel, an important alternative offering new fundraising paths for Chinese drugmakers that also help connect their innovative pipelines with global markets.
Li Hongmei
Partner
ETR Law Firm
A NewCo transaction typically involves a domestic pharmaceutical company spinning off the overseas rights to a drug pipeline into a newly established offshore entity. International investors and management teams jointly advance the project’s development and commercialisation. Eventual exit comes through either a listing of the new company or its acquisition by a larger pharmaceutical group.
In the past two years, NewCo transactions have expanded rapidly in China, with deal sizes ranging from tens of millions to several hundred million renminbi. Projects concentrate in popular therapeutic fields such as GLP 1, oncology and autoimmune diseases.
Transactions generally take the form of equity or licence transfers, with international funds often investing alongside domestic capital, suggesting that the model is becoming both mainstream and increasingly diversified.
While NewCos ultimately aim for acquisition by a major pharmaceutical company or successful IPO, their prospects hinge on research outcomes and market performance. If clinical development falters or commercial potential proves weak, the NewCo may struggle to attract a suitable buyer or secure a listing opportunity.
Compliance risks
The NewCo model must navigate substantial differences between Chinese and US regulatory frameworks. China maintains strict oversight over drug approvals, foreign investment and antitrust matters. China’s negative list on foreign investment also imposes shareholding caps in certain pharmaceutical sectors. In the US, the regulatory landscape extends to securities laws and national security reviews.
Significant discrepancies also exist between the two patent systems. In China, data protection for new drugs lasts six years, compared with up to 12 years in the US. Under the NewCo model, joint R&D between the partners can easily give rise to disputes over intellectual property ownership, while inadequate IP clearance during technology transfers may expose them to residual third party patent risks.
Financial and tax risks
Li Xinyi
Intern
ETR Law Firm
Chinese pharmas face dual pressures from exchange rate volatility and capital repatriation constraints. With much of their revenue coming from overseas, drugmakers are vulnerable to sharp swings in the renminbi, which can quickly eat into profits. At the same time, some firms struggle to collect overseas receivables on schedule, tightening cash flow.
When establishing a NewCo through asset transfers or equity contributions, firms must carefully assess whether the appreciation of contributed assets should be treated as a taxable deemed sale. If asset divestments involve cross border transactions, issues such as improper transfer pricing may trigger serious tax compliance risks.
Corporate governance risks
Information barriers and weakened decision making power are primary concerns for minority shareholders during establishment of a NewCo. Smaller shareholders often have limited insight into valuation of the underlying technology and terms of collaboration, leaving them unable to accurately assess the NewCo’s true worth or growth prospects.
Exit mechanisms such as share repurchase or liquidation clauses are not always designed in the interests of minority investors, whose low level of participation in governance may prevent them from realising expected returns once the company is listed or acquired.
Commercial, operational risks
Regulatory divergence in drug approvals. China emphasises domestic clinical trials and conditional approvals, while the US follows International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use standards and relies heavily on global multicentre data. Disparities in review timelines between the two systems can affect progress of cross border projects.
Data regulation. Under the NewCo model, genomic data of Chinese patients may be stored on overseas servers, potentially violating both China’s Data Security Law and the US Health Insurance Portability and Accountability Act, exposing parties to cross border data compliance risks.
Valuation challenges. Overvaluation during the commercialisation stage may deter foreign investors, while undervaluation can provoke opposition from existing domestic shareholders. Striking a reasonable valuation is critical.
Response strategies
Strengthening compliance review and due diligence. Companies should establish flexible compliance frameworks and dedicated in house compliance teams to monitor policy shifts in target markets, especially in high-risk areas such as antitrust and export controls, adjusting operations accordingly. Compliance must operate independently with clear accountability mechanisms. Regular training should raise awareness across the organisation.
Enhancing intellectual property management. Before launching new projects, drugmakers should conduct full patent risk assessments to identify potential issues and ensure that core technologies and products enjoy global patent coverage.
Agreements should clearly define the authorised scope, including patent numbers, claims, indications, commercialisation limits, territories and duration. Distinctions should be drawn between core and auxiliary technologies, with core patents licensed exclusively while auxiliary technologies may be licensed on a non exclusive basis.
To avoid clauses unduly restrictive of innovation, licensors should be granted a free or preferential licence for any improvements to the licensed technology, with clear differentiation between “improvement technologies” and “independent technologies”.
Optimising corporate governance. Founders should maintain control of the company while reserving appropriate equity stakes for external investors and management teams to ensure diversity in governance and balanced decision making.
The company charter should specify the rights and obligations of all shareholders to prevent governance inefficiencies or decision making paralysis caused by overly concentrated or excessively fragmented ownership. Equity incentive plans can further motivate employees, aligning management and shareholder interests.
Rigorous commercial valuation. When implementing the NewCo model, companies must conduct thorough market research to capture the latest trends in technological breakthroughs, market demand and policy direction in the sector. They should assess the global and target market landscape, analysing the strengths and weaknesses of key rivals.
Companies also need to evaluate their own R&D pipelines, technological reserves and innovation capacity, and objectively analyse the commercialisation potential of core patent technologies. Financial strength and fundraising capabilities should be prudently assessed, alongside resilience of the technology to licensing and equity dilution risks.
Li Hongmei is a partner and Li Xinyi is an intern at ETR Law Firm.
Jeffrey Quan, a senior partner of the firm, also contributed to this article.
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