In Depth: Popular Overseas Expansion Strategy Holds Pitfalls for Chinese Drug Developers

Chinese innovative drug developers are embracing the "NewCo" model to expand globally amidst a domestic capital shortage, driving international collaboration and funding opportunities for innovative drugs. The NewCo approach involves forming overseas entities in partnership with foreign investors, licensing international rights for drug candidates while retaining equity in the new companies. This strategy has grown in popularity due to reduced domestic investment appeal, with at least 11 NewCo deals announced between May 2024 and January 2025, aligning with a shift towards global markets [para. 1][para. 2][para. 3].

A key advantage of the NewCo model is the upfront cash generated through licensing, enabling companies to secure funding while retaining long-term value through stakes in their projects. Additionally, investors see this strategy as a way to tap into innovative drug assets with the potential to sell successful enterprises to multinational pharmaceutical firms. However, experts warn against licensing core pipeline assets through NewCo deals, which could limit strategic flexibility. Increasing U.S.-China trade tensions and regulatory scrutiny further complicate the process, particularly for companies seeking to establish NewCos in the U.S. market [para. 4][para. 5].

The model has gained traction since 2017, with its adoption in China's pharmaceutical industry growing steadily. Notable examples include Shanghai Allist Pharmaceuticals' 2021 NewCo deal for developing furmonertinib and Jiangsu Hengrui Pharmaceuticals' 2024 licensing agreement for GLP-1 products, securing $100 million upfront and potential milestone payments of $6 billion. Meanwhile, larger biotech firms like BeiGene are also exploring NewCo deals, demonstrating their capability to share risk and integrate partner strengths, which appeals to companies seeking global competitiveness [para. 6][para. 7][para. 8][para. 9].

However, smaller firms may resort to NewCo structures out of necessity due to constrained domestic investment and pricing limitations within China's healthcare system. This weakens their negotiating positions, occasionally forcing them to sell core assets at undervalued rates. Experts recommend licensing non-core assets to secure better returns, but market realities often complicate this ideal scenario. Additional challenges include cross-border coordination issues such as equity distribution, profit sharing, and navigating different legal and tax systems [para. 10][para. 11][para. 12].

The NewCo model's future faces uncertainties from complex geopolitical dynamics and U.S.-China relations. NewCo investors act as intermediaries, aiming to sell to multinational pharmaceutical companies, which are under growing pressure to refresh their drug pipelines as patents for existing drugs expire. While China's innovative drug offerings are increasingly attractive due to their global therapeutic potential, geopolitical risks, including potential U.S. restrictions on biopharmaceutical investments, could stifle progress. The U.S. remains the largest healthcare market, but growing regulatory and compliance challenges exacerbate the difficulties for Chinese companies looking to enter this market [para. 13][para. 14].

Despite these hurdles, experts believe the NewCo strategy will persist as it provides viable solutions for accessing global markets and financing drug innovations. Amid a cooling pace of deals in early 2025, industry insiders note that finalizing and publicly disclosing deals takes time. Internationalization remains essential for Chinese pharmaceutical companies, with the journey already underway as they seek to balance immediate financial returns with long-term global market access [para. 15][para. 16][para. 17].