Inventive deal structures are on the rise within China’s life sciences industry, with the “NewCo” model having garnered significant interest among Chinese pharmaceutical companies in recent years. In 2024, several landmark deals were structured using this innovative model.
So, what exactly is the NewCo model? What makes some Chinese pharmaceutical companies opt for NewCo as an alternative to a traditional license-out? Why are investors flocking to this trend, and what specific issues should they consider?
In this Insight, we dive deeper into the NewCo model.
In May 2024, Hengrui Pharmaceutical, a leading global pharmaceutical company listed on the Shanghai Stock Exchange (600276.SH), announced that it had granted exclusive rights to develop, manufacture, and commercialize its proprietary GLP-1 class of drugs—HRS-7535, HRS-9531, and HRS-4729—to Hercules. Notably, Hercules is a joint venture newly established in Delaware in 2024 by a small group of private equity and venture capital firms.
Under the terms of the agreement, Hercules will make an upfront payment and near-term milestone payments totaling $110 million, along with up to $200 million in clinical development and regulatory milestones and up to $5.725 billion in sales milestones. Hengrui will also receive tiered royalties on net sales ranging from low-single-digit to low-double-digit percentages. Additionally, Hengrui has acquired a 19.9% equity stake in Hercules. While not explicitly stated, it is inferred that Hengrui exchanged part of the license value for this equity stake in lieu of a capital injection into Hercules.
Following the Hengrui deal, two other Chinese pharmaceutical companies, both listed on the Hong Kong Stock Exchange—Keymed Biosciences Inc. (2162.HK) and Genor Biopharma (6998.HK)—entered into similar transactions using the NewCo structure.
The enthusiasm for the NewCo model was further accelerated by the recent news that Hercules, now renamed Kailera Therapeutics, launched with $400 million in Series A financing in October 2024. This is among the highest Series A or launch rounds in China’s biotech and pharmaceutical sector.
The “NewCo model” here refers to a hybrid structure where a Chinese pharmaceutical company spins off certain clinical assets and partners with investors to refinance the development of those assets through the creation of a new company (the NewCo) in an offshore jurisdiction.
Conceptually, NewCos are similar to strategic divestitures used by many large pharmaceutical companies but with more comprehensive features. They involve multilayered transactions, including not only asset spinoffs but also refinancing through a new joint venture, incorporating both equity investment and licensing of specific products or intellectual property (IP).
Sharing of Promising Long-Term Returns
A NewCo allows Chinese pharmaceutical companies to leverage domestic assets while benefiting from global network resources. This model enables shareholders to partake in the future growth potential of the NewCo, either through commercialization or potentially through acquisition by a large pharmaceutical company or public offerings.
Once an offshore platform is established, global investors can participate and access the high-potential assets originating from China without undergoing the regulatory scrutiny typically required for foreign direct investment in China. They can also avoid procedures such as foreign exchange approvals for equity acquisitions or filings with the China Securities Regulatory Commission for overseas initial public offerings. The transaction becomes more straightforward, as demonstrated by the Hengrui deal, where Hercules was established in Delaware, benefiting from favorable corporate governance and regulatory environments.
Flexible Options for Capital Injection
While Sino-foreign joint ventures have existed in China for decades, they have traditionally required shareholders to make either cash or in-kind contributions. In-kind contributions, such as technology or IP, often face regulatory uncertainties under Chinese law. In particular, the practice has been unsettled on a location-variation basis whether a shareholder of a Chinese company may make capital contributions in the way of granting the right to use technology/IP instead of the ownership thereof. Further, the values of these in-kind contributions must be appraised by qualified appraisal firms, and technology transfers must adhere to specific legal processes.
By contrast, an offshore joint venture provides more flexibility. As seen in the Hengrui case, a company can use a license in exchange for equity in the NewCo, offering biotech companies the capital needed for R&D and commercialization without large upfront cash investments.
Optimizing Resource Allocation
Spinning off non-core or early-stage products into a NewCo allows pharmaceutical companies to focus their resources on incubating priority pipelines. The lifecycle of pharmaceutical product development is costly, and most companies cannot afford to develop all pipelines simultaneously. Spinning off less-prioritized pipelines for external funding maximizes their value while extending the company’s cash runway for core products.
While the NewCo model is favored by companies with multiple or mature pipelines, companies with a single or limited number of assets may hesitate to adopt this model. Spinning off a key pipeline could significantly diminish their overall value.
Additionally, many biotech or biopharma startups are backed by private equity or venture capital investors. Spinning off core assets would require these investors’ consent and could involve complex internal approvals. Even if consent is granted, the company may need to compensate investors for any loss of value, either through equity in the NewCo or cash buyouts, both of which can impose significant financial burdens.
Furthermore, companies facing immediate cashflow issues may prefer other options that provide more immediate capital, which is why most NewCo deals announced thus far have been executed by large companies that can afford to trade near-term liquidity for future growth potential.
IP Licensing
Parties must carefully navigate IP-related issues during negotiations. Key questions include how to value the technology or IP if it is invalidated or challenged, how such developments might impact the licensor’s equity in the NewCo (or any compensation if the IP is compromised), and which party is responsible for prosecuting or defending third-party infringement claims, among other questions.
Traditional license agreements typically include termination rights for convenience or for cause (e.g., material breach by the licensor). Under the NewCo model, however, termination can be more complex as the licensor and licensee’s interests are intertwined. Termination could even lead to the liquidation of the NewCo. It is crucial to define clear exit strategies and outline which party will bear the legal and financial consequences in the event of termination.
Corporate Governance
The NewCo is essentially a startup separate from the pharmaceutical company that contributed the assets. As such, corporate governance must be structured carefully to avoid future shareholder disputes and pave the way for further financing rounds or public listings. Considerations include the jurisdiction of the NewCo (which affects tax implications), board composition, management independence from shareholders, the role of each stakeholder in the decision-making process and voting rights on material issues, and the implementation of an employee stock option plan.
Affiliated Transactions
There will likely be affiliated transactions between the NewCo and the original pharmaceutical company during product development and manufacturing. These transactions can raise competition concerns and must be carefully managed to avoid self-dealing and conflicts of interest, particularly when the pharmaceutical company holds a dominant share in the NewCo.
China’s life science industry has faced significant challenges in recent years, and while the market is beginning to recover, investors remain cautious. The NewCo model has emerged as a strategic option for Chinese pharmaceutical companies to maximize the value of their clinical assets. By shifting assets to global markets, NewCo models make it easier for investors to support high-potential therapeutics while hedging against geopolitical decoupling risks.
Innovative deal structures such as NewCos will likely continue to gain traction as companies look to balance long-term growth potential with the need to secure strategic partnerships in an increasingly complex global market.