How financial architectures shaped (and will continue to shape) Chinese drug development
4.5k words, 20 minutes reading time
Note: this essay is connected to a prior one titled “Curious cases of financial engineering in biotech”. I conclude that piece with the following paragraph:
To end this off: I have deliberately left out China, which may be the most aggressive current example of financial architecture shaping a drug pipeline. That deserves its own essay, and will get one soon.
This is that essay. And to those who already know vaguely understand this area: yes, ‘NewCos’ are part of the ‘current state’ section. The future will get more complicated!
The current state of Chinese drug development
If you had to take a guess, why has China been out-licensing drugs so frequently?
I naively assumed it’s because China got very good at moving through early-stage clinical development fast and because the domestic market is simply not as good as the US’s. Neither of these are wrong, but they are incomplete, as they do not explain the timing. The speed advantage and the weak domestic market have both been true for the better part of a decade, but you really only started to hear about the out-licensing in the past few years; 2022 if your job depended on it and 2024 if not. Something else has to be doing the causal work.
And much of that “something else” has to do with finance. My claim is not that finance created Chinese biotech productivity, merely that it determined how the shape of that productivity interacted with the rest of the world. I’d like to start by discussing the contribution of one thing in particular: Chapter 18A of the Hong Kong Stock Exchange (HKEX). Many, many things can be traced back to this particular rule.
But before we wonder what Chapter 18A is, we should first ask: where did Chapter 18A come from?
The proximate cause of it was none other than Alibaba.
In 2013, Jack Ma’s company was preparing to go public, and Hong Kong was the obvious venue; Alibaba was a Chinese company and HKEX was one of the largest Asian exchanges. The problem was that Alibaba wanted to list under a specific partnership system, in which a self-selected group of twenty-eight insiders would have the perpetual right to nominate a majority of the board. Hong Kong’s Listing Rules had forbidden this sort of arrangement for three decades under a principle known as “one share, one vote.” The HKEX, after some months of public handwringing, declined to bend. So Alibaba took its IPO to New York, where arrangements like this had been legal since forever, and in September 2014 listed on the NYSE at a valuation of $231 billion. It was, at the time, the largest IPO in history.
Charles Li, the head of the HKEX, was understandably unhappy about a Chinese success story listing somewhere that was not China, and wrote this:
We respect the company’s decision and wish it well.
We are proud of our tradition of respect for the rule of law and adherence to principles.
However, we also need to find ways to make our market more responsive and competitive, particularly with respect to new economy or technology companies.
We have to consider possible changes where they might be necessary, with everything according to our due process. The Listing Committee’s work on shareholding structures didn’t start because of Alibaba and will not end now because of Alibaba.
We need to ensure our markets continue to be relevant in the new era of economic development.
Over the following four years, HKEX rewrote its rules to ensure an Alibaba situation never happened again. The product was a three-part reform package that took effect on April 30, 2018: Chapter 8A, Chapter 19C, and Chapter 18A. This last one, Chapter 18A, is what we’ll be concerned with, because it is the only one that was specific to biotech companies. It allowed, for the first time, pre-revenue biotech companies to go public, without needing to satisfy any of the standard profit, revenue, or cash-flow requirements that other Chinese companies had to.
Now, this doesn’t mean there were no requirements, but they were softened to match the financial flavor that early-stage biotechs often have. The requirements were as follows: at least one Phase I clinical trial completed with no regulatory objection to proceeding into Phase II; an expected market capitalization at listing of at least HK$1.5 billion (roughly US$192 million); two fiscal years of operating history under substantially the same management; and enough working capital to cover 125% of projected costs for twelve months after listing.
Charles Li, in the run-up to the rules taking effect, stated that he hoped Hong Kong would overtake NASDAQ in Chinese biotech listings within five years.
The initial results were spectacular.
Ascletis listed in August 2018. BeiGene, which had already listed on NASDAQ, did a secondary in Hong Kong. Innovent Biologics listed in October 2018 and quadrupled in the following year. Junshi, CanSino, Shanghai Henlius, Akeso, and dozens of others followed. By the end of 2021, the peak year, the cumulative capital raised under Chapter 18A had crossed HK$100 billion, and the number of listed companies was approaching fifty. Hong Kong had, just as Li had hoped, become the second-largest biotech listing venue in the world.
And then the biotech winter of 2021-2022 happened. By the end of 2022, of the 56 biotech companies listed under Chapter 18A, only 13 were trading at or above their IPO price. By the end of 2023, only 9 were.
The trajectory of what happened next should be quite clear. Here you have a cohort of roughly sixty pre-revenue biotech companies in one corner of the world, each holding a pipeline of clinical assets ranging from plausibly valuable to genuinely world-class, each prevented from raising equity by the collapse of its own share price, and each locked out of every other public-market financing channel due to geopolitical risk and uncertainty.
On the other side of the Pacific, US pharma companies were staring into the patent cliff, which represented somewhere between $180 billion and $250 billions of revenue at risk from drugs coming off patent by 2030, and desperately scouring the world for assets with which to fill the gap.
These two sides were made for each other. The 18A cohort had clinical pipelines and no capital. Big Pharma had capital and not enough pipelines.
Thus, the out-licensing boom you have heard so much about. In December 2022, Akeso licensed ex-China rights to ivonescimab, its PD-1/VEGF bispecific, to a small Miami-based company called Summit Therapeutics for $500 million upfront and up to $5 billion in total deal value. This was, at the time, the largest single-asset deal ever struck by a Chinese biotech. Two years later, in September 2024, ivonescimab beat Keytruda in a Phase 3, non-small cell lung cancer trial shocked the world, and every Big Pharma BD team reorganized itself around the working assumption that the next blockbuster might come from somewhere in Chongqing or Shanghai or Beijing or Guangzhou. In 2024 alone, Chinese firms out-licensed 94 projects to overseas companies, up from essentially zero a decade earlier. In 2025, the figure was 157 deals worth $135.7 billion. In the first half of 2025, roughly 32% of global innovative-drug out-licensing value originated in China, up from single digits a few years prior.
Could this have happened without 18A?
If the 18A cohort didn't exist, the Chinese biotech industry would be a collection of private companies. Most of them would still be venture-funded, with valuations set by the more conservative Chinese VC culture rather than by the initially frothy public markets that slowly cooled. As such, the urgency to monetize pipelines would be considerably lower, and perhaps there would be little reason to aggressively do transpacific sales of intellectual property to Western buyers. And most important of all: without the clearly legible financial signals that public listing—which would not have existed without 18A!—offered to Western buyers, perhaps most would be too uncertain to ever commit hundreds of millions of dollars upfront to a China-based company they had never heard of, almost certainly slowing down the boom.
On the other hand, a lot of what drove the Chinese biotech ascendancy has nothing to do with 18A and would have happened regardless. China’s primary regulatory authority for drugs, the NMPA, ran through a sequence of reforms starting around 2015 that compressed drug approval timelines from years to months and cleared a backlog of roughly 20,000 applications in two years. The Chinese CRO ecosystem, WuXi and so on, professionalized to the point that running a Phase I in China was genuinely cheaper and faster than running one in Cambridge. The talent got better too! A generation of Western-trained scientists returned to run R&D at Chinese biotechs under the Thousand Talents Plan. And on the demand side, the Western patent cliff was going to happen anyway.
So, the cleanest version of the argument is something narrower than "18A caused the out-licensing boom," which is probably too strong, and broader than "18A was a minor contributor," which is too weak. 18A did not create Chinese R&D productivity, but it did shape how that productivity interacts with Western markets. Which is pretty interesting!
And the dominoes that were set up by 18A are only continuing to fall; Chapter 18A gave legibility to Chinese biotech’s, which led to out-licensing, which surely should lead to something else. And what is that something else?
‘NewCo’s’. These days, Chinese biotech’s are getting quite good at their job now, so good that they are beginning to get a bit more interested in the ‘nearly infinite upside potential’ economics that makes drug discovery so appealing. Past that, HKEX biotech’s trade at a substantial discount to their NASDAQ-comparable peers, more or less permanently, due to intense price negotiation by the Chinese government. These two, combined with the fact that China gets upset if one of its companies sets up shop abroad, has pushed financiers into increasingly creative territory.
And a solution soon manifested. Perhaps instead of a Chinese biotech accepting cash or royalties in exchange for their precious molecules, they should instead work with American funds to set up a US-based company around those molecules, taking a big chunk of equity for themselves, with the American funds taking the rest. You could argue that this is seemingly against the spirit of China’s discomfort with its companies setting up shop abroad. I agree! But China is seemingly fine with it.
Kailera Therapeutics is the cleanest recent example of this. On the Chinese side, Jiangsu-based biotech Hengrui contributed its GLP-1 portfolio. Bain Capital, Atlas Venture, and RTW put in $400 million, a former US pharma executive Ron Renaud took the CEO seat, and the whole structure was operational within months. The US-based investors get a promising company in their portfolio; one fluffed up by the starry-eyed and optimistic US markets. And Hengrui takes equity in this US-based vehicle, which, compared to a cash payment or bounded royalty, is uncapped on the upside. Both sides win.
As always, it’s worth being a bit concerned by new and exciting developments in finance. What should we be worried about here? The obvious one is that every dollar of Western venture capital that gets deployed into a Kailera is a dollar that doesn’t get deployed into a US-originated asset, with all the obvious caveats that venture capital is not neccesarily a fixed pool where every dollar is a one-for-one displacement. Either way, it’s a rational thing to do, play the same M&A game that pharma usually does, but with the side that is actually winning. Is the long-run consequence that the US stops being good at the sort of early-stage discovery it was historically best at?
Whatever the answer is, we’ll certainly be made aware of it in the upcoming decade.
The future of Chinese drug development
Well, maybe not a decade.
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