With the frequent occurrence of large-scale license out transactions, China's innovative pharmaceutical industry is constantly proving its research and development capabilities in front of global capital and multinational pharmaceutical companies.

The other side of the industry's positive momentum is that primary market investment and financing transactions are still in a low period. Focusing on the field of innovative drugs, some companies have secured large global BD deals, while many others are still struggling on the path of financing.

This means that China's innovative pharmaceutical industry is entering a stage of differentiation - leading companies with clinical data, global vision, and financing capabilities are gradually breaking through, while most companies still face the dual test of survival and development.

In June of this year, 21st Century Business Herald interviewed Xu Qian, Managing Partner and General Manager of Danlu Capital in Beijing, to discuss the role of venture capital in the innovative drug ecosystem, the logic behind the BD trading boom, and the institutional reality of venture capital fund exit paths.

In his view, License out should not be simplified as "selling seedlings", but rather a realistic choice that balances cash flow and strategic validation. More importantly, as long as the core team is still present and has the ability to continue research and development, it is still possible to carry out "continuous entrepreneurship" around the original platform and promote the continuous development and evolution of the pipeline.

Although the venture capital industry has not yet fully recovered, China's innovative pharmaceutical industry has achieved tremendous development in the past decade. As long as people, abilities, and confidence remain, the "seeds" of entrepreneurship will not dry up, and the forest of innovative projects will continue to flourish and thrive.

The role of venture capital in the innovative pharmaceutical ecosystem

21st Century: From the perspective of venture capital, how do you understand the role of market-oriented funds in supporting the innovative pharmaceutical industry?

Xu Qian: Simply put, market-oriented venture capital is a very important part of the innovation ecosystem in the process of innovative drugs moving from the laboratory to the market. Reviewing the development of China's Internet and mobile Internet, from the early three portals to BAT, JD, Meituan, ByteDance, etc., all benefited from the strong support of investment institutions. The business model of innovative drugs is very similar to that of the Internet. They are both high investment and high risk in the early stage. If they are made, they will be high returns.

From this perspective, venture capital firms are not only providers of funds, but also igniters, boosters, and navigators - providing initial funding in the early stages and providing resources and direction support during project advancement.

21st Century: When you mention venture capital or "navigator", what are the main aspects of its role?

Xu Qian: Venture capital institutions have more exposure to projects and have more experience in judging and responding to various situations. Entrepreneurs may be experienced in a certain technology field, but they have relatively little experience in the overall equity structure, team composition, financing pace, and even IPO path selection of the enterprise. Venture capital institutions can provide some references and suggestions in these areas to help them avoid risks and avoid detours.

At the end of the day, venture capital is not just about investing money, but also a systematic configuration that helps build teams, make strategic decisions, and connect resources. For many companies, good investors can help the founding team fill some of the gaps in the early growth process.

21st Century: In recent years, there have been significant changes in the funding sources of venture capital funds. What impact does this have on the investment and financing of innovative pharmaceutical companies in the primary market?

Xu Qian: In recent years, various types of state-owned LPs (fund investors) have gradually dominated the primary market, and the proportion of market-oriented funds has significantly decreased. This structural adjustment not only solves the funding source for the venture capital industry, but also has a certain impact on the market orientation of venture capital institutions to a certain extent.

Discussion on the Path of Capitalization and the Reality of "Selling Green Seedlings"

21st Century: In the past decade, the pace of policies, capital, and markets in the innovative pharmaceutical industry has been constantly changing. How do you see the impact of these changes?

Xu Qian: Looking back at the past decade, China's innovative pharmaceutical industry has achieved tremendous development. Since the clinical self-examination in 2015, the industry has rapidly aligned with international standards and gone through a series of policy reforms, accelerated review and approval processes, and capital inflows. Based on industry data from the past decade, 2021 has been a high point for investment and financing in the primary market of innovative drugs, both domestically and globally; In the following three years, the investment and financing amount in the primary market will significantly decrease. Although there has been a rebound in the secondary market this year, the return of funds to the primary market is still slow.

In recent years, there has been rapid development in the industry, accompanied by continuous industry structural adjustments. The industry cycle overlaps with the capital cycle, and venture capital institutions must always maintain adaptability and judgment.

21st Century: How to analyze the cycle of the domestic innovative pharmaceutical industry, whether it is bottoming out, rebounding, or entering a new stage of structural differentiation?

Xu Qian: From the perspective of the capital market, the Hang Seng Biomedical Index has risen by more than 30% since the beginning of this year, and there are signs of bottoming out and rebounding in the secondary market. The investment and financing of innovative drugs in the primary market have rebounded, but whether they can break out of the bottom still needs time to observe.

The current primary market shows a clear structural differentiation: companies that truly possess global competitiveness and have the ability to become License out or NewCo can achieve good development. According to statistics, the total amount of licenses for innovative drugs in China reached 51.9 billion US dollars last year, with a down payment of 4.1 billion US dollars, both reaching a historic high. Of course, the transaction amount in the secondary market will be larger. At the end of May, the transaction between San Sheng Pharmaceutical and Pfizer, with a down payment of $1.25 billion and a potential milestone payment of up to $4.8 billion, as well as a double-digit percentage gradient sales share calculated based on authorized regional product sales, Pfizer will also strategically invest $100 million. This was unimaginable in the past.

21st Century: What are the main exit paths for venture capital institutions in the field of innovative drugs?

Xu Qian: Currently, Hong Kong stock listing, license out trading, and NewCo are the three common methods. We will also keep an eye on other standards such as the fifth set of standards for the Science and Technology Innovation Board.

From the perspective of the listing and exit of biopharmaceutical projects, the Hong Kong Stock Exchange may gradually develop into a "NASDAQ" market for China's innovative pharmaceutical industry in the future. Although there are still some fluctuations and challenges in the short term, it is still a relatively realistic exit channel for venture capital funds as a whole.

21st Century: While License out is hot, there are also voices of "selling seedlings". What do you think?

Xu Qian: I understand this concern, but there is no need to overinterpret it. For many startups, license out is an important path to validate their own value and realize value. Moreover, the market will continue to adjust on its own, and the number of NewCo model projects that have recently achieved equity binding is gradually increasing.

Success in entrepreneurship is luck, and continuous innovation and iteration are the norm for achieving success. Just as many entrepreneurs in the Internet industry established credit through transaction exit, gained more experience and resources to support entrepreneurship, and achieved greater development, so did entrepreneurs in the innovative drug industry. As long as the core team still has innovative capabilities and continuous investment, it can continue to expand new pipelines and products, achieve new development, and inject sustained momentum into the industry.