NIE 2023 | Summit Dialogue: Seeking Change Amidst Complexity · Opportunities and Choices for the Development of Innovative Biopharmaceutical Enterprises

From the second half or end of 2021 to 2022 and into this year, the field of innovative drugs has encountered what is known as a capital winter. Before mid-2021, many investment institutions were keen on deploying in the biopharmaceutical sector. However, in the past one or two years, they have indeed faced an unprecedented cold snap. This is an inevitable part of the development process of biopharmaceuticals. It may be that in the early stages of rapid development, there were always some imperfections. Whether it is the Hong Kong Stock Exchange or the Shanghai Science and Technology Innovation Board, in the process of introducing some companies to listed on their respective sectors, there may have been issues in the early stages where some companies lacked innovation. They introduced projects from overseas without necessarily aiming to market their products to patients as the ultimate goal, but rather with the aim of cashing out in the stock market. This inevitably leads to problems.

Therefore, the capital winter is a process of sifting through the sand, and after the tide recedes, what remains can be revealed as sand or gold. I believe that as long as it is truly aimed at the clinical needs of patients and driven by innovation, it will always be respected and supported. Since our company was established, we have been committed to innovation, whether others are doing 'me too' or 'fast follow'.

"Innovation" is the innovation of science, which involves delving into the profound understanding of diseases to explore new drug targets and develop new medications. I believe this is the mainstream approach. Despite the current severe capital winter, we completed a financing round worth 200 million at the beginning of this year and will also conduct another round of asset delivery later. Therefore, as long as we persist in doing the right things, we will still receive support.

The development of biomedicine is a coexistence of opportunities and challenges. The field of innovative drugs is highly 'involved in a competitive environment'. According to Frost & Sullivan's report, 50% of innovative drugs are concentrated on only 6 targets. Moreover, in the healthcare insurance sector, centralized procurement also affects companies' profit margins by controlling prices. Therefore, the outlook for these years will be relatively pessimistic. However, amidst this pessimism, we are also thinking about the company's future direction.

In the current environment, it is indeed survival of the fittest, that is, 'survival of the most adaptable'. We focus on the pipeline of improved new drugs, which are a new segment between innovative drugs and generic drugs. We have established a technology platform and conducted many clinical multi-center studies, bringing multiple products to market. In addition, we actively promote internationalization, and the company largely maintains its operations through the performance generated by selling five products in the United States. Therefore, I believe that through these efforts, we will overcome difficulties.

The past two years have been very difficult for most people, especially companies focused on innovative drugs. In fact, they are facing internal and external challenges. In the process of survival of the fittest, a good attitude is very important because challenges breed opportunities. If one has a positive mindset, then there is a possibility of finding new opportunities in times of crisis. Only after the great waves have washed away the sand can gold be found; only in the midst of turbulent seas can one truly display their heroic nature.

We are firmly on the path of innovation, as there is a huge unmet need in the field of neurological diseases. Our technology has great potential for treating these diseases, and therefore we have an unshirkable responsibility.

From the legal and regulatory perspectives, I would like to share my observations over the past year or so. The capital market, especially the Hong Kong and US stock markets, has undergone unprecedented changes over the past few decades, filled with many uncertainties. Any one factor could become a black swan event, and now there are many black swans flying simultaneously. Biotech companies face tremendous challenges and difficulties in both primary and secondary markets, including geopolitical factors, Sino-US relations, investor changes, and many other aspects.

I will share three obstacles faced by biotech companies in terms of law and regulation, especially for those considering listing overseas. Firstly, the China Securities Regulatory Commission (CSRC) has introduced new filing regulations. Starting from March 31 this year, Chinese companies must file with the CSRC before arranging a listing hearing in Hong Kong or announcing a prospectus for listing on the US stock market. Although recent developments such as the emergence of red-chip and VIE structures have eased these regulations, they still pose challenges for some cutting-edge and high-tech industries. For example, we currently represent a gene testing company that wishes to list in Hong Kong using a red-chip or VIE structure but is facing issues related to foreign investment restrictions and prohibitions due to gene testing. A similar situation involves a company using a red-chip structure that also engages in CAR-T and other businesses. Can such companies successfully file? There are still some possibilities, at least within discussions among institutions such as the National Health Commission and the National Medical Products Administration. If the filing goes smoothly, the path for overseas listings in areas such as stem cells and gene therapy may be smoothed out. However, if there are delays or setbacks in filing, it could have a substantial impact on the industry track.

Secondly, the Sci-tech Innovation Board is tightening its regulations, and the US stock market has also been greatly affected since the Didi incident. There are very few Chinese concept stocks listed on the US market, and their financing levels are also low. In fact, the only relatively smooth channel at present is the Hong Kong stock market, but there are also issues with valuation and liquidity in the Hong Kong market, thus facing significant challenges. A company we are currently representing hopes to go public on NASDAQ in the United States and is expected to become one of the larger Chinese concept companies after the implementation of the new filing regulations. Therefore, if the path is clear, we hope this challenge can be successfully overcome.

The third challenge is whether investment in US biotech companies can accept large state-owned capital investment funds. The underlying concern is due to geopolitical reasons in Sino-US relations, which may lead to overseas acquisitions and hinder investments in US companies. Our company's listing in the US and Hong Kong also faces obstacles, having already had a substantial impact on the chip and artificial intelligence industries. This year, the Biden administration introduced new regulations that have restricted three industries: artificial intelligence, chips, and quantum technology, essentially banning dollar funds from investing in these sectors. Fortunately, biotechnology has not been included in this list; biotechnology benefits all humanity. Therefore, individuals tend to be optimistic, believing that changes in Sino-US relations will not affect biotech companies and will not further impact bilateral investment and listings.

The current challenge is systemic, not just an issue of corporate financing, but actually a result of the entire ecosystem behind it. As investors, we often face challenges from LPs when raising funds. As a founding member of DHC, I have fully experienced the fundraising and investment process for early-stage funds. In 2015 and 2016, when raising the first fund, LPs were not very concerned about healthcare, as the entire industry had not yet taken off. By 2018 and 2019, when raising the second fund, the vast majority of LPs for listed projects would ask us in detail about the industry's situation. Now, when raising the third fund, in a near first-tier city in China, it was almost entirely based on healthcare. When we approached them to raise funds, they euphemistically expressed their unwillingness to support healthcare anymore.

It is conceivable that the relationship from GP to LP, and then the implementation of relatively stricter regulations by local governments and other regulatory bodies, have dealt a blow to everyone's confidence. On the other hand, we can see that almost all negative news has been released, and the possibility of further bottoming out is basically very low, or at most 1%. Therefore, we are currently in a stage of bottom oscillation, waiting for the industry to rise again.

During the current process of sifting through the sands, many positive outcomes have emerged. For instance, some companies have successively implemented layoffs in the past, and it has been observed that their R&D efficiency, individual efficiency, capital utilization efficiency, or the output of a single salesperson in a sales-oriented enterprise have all improved. As startups competing with large enterprises, we often emphasize innovation and high efficiency. In fact, there is much room for optimization. Whether it is for market-oriented funds or the internal organizational structure of the company, overall strategy, or pipeline adjustments, optimized allocation can be made.

If I had to choose one factor, I believe it would be innovation. As long as drugs that have significant value for unmet clinical needs can be developed, then innovation is the direction for future development, regardless of the environment.

I very much agree with innovation. For our company, we have been focusing on innovation and continuously developing new improved drugs with clinical advantages through innovative technologies and platforms.

In the field of innovation, I am firmly optimistic about cell and gene therapy, which is closely integrated with our own business. Additionally, while previous cell and gene therapies were mainly targeted at rare diseases, future trends may shift towards treating chronic conditions. Moreover, we are also focusing on nucleic acid technology, which holds great market value as it enables patients to be free from the torment of diseases.

To innovate at a high cost-effectiveness or more effectively, resources, capital, and talent are all in short supply under the current environment. China's entrepreneurial environment does not possess the capability for large-scale investment and innovation at extremely high risk. Therefore, we need to ensure that innovation is truly clinically meaningful and market-valued, and that the use of funds can achieve maximum effectiveness. At the same time, we need to improve pricing, medical insurance, and other aspects to ensure competitive advantages both domestically and internationally.

The market adjustments in the past one or two years are not a bad thing. China's capital market has actually evolved with global development; for example, the US market no longer only considers listings but also has many relatively mature exit channels.

Since the opening of the 18A listing mechanism for Hong Kong stocks, more than 60 companies have gone public through this mechanism. However, relatively speaking, exit events in the form of large-scale acquisitions and mergers are less common. Nevertheless, recent adjustments have accelerated the market's maturation process. For example, Xianruida Medical, which focuses on peripheral thrombectomy catheters, went public on the Hong Kong Stock Exchange via the 18A route in 2021. In February this year, we represented the company and its major shareholder CPE to complete the exit, selling the shares to Boston Scientific. After the completion of the project, Boston Scientific became Xianruida's major shareholder, and Xianruida still maintains its listing status. First of all, this is the first project among 18A-listed companies to exit in this manner. This transaction is a barometer, indicating that mergers and acquisitions will gradually become an exit channel. Whether it is MNCs or Chinese Big Pharma, conducting acquisitions and mergers, as well as licensing in and out, will definitely be a trend in the future, rather than every company having to go public and fight alone.

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