Structuring Cross Border China Biotech 'NewCo' Transactions
By Stephen Thau and Jeff Zhang
Smart money will find good ideas, and if you follow the money in biotech these days, that means looking to China. From January to mid-May 2025, Chinese biotechnology companies had announced licensing or acquisition transactions with almost $1.8 billion in disclosed up-front payments, and almost $22 billion in potential milestone payments. Following over a decade of sustained investment in the biotechnology sector by the Chinese government and PE/VC funds, Chinese companies are becoming a go-to source for best-in-class and first-in-class therapies. According to LEK Consulting, the number of innovative products in Chinese pharmaceutical pipelines nearly doubled between 2021 and 2024 across cutting-edge areas in biotech, including bi/multi-specific antibodies, ADCs, and gene and cell therapies.
Deals for accessing Chinese biotechnology innovation generally follow either a licensing model or a “NewCo” model. In the licensing model, a licensee like Merck, Roche or AstraZeneca will license a molecule from its Chinese creator using familiar transaction structures that include an up-front payment, milestone payments, and royalties for ex-China rights. In the “NewCo” model, a Chinese innovator company will license ex-China rights to a newly formed company outside of China, and investors and/or licensees will fund development of the drug or technology through equity investments and/or licensing transactions, often with the Chinese originator retaining an equity stake in the “NewCo”.
Because the “NewCo” model can involve the transfer of intellectual property as well physical assets across borders, proper legal structuring is essential. When a mainland Chinese company transfers its pipeline and related assets to a company formed outside of China, it is subject to China’s technology export control restrictions. Except for a very limited number of biopharmaceutical technologies that are prohibited from export (such as gene editing technologies involving the editing of human reproductive cells containing genetic material), China requires permits for “restricted technologies” and contract registration for “freely exportable technologies.”
“Restricted Technologies” And “Freely Exportable Technologies”
A Chinese company exporting “restricted technologies” must apply to the competent foreign trade and economic authority for a license before even starting substantive negotiations with a potential licensee. Such negotiations may proceed only after the application is approved. After the technology export agreement or license agreement is signed, an application must be submitted to the same authority by the parties to obtain a technology export license, and no export shall be made without such license.
A Chinese company exporting “freely exportable technologies” must register the technology export or license with the competent foreign trade and economic authority upon signing the export or license agreement and obtain a technology export contract registration certificate. Although failing to register a contract for freely exportable technologies does not affect the validity of the contract itself, it may affect the China domestic company’s ability to receive payment for the licensed technology, creating a de facto requirement to register the contract.
Where a Chinese licensor also provides clinical samples to NewCo or transfers other materials, like assays used in manufacturing, it should also examine the relevant export regulations and restrictions for physical goods, as well as the administration of human genetic resources. For example, attention must be paid to whether the clinical samples intended for export are listed in the Catalogue of Goods Prohibited from Export, the Catalogue of Goods Subject to Export Licensing Administration (2024), or the Export Control List for Dual-use Biological Items and Related Equipment and Technologies.
Furthermore, if the samples or materials intended for export fall within the scope of human genetic resources administration, it is necessary to obtain administrative permission for export in accordance with the rules governing human genetic resources.
Information Sharing Provisions
In addition, if the NewCo plans to apply for an IND or for marketing authorization in the United States, it will be required to provide data on human clinical experience, manufacturing, toxicology, pharmacology and other areas. To the extent any of this information resides with the originating Chinese company, the agreements with NewCo will need to include appropriate provisions regarding information sharing. Because some of this information may involve important data and personal sensitive information obtained in China, attention must be paid to the relevant regulations and restrictions on cross-border data transfer. For example, the export of data from critical information infrastructure operators, important data, and certain volumes of personal sensitive data and personal data, must undergo a security assessment organized by the Chinese national cyberspace administration or be transmitted under standard contracts approved by the relevant authorities.
A Chinese company’s ownership of equity of NewCo is also subject to Chinese regulatory rules. The Chinese company must go through the outbound direct investment (ODI) procedures, including obtaining approval or filing with the competent development and reform authority (NDRC), approval or filing with the commerce authority (MOFCOM), and completing foreign exchange registration and filing with the foreign exchange authority (SAFE). ODI procedures are subject to considerable uncertainty including geopolitical circumstances. For example, ODI approval to certain destination jurisdictions might be suspended during tariff negotiations. Therefore, Chinese companies may consider establishing the NewCo in jurisdictions outside the United States to facilitate a timely completion of ODI procedures.
NewCos with Chinese ownership that are subject to U.S. jurisdiction must also be mindful of U.S. Committee on Foreign Investment in the United States (CFIUS) requirements. CFIUS filings and approval will be required if the Chinese company or individuals have access to “critical technologies” as defined by CFIUS, access to certain data about U.S. citizens, or if the NewCo has facilities near certain U.S. government installations. CFIUS regulations are updated periodically, so it is important for companies to check on the latest restrictions when considering transactions involving Chinese or other foreign persons or entities.
Other Risks To Consider
The NewCo model also presents other business risks. For example, parallel development of a drug in China and elsewhere can lead to concerns about clinical trial execution, as negative data in one geography can impact the value of the same product elsewhere. The parties also will need to decide whether separate manufacturing and supply is desirable, especially in light of evolving global trading policies.
The drivers of life science innovation — unmet medical needs, aging populations, patent cliffs on exiting blockbusters — are continuing, despite geopolitical turmoil. Innovation will attract capital, and investors and companies outside of China can benefit from opportunities created in China by working with knowledgeable deal counsel.
About The Authors:
Stephen Thau is co-chair of the Life Sciences & HealthTech Group at Orrick and a partner in the firm's Technology Companies Group in New York and Silicon Valley. He represents life science, medical device, health IT, and other technology companies as well as investors in transactional matters, including public and private financings, licensing, collaborations and strategic alliances, and mergers and acquisitions.
Jeff Zhang is a partner in Orrick’s M&A and Private Equity practice in Beijing and New York. He advises international and Chinese investors and companies on their transactional, regulatory and compliance matters across a variety of sectors, including Life Sciences and HealthTech.