Core Insights - The Chinese innovative drug sector has gained global recognition, with the Hang Seng Medical ETF rising over 90% and the Hong Kong Stock Connect Innovative Drug Index increasing by 130% this year, indicating a shift to the first tier of global pharmaceutical capabilities [1] - There is a trend where investors are actively engaging in business development (BD) transactions rather than waiting for IPOs, with international capital looking to invest in domestic biopharmaceutical firms to explore promising drug development projects [1][2] - The investment model has evolved, focusing on direct investments in drug development projects and supply chain management, leading to opportunities for domestic general partners (GPs) to raise USD funds and enter international supply chains [1][2] Investment Trends - BD transactions have become mainstream in the industry, particularly large deals exceeding USD 1 billion related to overseas licensing of drug pipelines [2] - For instance, the collaboration between 3SBio and Pfizer involves a potential total transaction amount exceeding USD 6 billion, with an upfront payment of USD 1.25 billion [2] - The total value of BD transactions in the first half of the year surpassed USD 60 billion, highlighting the significance of this investment approach [2] Target Investment Institutions - International limited partners (LPs) are seeking three types of domestic GPs for investment in innovative drug projects: 1. GPs that invest in U.S. biopharmaceutical companies, primarily to introduce Chinese drug projects [3] 2. GPs that invest in foreign companies with Chinese drug authorizations [3] 3. GPs that lead investments in newly established domestic companies (NewCos) focused on overseas sales of Chinese drugs [3] NewCo as a Strategy - Establishing NewCos allows domestic GPs to enhance their bargaining power in international collaborations by determining their share of profits and selecting international teams for management [5][6] - NewCos can be established at a low valuation, enabling domestic GPs to leverage investments while providing accountability to domestic LPs [6] - However, the effectiveness of this model depends on the specific terms of agreements, particularly regarding profit-sharing and distribution [6] Challenges and Market Alignment - Despite the potential advantages of NewCos, challenges remain, particularly in aligning drug development with international market demands [7][8] - Domestic GPs need to better understand U.S. market needs and integrate into the drug project initiation phase to facilitate marketization and internationalization [8] - The use of AI technology is being explored to match Chinese drug projects with international buyer demands, enhancing the likelihood of successful collaborations [8][9] Investment Focus Areas - International LPs are also interested in investing in AI pharmaceutical companies, platforms that incubate multiple projects, and specific types of research and development projects [9] - The emphasis on supply chain management capabilities is crucial for the success of these investments, reflecting a shift in biopharmaceutical investment strategies [9]

Core Viewpoint - The Chinese innovative drug sector has gained global recognition, leading to a shift in investment strategies where investors are actively seeking business development (BD) opportunities rather than waiting for IPOs [3][4]. Investment Trends - The Hang Seng Medical ETF has increased by over 90% this year, while the Hong Kong Stock Connect Innovative Drug Index has surged by 130%, indicating the strength of China's innovative drugs [3]. - International capital is looking to invest in domestic biopharmaceutical firms through collaboration to identify promising new drug development projects [3][4]. - The trend of BD transactions has become mainstream, with significant deals often exceeding $1 billion, particularly in overseas licensing agreements [6]. Types of Investment Institutions Sought - Dollar LPs are targeting three types of domestic GP: 1. Investment in U.S. biopharmaceutical companies, primarily to introduce Chinese drug projects [7]. 2. Investment in foreign companies that have received Chinese drug authorizations [7]. 3. Leading investments in newly established domestic companies (NewCo) focused on overseas sales of Chinese drugs [7]. NewCo as a Strategy - Establishing NewCo can enhance the bargaining power of domestic GPs by allowing them to control revenue shares and select international teams for management [11]. - The success of NewCo depends on the specific terms of agreements, including revenue sharing and distribution timelines [11][12]. Challenges and Opportunities - Despite the potential of NewCo, challenges remain, such as the initial low investment from international LPs and the need for further data before transferring ownership [12]. - The ultimate value of drug pipelines remains crucial; successful projects that meet international demand will attract higher valuations [13][14]. Supply Chain Management - International LPs prioritize three capabilities in domestic GPs: identifying quality projects in China, finding competent teams in the U.S., and understanding the needs of multinational pharmaceutical companies [14]. - There is a gap in understanding the U.S. market demands among Chinese drug companies, which could hinder successful international collaborations [14][15]. AI and Future Directions - AI-driven approaches are being utilized to match Chinese drug projects with international buyer needs, enhancing the likelihood of successful partnerships [15]. - The focus on AI and platform-based investments reflects a broader trend in biopharmaceutical investment strategies, emphasizing the importance of supply chain management capabilities [15].