The NewCo model is transforming the way Chinese biotech companies commercialize their innovative assets while enabling foreign investors to generate substantial returns. This approach allows originating companies to share development risks, secure upfront and milestone payments, and retain equity for long-term value capture. As geopolitical and market dynamics drive the need for global integration, NewCo has emerged as a strategic solution, enabling cross-border investor participation and operational focus. With proven success in navigating this complex landscape, ARC Group is uniquely positioned to connect biotech innovators with the right partners and strategies for success.

I. What is NewCo?

The NewCo model refers to an innovative business structure in which a biotech or pharmaceutical company spins off specific drug development assets into a newly created, independent company (the “NewCo”). This model involves a hybrid structure of asset licensing and equity investment, typically established in offshore jurisdictions. By doing so, the originating company retains partial ownership in the NewCo, allowing it to participate in long-term value creation while sharing risks and development costs with external investors.

Before the transaction:

• The domestic pharmaceutical company (境内医药公司) wholly owns the pipeline asset (核心资产).
• No NewCo exists yet, and no external investors are involved.

After the transaction:

• A NewCo is created offshore (境外).
• The domestic pharmaceutical company spins out the pipeline asset to the NewCo via an exclusive licensing agreement (管线权益 with 独家许可协议). The domestic pharmaceutical company receive economic returns including but not limited to upfront payments, milestone payments, and future royalties.
• The offshore investors (境外投资人) inject capital into the NewCo.
• Shareholding Split in NewCo:
  • The domestic pharmaceutical company holds a minority equity stake in the NewCo (e.g., often around 20%-30% based on similar examples).
  • Offshore investors hold the majority equity stake in the NewCo (e.g., 70%-80%, depending on investment amounts and negotiations).

Key Features of the NewCo Model

1. Asset Spin-Off: A core pipeline or early-stage clinical asset is spun off into the NewCo, making it the company’s focal development and commercialization driver.
2. Investor Partnerships: Leading global funds or venture capitalists provide financial backing, often acquiring significant equity stakes in exchange for their investment.
3. Cross-Border Platform: The NewCo is frequently domiciled in jurisdictions with favorable corporate governance (e.g., Delaware, Cayman Islands), facilitating participation by foreign investors without regulatory hurdles common in China.
4. Dual Roles for Originating Company: The originating company acts as both a licensor (granting the asset) and a shareholder, ensuring it benefits from both immediate licensing revenues and equity appreciation.
5. Balancing Priorities: NewCo gives biotech companies another strategic option to harness the potential of their pipelines. Companies could choose, at their discretion, what assets to nurture in-house versus what assets are better off under NewCo to bring in some early revenue, while still maintaining access to later stage benefits.

Comparison with Traditional Models

The NewCo model provides a compelling alternative to traditional out-licensing and direct overseas investment models:

1. Enhanced Upside Sharing: Unlike traditional out-licensing, where the originating company transfers all commercialization rights in exchange for milestones and royalties, NewCo allows companies to retain equity and directly participate in the long-term upside of asset value growth. For instance, in Hengrui’s Hercules deal, a 19.9% equity stake provided an opportunity to capture downstream value beyond upfront and milestone payments. Similarly, Keymed Biosciences’s NewCo arrangement with OrbiMed for the two bispecific antibodies CM512 & CM536 ensures that Keymed Biosciences benefits from future sales revenue alongside licensing income. As seen in past cases where licensees reaped disproportionate benefits (e.g., Aiolos Bio’s $1 billion sale to GSK after licensing a Hengrui drug), the NewCo model ensures originating companies retain more control and share in future success.
2. Risk Mitigation: In traditional overseas expansions, companies face significant upfront financial burdens and regulatory hurdles when directly investing or acquiring foreign entities. The NewCo model shifts much of the development and commercialization risk to investors while offering operational independence through offshore jurisdictions.
3. Greater Flexibility: Traditional direct overseas investments often involve rigid financial structures like greenfield investments or acquisitions. NewCo’s hybrid structure combines licensing with equity investments, offering companies like Kangnuo and Hengrui more agile capital allocation strategies while leveraging external resources.

In addition, investors could handpick a focused group of assets that is of particular therapeutic interests instead of investing in the whole company, that may own other assets that are not of interest.

Case Study: Hengrui’s Hercules Transaction

In May 2024, Hengrui Pharmaceutical, a prominent Chinese biopharma company, spun off three GLP-1 assets into a NewCo named Hercules, established in Delaware. Hengrui partnered with global funds like Bain Capital and Atlas Venture to raise $400 million in Series A financing, making it one of the largest NewCo launches in China’s biotech history.

• Equity Investment: Hengrui retained a 19.9% stake in Hercules, valued at $113 million.
• Upfront Licensing Revenue: Hengrui received $110 million in upfront payments and up to $5.725 billion in sales milestones and royalties.
• Strategic Advantage: Hercules focused entirely on the GLP-1 portfolio, with access to additional funding and operational independence, positioning it for future commercialization or acquisition.

The investors like Bain Capital and Atlas Ventures fund Hercules (the NewCo in the Hengrui case). These investors are the primary shareholders of Hercules. Essentially, Hercules is the special-purpose vehicle (SPV) or entity they create and capitalize to acquire, develop, and commercialize the asset(s).

• Hercules is the NewCo itself, formed to hold the asset (GLP-1 product portfolio).
• Investors such as Bain and Atlas provide the financial backing for Hercules, but they are the ones with equity stakes in the NewCo.

This is likely because the investors drive the deal and fund the NewCo, making them key stakeholders. Hercules is a legal entity created for the deal, but the investors’ involvement is what makes the deal possible. Essentially:

• Hercules holds the asset.
• Bain, Atlas, etc., own Hercules and thus control the asset indirectly.

II. Why Now?

Market Drivers

The rise of the NewCo model in Chinese biotech from 2022-2024 is driven by several key factors:

1. Geopolitical and Market Dynamics
   • Exporting Innovation: With China’s tightening regulatory environment and pricing pressures from initiatives like volume-based procurement (VBP), biotech companies are increasingly looking overseas to unlock the full value of their innovations. The NewCo model allows Chinese firms to tap into international markets where the pricing and reimbursement potential is significantly higher.
   • Global Capital Access: Offshore NewCo structures bypass complex Chinese regulatory hurdles, such as Outbound Direct Investment (ODI) approvals. This simplifies access to international capital markets and opens opportunities to partner with leading global investors like Bain Capital and RTW Capital.
2. Investor Appetite
   • Fast, High-Return Opportunities: For global investors, NewCo provides an efficient way to bet on high-potential pipelines. Unlike traditional license-outs, which provide linear returns, NewCo offers the possibility of exponential gains through equity appreciation and strategic exits, such as acquisitions or IPOs. For example, Telavant, a NewCo originally created by Roivant and Pfizer, was acquired by Roche for $7.1 billion, allowing Pfizer to profit handsomely from its retained 25% stake.
   • A Proven Playbook: High-profile successes like Cerevel (Pfizer + Bain Capital) and Hercules (Hengrui + Bain Capital) have demonstrated how the NewCo model can rapidly create value. These case studies encourage more investors to replicate the formula.
3. Evolving Industry Landscape
   • Specialization and Outsourcing: As the biopharma industry evolves, companies are adopting a more modular approach to innovation. Early-stage R&D, clinical trials, and commercialization are increasingly handled by specialized entities. NewCo fits this trend, allowing originating companies to focus on core pipelines while delegating secondary or early-stage assets to dedicated entities like Hercules or Platina Medicines.
   • Favorable Capital Market Trends: Despite recent market volatility, biotech IPOs and M&A activity in the US and EU have rebounded. This creates a strong incentive for Chinese firms to position assets within globally competitive structures like NewCo, which can serve as efficient acquisition targets for MNCs or candidates for public offerings.

III. Challenges and Outlook

Challenges and Limitations

While the NewCo model is a promising innovation, it is not universally applicable and comes with inherent challenges:

1. Asset Suitability and Valuation Risks
   NewCo is best suited for non-core or lower-priority assets that may not justify full internal development but still hold global market potential. For smaller biotech firms, spinning off even one or two key pipelines can significantly reduce their valuation, making the model less attractive compared to traditional licensing deals. Companies with limited pipelines often opt for license-out models to retain strategic control over their portfolio.
2. Execution Complexity and Dependence on Partners
   Establishing a NewCo requires significant resources, from navigating cross-border legal and regulatory frameworks to recruiting a specialized management team capable of operating in global markets. The process demands strong operational execution and alignment between originating companies, investors, and other stakeholders. Without top-tier investors or MNC backing, NewCo initiatives risk stalling due to insufficient funding or operational mismanagement.
3. Uncertain Outcomes and Market Saturation
   The success of NewCo hinges on eventual exits, such as acquisitions by MNCs or IPOs. However, failed clinical trials or changing market conditions could lead to underperformance, leaving originating companies and investors with diminished returns. As more firms adopt this model, market saturation could reduce investor enthusiasm, leading to tougher negotiations and lower valuations.

Outlook

1. Targeted Adoption for Strategic Objectives
   Larger companies like Hengrui and Kangnuo will continue leveraging NewCo to extract value from non-core pipelines, allowing them to focus on core priorities. However, smaller companies are likely to use the model selectively, prioritizing assets with strong global demand that may struggle to secure licensing deals outright.
2. Global Integration and Investor Appeal
   The NewCo model will increasingly act as a bridge for Chinese biotechs to integrate into global innovation ecosystems. Offshore platforms not only facilitate access to international capital but also position assets for MNC acquisitions, offering a win-win for all parties involved. This approach aligns with global trends toward specialization and segmentation in drug development.
3. Refinement of the Model and Market Potential
   As the model evolves, companies may adopt best practices from established players like Roivant, refining execution with clear SOPs for governance, clinical advancement, and investor engagement. Therapeutic areas like autoimmune diseases, metabolic disorders, and T-cell engagers will remain focal points, reflecting strong demand from investors and MNCs alike.

The NewCo model will play a significant role in the next phase of globalization and consolidation for Chinese biotechs. However, its success will require careful selection of assets, operational precision, and strategic alignment with investors and partners.

IV. How ARC Can Help

ARC Group is your trusted partner in navigating the biotech investment landscape. With deep expertise in life sciences, proven success in executing complex transactions, and strong global networks, we provide the strategic support needed to drive growth through innovative structures like the NewCo model.

1. Warm Investor Connections

ARC maintains strong, direct relationships with global strategic and financial investors, enabling high-impact fundraising efforts. Our ongoing dialogues with top-tier MNCs and biotech-focused firms ensure that we can connect you with the right partners for success. The NewCo model, which thrives on sophisticated investor participation, benefits from our ability to secure these key partnerships.

2. Nuanced Understanding of Biotech Dynamics

At ARC, we understand every critical stage in the biotech lifecycle, from Pre-IND filings to pivotal Phase 1, 2, and 3 trials. We also grasp the delicate balance between platform-focused innovation and pipeline-specific assets, helping companies make informed decisions about which assets to prioritize for spinoffs or partnerships.

For those exploring the NewCo model, ARC offers strategic insights into spinoff timing and asset alignment to maximize both capital efficiency and long-term potential.

3. Cross-Border Excellence & Exit Flexibility

With a strong track record in facilitating global transactions, ARC ensures biotech companies gain access to diverse investor pools across markets. Our expertise in platforms like Bio-Europe and Bio-IT positions companies for success, while our deep understanding of cross-border dynamics helps navigate the complexities of international collaborations。

The NewCo model, which often involves offshore structures and cross-border financing, benefits greatly from ARC’s ability to connect capital with innovation seamlessly.

ARC also specializes in SPAC/de-SPAC and ranked#1 globally in SPAC M&A league table in transactional value, market share, and number of transactions in 2022. This provides the potential NewCo great flexibility in potential exits, and ARC could add value to all these cases, including but not limited to: M&A with pharma, additional cap-raise, IPO, SPAC/de-SPAC.

ARC Group brings unparalleled expertise to biotech investments, from adopting innovative models like NewCo to securing high-impact partnerships. We understand the journey for capital raises and out-licensing partnership. Let us help you unlock your potential and achieve your vision. Contact us today to explore your next steps.

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