On September 22, 2017, Shanghai-based Ding Ding Pharmaceutical (stock code: ZLAB) announced the completion of the initial public offering of American Depositary Shares and its listing on the NASDAQ Global Market. The total amount of the fundraising was approximately US$172.5 million. . The opening price of the day was reported at 24.25 US dollars, and the first day rose more than 55%. Up to now, the price per share of Ding Pharmaceutical has been 27.11 US dollars, and the total market value has reached 1.337 billion US dollars [1]. The price per share of Baekje Shenzhou and Hutchison Whampoa [2] listed on the NASDAQ market in February and July 2016 is US$94.50 and US$35.04, respectively, and the total market value has reached 4.297 billion and 4.257 billion, respectively. US dollar [3].

Different from the Chinese pharmaceutical stocks that have been privatized and delisted in recent years, a group of new and innovative pharmaceutical R&D companies with unique technologies and products represented by Ding Ding Pharmaceutical and Baekje Shenzhou have succeeded in IPO in the US. It is favored and sought after by the US capital market. This shows that China's innovative drug research and development enterprises (“innovative pharmaceutical companies”) with high potential drug pipelines (such as oncology drugs), strong research and development capabilities and the ability to land in the Chinese market are under the capital market. A tuyere.

I. Main features of China's innovative pharmaceutical companies listed in the US

(1) Most of them are in the stage of capital investment and non-profit, and can only be listed in the US stock market.

The innovative drug development cycle is long, the risk is high, and the investment is huge. The investment required is tens of millions or hundreds of millions of dollars. For a company that does not have any listed products and most of which are still in the stage of research and development and clinical trials, it is difficult to make a profit. With the advancement of clinical research in the company's research products, the demand for funds will increase rapidly. Although the capital investment of VC and PE has played a role in the development of innovative pharmaceutical companies, it has experienced many rounds of financing. Small innovative pharmaceutical companies are still unable to ensure that the company has sufficient funds to bring existing products in the R&D or clinical stage to the market, and at the same time face the pressure of VC and PE to exit the demand. Under this circumstance, innovative pharmaceutical companies will undoubtedly need more financial support from the capital market to ensure the smooth progress of clinical research and drug candidate listing applications. However, the profit threshold of domestic A-shares has made the innovative pharmaceutical companies still in the stage of burning money discouraged. The US capital market is not particularly concerned about whether listed companies have profit, historical history, business scale and assets. They are concerned about the future growth prospects of enterprises, and whether the listed companies’ technologies, products and services are very large. Potential market demand. The US capital market has no profit requirements for pharmaceutical companies. Foreign investors have higher acceptance of start-up bio-pharmaceutical R&D companies that have no products, focus on R&D and require a large amount of capital investment. Compared with other domestic and overseas capital markets, they are easier to obtain in the US. Financing and good valuations are the main reasons why innovative pharmaceutical companies choose to list in the US.

(2) Most of the research and development pipelines with strong potential value and strong research and development capabilities and teams

The research and development of innovative drugs should go through the process of compound screening, preclinical testing, clinical trials, registration and other procedures. The research and development is extremely difficult. Only one of the 5000-10000 candidate compounds can be finally listed. The development cycle of an innovative drug takes a long time. In 10 years, the average research and development cost of each innovative drug reached billions of dollars [4]. For these innovative drug research and development enterprises that are not profitable and require huge capital investment, in order to obtain the recognition and high valuation of the capital market, it is necessary to have rich product pipeline layout and strong research and development strength as support. Innovative drug R&D companies are generally committed to developing innovative, best-in-class targeting and most unique technologies and capital market hotspots (such as immuno-anti-tumor drugs). Although these innovative pharmaceutical companies have not yet listed products, most of the R&D pipelines are very strong, with several clinical trials of drugs and several preclinical products. Taking Ding Ding Medicine as an example, according to the Ding Ding Pharmaceutical Prospectus [5], there are currently six product layouts in the research product pipeline of Ding Ding from the discovery stage to the later stage of clinical trial, among which Ding Ding has reached a strategy with TESARO. The cooperation agreement, the drug Niraparib (PARP inhibitor), which has obtained exclusive research and development and sales rights in the Chinese market, was approved by the FDA in March 2017 and listed in the US, while Niraparib (for ovarian cancer and breast cancer treatment) The research and development stage of the Chinese market has entered the third phase of clinical practice. In the process of innovative drug valuation, the valuation of innovative pharmaceutical companies is basically proportional to the number of products in the pipeline and the stage of the research, and if an innovative pharmaceutical company has 1-2 products in progress, it has obtained FDA approval. Or has entered the late stage of clinical trials and there is a high probability of being approved for listing, then its valuation or market value will be explosively increased [6]. A product pipeline that can obtain investors, capital market recognition, and high valuations of innovative pharmaceutical companies must be rich and well-distributed. Products at the discovery stage and early clinical stage can prove the innovative research and development capabilities of the innovative pharmaceutical companies. It represents the direction of the future technology market; products that have even obtained the approval of the listing in the later stage of clinical trials prove the research and development strength and success rate of the innovative pharmaceutical companies, which enables investors and capital markets to see investment profits and liquidation. prospect.

Another core competency of innovative pharmaceutical companies is their strong industry leaders and strong R&D team strength. The founder or core team of Chinese innovative pharmaceutical companies listed in the US, or top scientists returning from overseas, or senior executives from multinational pharmaceutical companies. In the past 10 years, the domestic talent introduction program for innovation has promoted the return of overseas scientists and the intensive and vigorous entrepreneurial momentum of the pharmaceutical industry. These entrepreneurial teams with overseas returning backgrounds not only understand the latest science and technology, but also have international connections. They are also more likely to get capital favor when starting innovative drugs. The following picture is a brief background of the main founders and core managers of some innovative pharmaceutical companies, which shows the elite composition of the innovative pharmaceutical management team.

(3) Most of the business models that use licensing and supplemented by independent research and development

According to the "Chemical Drug Registration Classification Reform Work Plan" promulgated by the China Food and Drug Administration (CFDA) in February 2016, innovative drugs refer to innovative drugs that are not listed at home or abroad, and contain new structures with clear pharmacological effects. a compound that has clinical value. The development of new drugs is a process of gradual accumulation. Even in Western countries with rich resources such as scientific research institutions, funds, and top hospitals, a new drug will go through decades of accumulation and countless years from initial discovery to final listing. failure. It is important to have an innovative drug with completely independent intellectual property rights, but also consider the unique difficulties and laws of the innovative drug itself. “Although first-in-class sounds exciting, it is actually too risky to provide investors with a solid return. In this case, we are primarily concerned with the safety of new drugs, and secondly the effectiveness of The best-in-class of the same kind of medicine," said Xu Yinglin, chairman of Xu Nuo Pharmaceutical. The Trends in clinical success rates report from Nature Reviews Drug Discovery points out that the success rate of collaborative projects is much higher than that of independent projects. Therefore, even multinational pharmaceutical giants are an effective way to manage development as a risk management. At present, a basic model of innovative pharmaceutical companies is to select more mature clinical drug candidates and conduct clinical research through internal research and development and licensing through the establishment of strategic partnerships with the world's top multinational companies or R&D institutions. Ways to build a comprehensive product line. And Ding Ding Medicine is the pioneer and practitioner of this model. According to the prospectus of Ding Ding Pharmaceutical, there are currently six products in the research product pipeline of Ding Ding Pharmaceutical, including three from GSK, Sanofi and UCB. The products are acquired by the exclusive clinical development, registration, production and sales rights of related drugs worldwide, while the three products in cooperation with TESARO, PARATEK, BMS, etc. are acquired in Greater China, and many products Has entered the middle and late stages of clinical research and development. The picture below shows the product development pipeline of Zaiding Medicine:

2. Major legal issues and risks encountered by Chinese innovative pharmaceutical companies listed in the US

(1) Red-chip structure and the issue of the departure of domestic identity shareholders

The red chip structure adopted by the US listed companies in the US is mainly the VIE structure and the equity control structure. The Chinese innovative pharmaceutical companies listed in the US mostly adopt the equity control structure, mainly because the research and development of innovative drugs belong to the foreign-invested encouraged industries, and there is no need to adopt the VIE structure for indirect control. At the same time, the founders of innovative pharmaceutical companies are mostly overseas with foreigners. Most of the national staff and major investors are offshore funds. However, because the business operations of foreign-invested enterprises need to be subject to the restrictions on foreign investment in the Foreign Business Guidance Catalogue, although the equity control structure does not have the inherent legal and moral risks of the VIE framework, the foreign-invested innovative pharmaceutical companies with the equity control structure will not be able to Engaged in research in specific areas of medicine or technology, such as pharmaceutical and technology research and development business involving human stem cells, genetic technology [7].

In addition, although the shareholders of innovative pharmaceutical companies listed in the US are mostly foreigners or overseas dollar funds, there are also some companies whose shareholders are Chinese nationals or introduce some RMB funds or domestic investors in the company financing stage. In the process, it is necessary to solve the problem of the shareholding of these domestic identity shareholders or the red-chip restructuring. China's natural person shareholders' shareholding rights are usually registered through the foreign management No. 37 [8], and the channels are still relatively convenient and smooth in the current policy environment. At the same time, the Chinese medicine natural person shareholders who need to register for the No. 37 document are usually not holding a high proportion. Even if it is difficult to handle the No. 37 document, it can also entrust other foreign founders or have completed the external management No. 37. The registered Chinese natural person shareholders will be settled on behalf of the shareholders. However, for domestic institutional investors, because institutional investors invest in the rounds of financing of innovative pharmaceutical companies are all real money and the shareholding ratio is usually high, it is difficult to solve the exit problem in the red-chip restructuring. . The overseas shareholding method of domestic institutional investors is usually to implement the overseas institutional investment (“ODI”) supervision process under the Chinese law on foreign investment laws, that is, to handle the ODI filing registration of the local development and reform commission, the commercial department and the foreign exchange administration, Set up its own shareholding platform (SPV) overseas or its existing investment entities to hold shares issued by the overseas venture capital firm Cayman Holdings (the future listing entity) and to establish its own innovative pharmaceutical companies in China. The shares were transferred to overseas holding companies [9]. The red-chip restructuring framework of innovative pharmaceutical companies with domestic shareholding structure is as follows:

However, starting from 2016, with the gradual tightening of China's regulatory policies on overseas investment by domestic institutions, especially after the issuance of the State Council issued [2017] No. 74 [10] in August 2017, “the establishment of no specific industry outside the country” The project's equity investment fund or investment platform is listed as a restricted overseas investment and needs to be approved by the overseas investment authority. Domestic institutions will face a stricter regulatory situation and non-existence through the establishment of a shareholding platform SPV way through ODI. Certainty. The aforementioned provisions of Guobofa [2017] No. 74 affect not only the red-chip restructuring of innovative pharmaceutical companies with domestic investment entities, but also the investment institutions that will engage in overseas investment and mergers and acquisitions through the establishment of overseas SPVs. Although how to define “equity investment funds or investment platforms without specific industrial projects”, how to limit and review the scales, and the time limit are still vague, it is subject to the specific implementation rules of this document or the introduction of relevant regulations, but it can be foreseen in In the coming period, the red-chip restructuring for the purpose of overseas listing will face more risks affected by uncertainties in policies and regulations.

(II) Impact of China's innovative pharmaceutical industry regulatory policies and regulations

The pharmaceutical industry, especially the innovative medicine industry, is an industry that is greatly affected by policies and regulations. The drug supervision and management policy will directly affect the innovation power and operational development of innovative pharmaceutical companies. The overall level of China's innovative pharmaceutical industry is not high. On the one hand, the innovative pharmaceutical companies have their own scientific research level and insufficient funds, and their risk resistance is weak. On the other hand, China has long lacked incentives and innovations and supporting policies and backward regulatory policies and regulations. It restricts the development of innovative pharmaceutical companies and the development of new drugs. Therefore, in order to promote the research and development of China's medicines, especially major new drugs, and promote the upgrading of the medical device industry, since the State Council promulgated the "Opinions on Reforming the Approval System for Drug Medical Device Evaluation and Approval" in August 2015, China has successively introduced a series of deepening medicines. Review of system reforms and policies and regulations that encourage drug innovation, especially the official announcement of the State Council’s “Opinions on Deepening the Review and Approval System Reform and Encouraging Drug Medical Device Innovation” (“Opinions”) in October 2017, will be on innovative medicine The rapid development of the industry has far-reaching effects and great promotion.

The main reform policies and measures that benefit the innovative pharmaceutical enterprises in the "Opinions" are mainly reflected in: (1) reforming clinical trial management, changing the clinical trial institution from the original qualification system to the filing system; reforming the approval of clinical trials, from the past explicit The license shall be changed to implied license; (2) the evaluation and approval shall be optimized, and the conditional approval shall be clarified. The rare disease drug and the clinical urgent need drug may be conditionally approved; in addition, the drug and raw materials, auxiliary materials and packaging materials shall not be separately approved in the future. Rather, it is related to the review and approval of the preparation; (3) Strengthening the protection of innovative rights and interests, exploring the establishment of a drug patent link system, piloting the compensation for the drug patent period, improving and implementing the protection of drug data and establishing a catalogue of listed drugs; (4) Drug supervision It is necessary to highlight the system of listing license holders and clarify the responsibilities of the holders of listing licenses. [11]

The "Opinions" will bring new opportunities for the research and development and operation of innovative pharmaceutical companies. For example, in the field of data use in clinical trials, previous Chinese regulations required that drugs listed in China must be clinically tested in China, and the "Opinions" proposed clinical trial data obtained in overseas multi-center clinical institutions, in line with China's drugs. Registration requirements can be used to declare registration in China. Most of the innovative pharmaceutical companies listed in the United States are conducting drug registration and clinical trials in developed markets such as the United States, Australia, and the European Union. This will reduce repeated clinical trials, improve efficiency, reduce research and development costs, and significantly shorten the registration and finalization of new drug applications. Time to market. While enjoying the dividend of pharmaceutical reform, innovative pharmaceutical companies will also face more challenges or responsibilities. For example, the Opinions once again emphasizes the authenticity requirements of clinical trial data, insists on serious investigation and punishment of data fraud, and stipulates that clinical trial entrustment agreement signatories and clinical trial researchers are the first responsible persons of clinical trial data, and need clinical trial data. The reliability assumes legal responsibility. If there is a problem of authenticity, the responsible person of the relevant non-clinical research institution and clinical trial institution, the person responsible for the false report, the registered applicant and the person responsible for the contract research organization shall be investigated according to law.

It should be pointed out that the "Opinions" and most of the drug reform documents are some programmatic guidance documents, and no formal laws and regulations have been formed. The current Drug Administration Law and the Drug Registration Management Measures are applicable to innovative pharmaceutical companies. Most of the laws and regulations are still in the process of revision, solicitation draft or pilot stage. Therefore, there will be some uncertainty about the implementation and implementation of the above-mentioned drug reform documents in the future promulgation of the revised Drug Administration Law and Drug Registration Management Measures. Sex.

(3) Protection of intellectual property rights of innovative pharmaceutical companies and related legal issues

The pharmaceutical industry is far more dependent on patent protection than other technical fields. The famous American economist Mansfield once pointed out that "if there is no patent protection, 60% of new drugs will not be invented." This is because the development of new drugs has the characteristics of “high investment, high risk, long cycle”. In the early stage, a large number of clinical trials are required, and subsequent complicated and long drug registration procedures are required. Compared with the original drug, generic drugs The R&D cycle is relatively short and the approval process is relatively easy, allowing it to enter the market at a lower price. Therefore, if there is no sound patent system to guarantee the return rate of R&D investment of the original research drug enterprises, the innovation power of the original research drug enterprises will be greatly affected, which is not conducive to the continuous innovation of the pharmaceutical industry.

According to the provisions of China's Patent Law, the protection period of invention patents is 20 years, counting from the date of patent application. In the field of medicine, the protection objects of pharmaceutical invention patents mainly include new compounds, new preparation methods, new pharmaceutical preparations, new uses, and the like. Among them, the compound patent protects the Active Pharmaceutical Ingredient (API), which is the patent that best reflects the core competitiveness of the drug. As mentioned above, the birth of new chemical drugs has to undergo two stages of “screening” and “development”. After the screening phase is completed, the next step is a long clinical trial. Therefore, experienced pharmaceutical companies generally apply for lead compounds, general compounds, preferred compounds, preparations, crystal forms, preparation methods, new uses, and composition patents in stages with the development process in order to maximize the use of patent protection. The advantages brought. Even so, the review of drug patents usually requires a longer period of time than the general patent authorization review, coupled with lengthy clinical trials and review approval procedures, many innovative drugs are on the market, the patent protection period is running low. In addition, the "Regulations on the Administration of Drug Registration" stipulates that the approval of generic drugs can be applied two years before the end of the patent period. Therefore, after the expiration of the patent protection period, generic drugs can quickly enter the market at relatively low prices.

In order to promote the innovation and development of the domestic pharmaceutical industry, many countries have set up a patent extension system for innovative drugs to compensate for the time loss between the entry into force of the patent and the approval of the new drug. In the current Patent Law of China, the patent period extension system has not been stipulated. However, in the "Opinions" promulgated in October, the State Council has proposed to select some new drugs to carry out the trial of the drug patent term compensation system, and delay the listing due to clinical trial and review approval. Time to give appropriate patent term compensation. China's "Patent Law" is undergoing the fourth revision. It is not clear how the specific provisions of the drug patent term compensation will be put on the ground. Innovative drug companies should pay close attention to relevant legal developments and adjust the R&D strategy in a timely manner.

In the field of medicine, the patent linking mechanism is also a very worthy intellectual property system. The patent link refers to the “link” of the generic drug registration and the original research drug patent protection period, that is, the generic drug registration application should consider the patent status of the previously listed reference preparation. A sound patent linking system plays an important role in promoting drug innovation and balancing the development of generic drugs. China has established a preliminary patent link system through the current “Regulations on Drug Registration”, but since the drug patent information retrieval system is not yet sound, there is no effective communication mechanism between the CFDA and the State Intellectual Property Office (SIPO), and the CFDA does not pay attention to it. Issues such as patent infringement review have not yet played their due role.

In May 2017, the CFDA issued the “Policy on Encouraging the Innovative Protection of Innovators of Drugs and Medical Devices (Draft for Comment)” (“Draft for Comment”), and is committed to further establishing a patent linking system in China. The "Draft for Comment" requires that if the patent owner of the relevant drug believes that the applicant has infringed his patent right, he shall file a patent infringement lawsuit with the judicial organ within 20 days after receiving the applicant's non-infringement statement. In order to delay the time-to-market of generic drugs, it seems that innovative pharmaceutical companies must file patent infringement lawsuits within 20 days, and patent infringement lawsuits usually lead to parallel patent invalidation procedures and even to patent invalid administrative litigation. It can be seen that the introduction of the patent link system may have an impact on the patent stability of innovative pharmaceutical companies, and major issues such as litigation may also affect the company's IPO strategy. The "Opinions" also proposes to explore the establishment of a patent link system, and at the same time stipulates the self-acquired and undisclosed test data and other data submitted by applicants who challenge patent successful drug registration, and gives a certain data protection period. Incentives for generic companies to challenge patents, on the other hand, will increase the instability of the patent status of the original pharmaceutical companies.

(4) Legal insurance for intellectual property licensing

In addition to independent research and development and ownership of patents, innovative pharmaceutical companies will also adopt license-in (licensed introduction) to obtain the license to implement relevant patents and proprietary technologies for research and development, production and commercialization of original drugs. For example, according to the Baekje Shenzhou Prospectus, a patent of the three US patents related to the BGB-A317 drug candidate, Ono Pharmaceutical Co and Licensee Bristol-Myers Squibb Co, are working with Merck & Co. filed an infringement lawsuit against the three US patents, and the defendant challenged the validity of the three US patents in the infringement lawsuit. If the validity of the three US patents is maintained, and Baekje Shenzhou plans to produce and sell the drug in the United States, it will need to obtain a sub-license within the United States from Bristol-Myers Squibb Co, or if Baekje Shenzhou plans to If the country produces or sells the drug, it will be required to obtain a license for the three patents in the country.

The intellectual property license may come directly from the drug patentee or from the drug patent licensee with sublicense. The legal risks from intellectual property licensing contracts may seriously restrict the research and development process of innovative pharmaceutical companies, and even cause innovative pharmaceutical companies to lose the research and development capabilities or legal rights of clinical drug candidates. For example, if the patentee is a relatively strong multinational pharmaceutical company, sometimes it is difficult for the licensee to promote due diligence on patent-related patents, especially proprietary technology due diligence, before signing the license agreement. However, the patent ownership relationship between affiliates within a multinational enterprise is complicated. It is possible that the patentee is a subsidiary and the signatory of the license agreement is another entity. If the license agreement does not previously stipulate the licensee’s right to grant the license, This may lead to disputes and even terminate the license contract. In addition, in the process of implementing the patent, it is likely to need to use the relevant proprietary technology. If the license agreement does not clearly stipulate the proprietary technology license or does not list the proprietary technology list in detail, it may also cause hidden disputes such as trade secret infringement disputes.

In addition, if the innovative pharmaceutical companies get only the interests of Greater China during the negotiations, the development progress and success of the drug candidate in the world will determine its fate in the Chinese market. If the authorized project is terminated abroad due to funding, partners, internal planning, etc., or has not been approved by the FDA or EMEA, projects in Greater China are likely to be affected as a result.

(5) Dependence of innovative pharmaceutical companies on third parties and related legal issues

Most of the innovative pharmaceutical companies that are currently listed in the US are small and medium-sized innovative companies operated by the “small and beautiful” elite team. They can take advantage of small businesses and fully cooperate with external third parties to use contract research organizations (CROs). Cooperative production companies (CMOs) and cooperation with multinational pharmaceutical companies and research institutions fully utilize their technological advantages to enhance the company's research and development efficiency. However, this kind of operation mode is also a "double-edged sword" for small innovative pharmaceutical companies. While making full use of the advantages of the partners' funds, products, technology, market and other advantages to enhance their research and development capabilities, partners and cooperative products are in law. Some major flaws and defects in the aspect may also bring huge legal risks to innovative pharmaceutical companies.

On May 26, 2016, the State Council issued the “Pilot Program for the License System for Drug Listed Licenses” and began piloting the System of Listing License Holders (MAH) in 10 provinces and cities, breaking through the previous licensing and production licenses. "Bundling." The "Opinions" proposed to promote the full implementation of the listing permit holder system, which is conducive to summarizing the pilot experience and ensuring that the innovative pharmaceutical companies can enjoy the ultimate market benefits brought by technological innovation as the identity of the listed license holders. Great to promote the research and development of innovative pharmaceutical companies.

Under the system of the listing permit holder, if the innovative pharmaceutical company that is the holder of the listing license does not have the corresponding production qualification, it must entrust a qualified pharmaceutical manufacturer to produce the drug approved for listing. The CMO shall be a pharmaceutical production enterprise that establishes and holds a Pharmaceutical Production License and a Good Manufacturing Practice (GMP) certificate for the corresponding pharmaceutical production scope. The applicant and the holder are the responsible persons for the drug marketing approval, and undertake the safety and validity guarantee obligations of the drug life cycle, including registration, production, circulation, monitoring and evaluation, quality traceability, information disclosure, etc., although certain obligations may Make an agreement with the manufacturer, but the ultimate responsibility should be borne by the application holder. However, if the entrusted production enterprise fails to comply with the production facility inspection requirements and quality management regulations stipulated by the law, or is punished by the regulatory authorities, it will bring serious legal risks and legal responsibilities to the entrusting party (innovative pharmaceutical enterprises), directly leading to new drugs. R&D and production processes are hindered. This will require innovative drug holders to have strong risk taking and control capabilities.

Third, the conclusion

The innovative pharmaceutical R&D industry is a gold mine with continuous growth and great potential. Under the support of the state's policy of encouraging innovation, it has already ushered in a golden period of development. The IPO to the United States, the recognition of international capital markets and financial support will enable Chinese innovative pharmaceutical companies to obtain more resources and strengths to accelerate research and development. As long as they are in the process of innovation and development, they should pay full attention to relevant legal risks and avoid potential. Major legal issues, under the background of medical reform, China's innovative pharmaceutical R&D industry is bound to enter the fast lane of development. While congratulating the newly-innovated pharmaceutical companies such as Ding Ding and Baekje Shenzhou on their successful landings on Nasdaq and achieving great success, we also hope to see more and more Chinese innovative pharmaceutical companies relying on domestic and overseas capital markets.