After accumulating substantial operating profits, API companies have embarked on a second entrepreneurial journey into innovative drugs. Unlike many biotech firms that rely on public financing in the primary market, API companies can incubate innovative drug subsidiaries in-house. The initial seed funding for such ventures is typically injected by the listed parent company itself. Upon completing initial team building, pipeline establishment and clinical advancement, the subsidiaries proceed with external financing and spin-off listing.
Typical representative cases include Huahai Pharmaceutical / Hua'otai Biotech and Zhejiang Medicine / NovaMab Biotech. Established generic drug and API enterprises such as Huahai Pharmaceutical and Zhejiang Medicine originally built their businesses on small-molecule drugs. Their internally incubated subsidiaries have pivoted to the macromolecule sector, covering antibody drugs, ADCs, fusion proteins and other modalities. Moreover, while their parent companies mainly focus on chronic disease therapies, these innovative drug subsidiaries are positioned in two high-profile tracks: oncology and autoimmune diseases.
In the early stage, the parent companies provide continuous financial support to cover routine R&D expenditures of their subsidiaries. In the mid-to-late stage, external investors are introduced to supplement operating capital and optimize the equity structure for future spin-off listing.
As a time-honored API enterprise, Huahai Pharmaceutical was among the first batch of Chinese firms to export API products to the global market. Despite the setback from the Valsartan contamination incident, its solid core business underpinned the company's subsequent development. Its subsidiary Hua'otai Biotech focuses on oncology and autoimmune diseases. Its core asset risankizumab biosimilar HB0034 submitted a New Drug Application (NDA) in October 2025 for the treatment of flares of generalized pustular psoriasis (GPP) in adult patients. Huahai Pharmaceutical and Hua'otai Biotech are expected to take the lead in achieving value breakthroughs in the autoimmune disease space.
NovaMab Biotech, a subsidiary of Zhejiang Medicine, entered into a collaboration with renowned ADC developer Ambrx at its early startup stage and in-licensed the asset ARX788. Amid fierce competition in the HER2 ADC track, the China-based Breast-01 clinical trial of ARX788 demonstrated an ORR of 65.5% and a DCR of 100%. Further analysis indicated a superior safety profile compared with DS-8201. The asset is strategically targeted at the untapped market of DS-8201-resistant patients.
The above cases reveal multiple inherent advantages for listed companies pursuing innovative drug transformation via in-house incubation of subsidiaries: shared sales networks and inherited commercialization capabilities; strong endorsement from the parent company enabling higher efficiency in primary market equity financing compared with standalone biotechs; greater bargaining power in financing thanks to sustained financial backing from the parent, supporting resilient valuation against market volatility rather than easy markdowns; and established relationships of the parent with the CSRC, stock exchanges and securities firms paving the way for the subsidiaries' future spin-off listing.
Although innovative drug subsidiaries currently consume capital and profits of parent companies, they carry almost all the growth imagination for the parent's strategic upgrade from generics/API business to innovative drugs. Hence, the market may afford greater patience to await long-term value realization.
Beyond in-house incubation, external in-licensing via BD serves as another mainstream path. Lonlich Pharmaceutical, a veteran API enterprise, has also launched its business development layout. It has closed two BD transactions with Yafei Biotech and Shanghai Affinity Biotech respectively, securing the exclusive rights for R&D, production and commercialization of drug molecules ALK-N001/QHL-1618 and ALK-N002/IMD-1005 across China (including the Chinese mainland, Hong Kong SAR, Macao SAR and Taiwan Region).
Compared with building pipelines from scratch through internal incubation, BD in-licensing mitigates early-stage discovery risks and partially avoids clinical development uncertainties. For the in-licensing party, paying licensing fees to acquire a mature asset carries far lower risks than de novo molecular design. Decades of accumulated sales networks and commercial teams can rapidly empower in-licensed assets, and the BD transaction proves successful once value is unlocked through subsequent commercialization.
It is foreseeable that an increasing number of established generic and API pharmaceutical companies will adopt the BD in-licensing strategy. Currently, China hosts abundant high-quality Phase II and Phase III clinical assets that lack sufficient funding for further clinical advancement, presenting promising acquisition and in-licensing opportunities for API enterprises.
