CSPC Pharmaceutical Group Ltd. (1093.HK), one of China's top four generic drug makers, announced on May 30 that it is in advanced discussions for three drug licensing deals potentially worth up to $5 billion in combined initial fees and milestone payments. The announcement came just one day after the company reported disappointing first-quarter earnings, with revenue falling 21.91% to 7.02 billion yuan ($976,000) and net profit declining 8.36% to 1.48 billion yuan.
Strategic Licensing Push Amid Financial Pressures
The timing of CSPC's licensing announcement appears strategic, coming immediately after lackluster quarterly results that saw the company's stock price subsequently rise 16.9% over six trading days. The drug licensing talks cover the development, production and sale of a targeted cancer therapy and other CSPC products, with the cancer treatment being an antibody-drug conjugate that targets the epidermal growth factor protein in tumor cells.
According to the company's statement, discussions on one potential transaction have reached an advanced stage and are expected to be finalized later this month. However, CSPC emphasized that the talks are ongoing and no legally binding agreements have been reached.
Recent Partnership Success
The potential deals would add to CSPC's growing portfolio of licensing arrangements completed in 2024. In April, the company secured a global licensing agreement with BeiGene (688235.SH; 6160.HK; ONC.US) for a drug targeting cancers through the MTAP enzyme pathway. CSPC received $150 million upfront and retains rights to up to $135 million in staged development payments and up to $1.55 billion in sales milestone fees.
Earlier in February, Radiance Biopharma acquired European and U.S. rights to develop and commercialize an antibody-drug conjugate targeting the ROR1 protein. The deal included $15 million upfront, $150 million in development milestone payments, and $1.08 billion in sales milestone payments plus revenue sharing.
Financial Challenges Drive Innovation Strategy
CSPC's first-quarter performance reflected broader challenges facing Chinese pharmaceutical companies transitioning from generic to innovative drug development. Revenue from finished drugs fell 27.3% to 5.5 billion yuan, while oncology business income plunged 65.7%. The declines were attributed to mandatory price cuts for two key chemotherapy and blood condition products to meet China's national health insurance requirements.
The company's R&D expenses rose 11.4% in Q1 2024, accounting for 18.56% of operating revenue, as CSPC invests heavily in its transformation from generic to groundbreaking drugs. However, the innovative drug business still lacks sufficient scale to serve as a strong revenue driver.
Industry-Wide Licensing Trend
CSPC's licensing strategy reflects a broader trend among Chinese biotechnology firms. According to Sun Chuan, managing partner at a law firm advising these companies, "Last year we saw at least seven newco deals. So far this year we have already identified five deals, and more are under discussion."
This surge in licensing agreements allows Chinese companies to monetize their drug development efforts while providing multinational partners with cost-effective access to innovative therapies developed in China's lower-cost research environment.
Risk Factors and Market Valuation
Despite the promising licensing prospects, investors face significant risks. VCBeat, a biotech and healthcare-focused information platform, estimates that of 62 licensing deals between Chinese pharmaceutical companies and foreign partners in 2020, at least 25 had been canceled by April 2024, representing a 40% reversal rate.
CSPC's own experience illustrates these risks. A previous deal with Elevation Oncology for cancer drug EO-3021, worth $27 million upfront and $1.15 billion in milestones, was terminated after Phase One U.S. clinical trials failed to match Chinese test results.
The company's stock trades at a price-to-earnings ratio of approximately 20 times, significantly lower than industry peer Jiangsu Hengrui Pharmaceuticals' multiple of 51. This valuation gap reflects investor concerns about CSPC's ability to successfully transition from its declining generics business to innovative drug development while maintaining adequate funding for long-term R&D investments.
