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Behind SVB Bankruptcy: China Biotech Company Financial Risk




Recently, Silicon Valley Bank (SVB), one of the top 20 banks in the United States, collapsed and declared bankruptcy. After the Silicon Valley Bank "thunderstorm" incident, not only were global depositors worried about the collapse of the banking industry, but it also caused a wave of commotion among Chinese biotech companies.


This is also because, according to Silicon Valley Bank’s previous financial report, 12% of Silicon Valley Bank’s deposits belong to the healthcare and biotechnology industries, and many of these companies are start-ups.


Will the start-up R&D pharmaceutical companies that have been "burning money" face a bankruptcy crisis due to the collapse of Silicon Valley Bank? Can biotech companies in the early stages of development still take a stable follow-up development path?


How Does It Affect China Biotech Companies?


According to previous information released by Silicon Valley Bank, it provided banking services for at least half of the healthcare startups backed by venture capital funds in 2022. Last year, it also participated in 44% of the IPO projects in the US healthcare and technology sectors. Silicon Valley Bank's external presentation materials for the fourth quarter of 2022 also pointed out that Silicon Valley Bank has provided a series of banking and investment services from the early stages of the life cycle of these startups, and not only for the company as a whole but also for its employees.


In view of the fact that the Silicon Valley Bank incident has aroused great concern in China's technology industry, especially the pharmaceutical industry, many biotech companies have also received inquiries, including BeiGene, Zai Lab, CANbridge, Sirnaomics, I-Mab, etc. All biotech companies have issued public announcements. Judging from the statements of major companies, the impact of the Silicon Valley Bank incident is limited, and companies already have better strategies to deal with these potential risks.


Among them, BeiGene Hong Kong Stock Exchange announced that the company's uninsured cash deposits in SVB accounted for approximately 3.9% of its most recently reported total cash, cash equivalents, restricted funds, and short-term investments of US$4.5 billion as of December 31, 2022. The Federal Deposit Insurance Corporation (FDIC) said it will pay prepaid dividends to uninsured depositors within one week of March 13, 2023, and uninsured depositors will receive a certificate of receivership for the remaining amount of their uninsured funds. The Company does not anticipate that recent developments in SVB will have a material impact on the Company's operations.


Zai Lab said Silicon Valley Bank was closed and the FDIC was appointed as receiver. As of December 31, 2022, the company's total cash and cash equivalents were approximately US$1.009 billion, while the amount held in SVB accounted for a very small proportion (about 2.3%). Most of the company's cash and cash equivalents are distributed among several large international financial institutions, including JP Morgan Chase, Citigroup and Bank of China (Hong Kong) Limited. In addition, the company has no significant debt or other financing arrangements with SVB. In light of the above, Zai Lab believes that the closure of SVB will not affect the company's ability to meet its operating expenses and capital expenditure needs, including paying wages and making payments to third parties.


CANbridge stated that the amount of cash it deposits in SVB is not significant and is usually within the range guaranteed by the Federal Deposit Insurance Corporation of the United States. Its cash and cash equivalents and time deposits are currently mainly deposited in a number of large commercial bank accounts. SVB closed the relevant The impact of deposits is very small; Sirnaomics officials stated that Silicon Valley Bank is only a current bank, which is only used to pay wages and pay expenses, so there are not many deposits. It doesn't have much impact on the company.


In addition, I-Mab said that in view of the recent progress of Silicon Valley Bank, I-Mab hereby declares that the company has no business cooperation with Silicon Valley Bank or its affiliates and has no deposits in Silicon Valley Bank or its affiliates.


For financial institutions such as Silicon Valley Bank, which are favored by technology and life science startups, rising policy interest rates and suppressing loan demand may make it more difficult for biopharmaceutical innovators to maintain research and development spending.


For enterprises with a relatively high proportion of overseas business, the impact of the Fed's interest rate hike and rising interest rates may also have a certain impact. The Fed's raising interest rates and rising interest rates have brought a signal of currency strength. Under this circumstance, the cost of overseas export business will be reduced, which will prompt enterprises to adjust their domestic and overseas market strategies and increase their emphasis on overseas business.


On the other hand, due to rising factor costs and lower interest rates in China, Chinese enterprises, especially manufacturing enterprises, may be prompted to generate capital export demand.


How To Prevent and Control Globalization Risks for China Pharma Startups?


At present, it is an inevitable choice for Chinese pharmaceutical companies to go global at an accelerated pace. In addition, with the development of Chinese medicine, the increase in international exchanges, and the improvement of credit, overseas licensing transactions of Chinese innovative drugs are gradually becoming normalized. From 2020 to the first half of 2022, nearly 70 China domestic innovative drugs will be licensed oversea.


In December 2022, Kelun Pharmaceutical announced that its holding subsidiary Kelun Biotech signed a cooperation agreement with Merck, and Kelun Biotech will authorize the global or partial market rights of 7 ADC drugs under development to Merck;


In addition, BeiGene and Novartis reached a cooperation on the overseas rights and interests of ospolizumab (anti-TIGIT monoclonal antibody), with a transaction amount of US$2.895 billion and a down payment of US$300 million;


Jemincare and its subsidiary Shanghai Jiyu reached an exclusive license agreement with Roche and its subsidiary Genentech for the global development and commercialization rights of the oral androgen receptor (AR) degrader JMKX002992, with a milestone payment of up to US$590 million;


AstraZeneca has obtained the global exclusive rights of Harbor BioMed's bi-antibody HBM7022. Harbor BioMed will receive an upfront payment of US$25 million and a milestone payment of up to US$325 million, as well as royalties based on future sales of HBM7022.


However, China's domestic start-ups still need to improve in many aspects: on the one hand, companies need to strengthen their understanding and use of local policies; on the other hand, companies need to strengthen the competitiveness of their products; In terms of commercialization, there are still many challenges; in addition, companies need to improve local registration and access capabilities.


In terms of new drug clinical trials, since international multi-center clinical trials are a process, the final landing must enter the commercial end of the European and American markets.


Companies with different stages and characteristics must plan their overseas strategy as early as possible, from early cooperative development to equity sharing, and balance opportunities and risks through different models.


When Biotech companies choose overseas investments and acquisitions one after another, they often face financial risks, safety review risks, etc., which will cause the project to be delayed again and again or even eventually fail.


Therefore, before choosing to go global, it is necessary to take risk prevention measures, avoid putting eggs in the same basket, conduct market research in advance, and reduce various risks during project implementation.


The collapse of Silicon Valley Bank also sent a big signal. For pharmaceutical companies, they need to be more cautious in choosing partners in terms of financial transactions in the future.


However, opportunities often coexist with challenges. For Chinese biopharmaceutical companies, the awareness of risk prevention has increased in recent years. China has given soft and hard support regarding policies and funds, such as re-loans for technological innovation and policy-based financing for small businesses and medium and micro enterprises to reduce the company's dependence on US dollar PE/VC.


 

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