The formation of Sarafa showcases a complex strategy for capitalizing and publicizing assets from China. The process involved concurrently in-licensing an asset, raising a $230M private round, and executing a reverse merger into a public company, demonstrating a rapid path to the U.S. market.
In debates over U.S.-China biotech relations, a crucial distinction exists between physical supply chains (drugs) and innovation supply chains (patents). While physical supply chains may require protection, blocking innovation flow from China is counterproductive, as patents are public and value is captured in U.S. markets.
The idea that U.S. capital is excessively flowing to China for biotech assets is overstated. The total upfront payments for all 2025 out-licensing deals from China ($5.6B) are dwarfed by the value of a single U.S. acquisition like Apogee ($10.9B), proving that the bulk of value creation remains in the U.S. market.
Smaller biotech firms face significant hurdles in gaining market access. They often cannot negotiate directly with Pharmacy Benefit Managers (PBMs) for formulary placement. Instead, they must use a third-party negotiator representing multiple small companies, a process that is opaque and can cause critical launch delays.
The traditional biotech model relied on M&A for investor returns. However, the emergence of profitable, independent companies like RevMed could attract generalist investors, creating more sustainable long-term value for the sector than selling off its most promising assets to large pharma.
The current surge in the XBI index is not a sign of an overvalued market. Unlike frothy periods where all stocks rise, this rally is supported by strong fundamentals like FDA permissiveness and M&A activity, while still allowing for stock-picking differentiation between winners and losers.
AbbVie's acquisition of Apogee highlights that pharma will pay significantly for assets with replicable global trial data. Gaining even a one-year head start against a major drug's patent cliff (like Dupixent's) is a critical, value-creating advantage that justifies a multi-billion dollar price tag.
Despite common wisdom that M&A activity drives the biotech market, a regression analysis over the last five years shows almost no correlation (R-squared of 0.2) between biopharma M&A deal value and the performance of the XBI index. This suggests M&A may not be a primary market driver.
Investing in oncology presents a paradox. While it's notoriously difficult to predict clinical success from preclinical data, the sector remains a top investment area. This is because it offers unique financial advantages like early de-risking in patient trials, premium pricing, and consistent M&A demand.
Instead of traditional metrics, a useful gauge for biotech valuation is the number of years it would take for large pharma's free cash flow to acquire the entire SMIDCAP biotech sector. Currently under four years, this indicates valuations are not at the extreme highs seen in 2020 (over five years).