Ending equity in name, debt in substance VAMs — Reshaping the capital ecosystem for China's innovative drug industry

Over the past decade, China's innovative drug industry has experienced rapid development, driven by a tripartite engine of technology, capital, and regulatory reform, opening a transformative window from "generic drugs" to "original innovative drugs." However, behind this encouraging progress lies a distinctive investment and financing structure in the innovative drug sector—equity in name, debt in substance arrangements coupled with valuation adjustment mechanisms (VAMs).

This guaranteed-return structure allows investment institutions to secure fixed returns through equity investments structured with debt-like logic, distorting the risk-sharing mechanism inherent to innovative drug R&D and investment into a model of "profit sharing, risk shifting, and imbalanced rights and responsibilities." In terms of its impact on China's innovative drug industry, this model does not deliver a catastrophic blow but rather erodes industry foundations gradually, like water dripping through stone. It acts as an invisible shackle, distorting the formulation and implementation of long-term development strategies by pharmaceutical companies and biotech firms, quietly undermining the sustainable and healthy growth of the industry's ecosystem.

In the contract dispute case Zhang Yufang v. Xie Yumin et al. ((2020) Supreme Court Commercial Case No. 5), VAM clauses centered on equity repurchase were thoroughly examined and ultimately deemed by the court as constituting a loan agreement. The essence of venture capital lies in equity-based transactions, whereas equity in name, debt in substance VAMs—stipulating that "regardless of the company's operational performance, the original shareholders must repurchase the equity at a fixed premium"—do not bear the operational risks of the target company. Such arrangements are recognized as "risk-free returns," thereby triggering their classification as debt instruments.

In the practical context of innovative drug investment and financing, the prevalence of this structure results from multiple overlapping factors: constrained exit pathways for investment institutions, an immature merger and acquisition market, a scarcity of patient capital, and the relatively weak negotiating position of pharmaceutical companies in financing discussions.

Amid the dual pressures of financing anxiety among drug developers and capital's pursuit of returns, equity in name, debt in substance VAMs have gradually become an industry standard. The cost, however, is profound and persistent—this model enables investment institutions to shift risks rather than share them, while compelling pharmaceutical companies to bear not only the inherent high risks of drug R&D but also additional financial risks. This incentivizes companies to shift their strategic focus from "innovation-driven development" to "default avoidance," leading to more conservative approaches in technological exploration, shrinking tolerance for trial and error in drug development, and ultimately rendering the innovative drug ecosystem increasingly unsustainable.

From an industrial perspective, China's innovative drug sector does not lack wisdom, talent, or diligence. What it lacks is a long-term-oriented industrial and capital ecosystem. Crucially, it must avoid financing structures such as equity in name, debt in substance VAMs. In short, only by establishing a sustainable innovation system that embraces the risks and uncertainties of drug development, allows for failure, respects industrial realities, and fosters a multi-layered, mature, long-term capital market ecosystem can China's innovative drug industry truly embrace its future.

As a type of corporate valuation adjustment mechanism (VAM), the core feature of the equity in name, debt in substance VAM model is that investors provide capital to a company in the form of equity, enjoying the rights typically associated with equity investments (such as information rights, board appointment rights, rights of first refusal, and prior consent to corporate actions) and the potential for high returns, while simultaneously using structured contractual terms to hedge the risks inherent in equity investment and lock in a guaranteed, debt-like return on their investment.

In the context of this article, equity in name, debt in substance VAMs in China's innovative drug sector are defined as a distinctive financing structure: it allows investment institutions to participate in the funding of a pharmaceutical company (Pharma) or a biotechnology company (Biotech) in the form of equity. However, it ties fixed, debt-like returns (e.g., guaranteed minimum yields, share repurchase agreements, drag-along rights) to the achievement of specific timeline-based milestones and key performance indicators (such as clinical trial progress, drug approval, or an initial public offering – IPO). The contractual agreement shifts the risks associated with the VAM onto the company itself and/or its controlling shareholders and/or its founding team. This structure enables the investment institution to secure a guaranteed, debt-like return while retaining equity-related rights and potential upside, thereby circumventing the risks typically borne by equity investors.

Under this structure, in theory, regardless of whether the portfolio company fulfills its VAM commitments, the investment institution can exit unscathed, recovering its principal plus the guaranteed investment return from the company and/or its controlling shareholders and/or its founding team. If the company completes an IPO, the investment institution can exit via the secondary market after the lock-up period expires, achieving a return higher than that of a standard debt investment. In reality, for China's innovative drug industry, equity in name, debt in substance VAMs are no longer a form of financial innovation. Instead, they represent a structural distortion arising from the misalignment between capital market cycles and the inherently long cycles of drug development. They have ceased to function as risk-pricing tools and are gradually eroding the long-term competitiveness of China's innovative drug sector, akin to the proverbial "boiling frog."

In practice, a typical equity in name, debt in substance VAM exhibits two key characteristics: 1) it is tied to a specific timeline and the company's IPO; and 2) it grants the investment institution redemption rights and drag-along rights. For instance, in early 2025, an innovative pharmaceutical company completed its latest funding round by issuing convertible, redeemable preferred shares to investment institutions. The suite of strong protective terms in the financing agreement included redemption rights, drag-along rights, prior consent to corporate actions, liquidation preferences, and others.

According to the company's IPO prospectus, if the company failed to complete an IPO within the 18-month period stipulated in the financing agreement, or if its IPO application was rejected or withdrawn, the investment institutions from the latest round (i.e., the preferred shareholders) would have the right to require the company to redeem their shares at an agreed-upon price. Alternatively, they could exercise their drag-along rights to compel other shareholders to jointly sell their shares to a third party.

In other words, if the IPO were completed on time, these preferential exit rights (such as redemption and drag-along rights) would become void. Conversely, the investment institutions could exercise these rights to ensure a smooth exit plus a guaranteed investment return. This logic mirrors the "South Beauty – CDH Investments" VAM case: at that time, South Beauty failed to complete its IPO within the agreed timeframe and did not meet the targets set in the VAM agreement. Founder Zhang Lan was unable to cover the high repurchase amount, leading CDH Investments to exercise its drag-along rights. Together with Zhang Lan, they sold South Beauty's equity to the private equity firm CVC, resulting in Zhang Lan's eventual exit from the company.

Here, the latest financing agreement of the aforementioned pharmaceutical company follows the same logic—by structuring an equity in name, debt in substance VAM tied to a timeline and an IPO, the investment institutions positioned themselves to potentially reap high equity investment returns while ensuring a debt-like guaranteed return and a secure exit.

To further clarify the scope of equity in name, debt in substance VAMs in China's innovative drug sector, the following is an example of a non-equity in name, debt in substance VAM from the industry's investment landscape: In the second half of 2025, Sino Biopharm acquired 95% of the equity in LaNova Medicines. The total consideration was paid in two tranches, with the second tranche (approximately 15% of the total) contingent upon the achievement of milestones related to LaNova's core product, LM-299 (a PD-1/VEGF bispecific antibody). If the milestones were not met, Sino Biopharm could defer payment of the second tranche.

Given that LaNova's valuation was heavily reliant on the potential revenue from its pipeline licensing deals, Sino Biopharm used this staged payment structure and milestone-based VAM to balance the potential high rewards of projects like LM-299 against the risk of R&D failure. This transaction is regarded as a typical case of M&A among Chinese pharmaceutical companies. The VAM design, focused on core pipeline progress, protected the buyer's interests, provided a novel exit pathway for the investment institution, and, crucially, in a non-equity in name, debt in substance manner, incentivized LaNova to efficiently advance the development of its key drug pipeline.

In the financing practices of China's innovative drug sector, investors typically hold a dominant position. Driven by risk control considerations, they impose stringent VAM terms, which pharmaceutical companies/Biotechs, under funding pressure, often have little choice but to accept. These VAM clauses commonly require the entrepreneurial team to achieve critical milestones by agreed deadlines, such as securing a new funding round at a predetermined valuation, completing a company IPO, obtaining drug approval, making specific clinical trial progress, or meeting sales or profitability targets. Failure to meet these conditions triggers punitive arrangements, including share repurchase obligations, equity dilution, or cash compensation.

According to the definition within the context of this article, such financing agreements essentially constitute equity in name, debt in substance VAMs between the investment institution and the investee. For the investment institution, this structure lowers risk, enhances control, and increases the potential return on investment by transferring the risks of the VAM and the associated operational pressures onto the company founders and their team. If the VAM terms are triggered, founders may lose control of their company (as exemplified by the "South Beauty – CDH" case), and the company itself may face a capital chain rupture or even bankruptcy due to overwhelming repurchase obligations.

According to industry statistics, over 80% of equity investment agreements in China contain repurchase clauses, with some institutional sample surveys indicating the proportion is as high as 90%. Simultaneously, investment institutions commonly demand that founding shareholders provide joint and several liability guarantees for repurchase obligations, and in some cases, designate the founder as the sole obligated party. The core dilemma posed by equity in name, debt in substance VAMs for China's innovative drug industry lies in the fundamental mismatch between the short-cycle capital return demands and the long-cycle reality of drug R&D. This mismatch forces portfolio companies to distort the formulation and execution of their long-term development strategies under the dual pressures of securing funding and being compelled to chase short-term milestone achievements.

On another front, using the Hong Kong Stock Exchange in 2025 as an example, some pharmaceutical companies/Biotechs, pressured by VAMs, rushed their IPOs. This contributed to an imbalance between asset supply and capital supply within the biopharma sector. Consequently, even after a successful listing on the Hong Kong exchange, these companies often face challenges of inadequate or even depleted localized liquidity in the secondary market, leaving investment institutions still struggling to achieve a satisfactory exit.

In judicial practice, the recognition by Chinese courts of the validity of "VAM agreements" has undergone a prolonged evolution, marked primarily by the 2012 "Haifu Case", the 2019 Supreme People's Court's of the People's Republic of China "Minutes of the National Courts' Civil and Commercial Trial Work Conference" (the Nine Minutes), and the 2023 "Interpretations on the Contract Part of the Civil Code". The "Haifu Case" established the principle that "VAMs with the company are invalid, while VAMs with shareholders are valid," which led investment institutions to widely designate founders as the primary repurchase obligors. The Nine Minutes recognized the validity of VAMs between investment institutions and the company itself. However, due to the complexity of the capital reduction procedures required for a company to repurchase its own shares, courts often dismissed investor claims, further reinforcing the practice of including controlling persons/founders as repurchase obligors and, from the outset, insisting on the strict enforcement of VAM clauses.

In 2024, the "Analysis Report on VC/PE Fund Repurchase and Exit" published by Lifeng Partners revealed that among repurchase cases entering judicial proceedings, the average recovery rate was only about 6%. Among cases that progressed to the enforcement stage, a mere 4.6% resulted in 100% recovery and full execution. VAM-triggered repurchases result in a lose-lose outcome in approximately 95% of scenarios, indicating that a VAM agreement's validity does not equate to enforceability. When a company encounters operational difficulties, fulfilling the repurchase clause becomes nearly impossible, leaving investment institutions unable to recover their capital even after winning a lawsuit.

Meanwhile, investors face pressure from their Limited Partners (LPs) to enforce repurchase clauses, and founders, in an effort to protect themselves, may resort to measures such as asset isolation, stripping company assets, or transferring assets overseas. From the moment the investment agreement is signed, both parties can become entrenched in a crisis of trust and an institutionalized game of strategy, ultimately leading to a lose-lose outcome: the company's development is hampered, the founding team loses control, and the investors fail to recoup their funds.

It is foreseeable that for innovative drug companies—already characterized by high investment, long cycles, and high risk—the impact of equity in name, debt in substance VAMs is more negative, profound, and enduring, regardless of whether the VAM counterparty is the company/Biotech itself, its founder, or the founding team, or when considering the broader innovative drug industry ecosystem.

Innovative drug R&D is inherently characterized by "high investment, long cycles, high risk, and high potential returns"—this is the industrial reality. Within China's still-maturing investment and financing system, where information asymmetry is widespread, VAM agreements are often viewed as a financial tool to regulate risk and allocate responsibility.

In theory, such clauses aim to create a clearer framework of incentives and constraints amidst uncertainty through mechanisms like repurchase, compensation, and drag-along rights. Their essence is not gambling but rather a tool for pricing risk. Their widespread presence in reality stems from a core issue: the lack of smooth exit channels for investment institutions.

On one hand, the typical fund lifecycle for investment institutions is only 3-5 years. This has become even more pronounced with the rising proportion of state-owned LPs and their stricter performance evaluations. This short-term horizon is fundamentally misaligned with the long-cycle reality of drug development, thereby giving rise to guaranteed-return repurchase clauses. On the other hand, pharmaceutical companies/Biotechs require massive R&D investments and generate little to no revenue for extended periods until drug approval. Simultaneously, they face a "capital winter," tightening financing conditions, and weak bargaining power. To sustain their R&D pipelines and team stability, they are often forced to accept onerous terms tied to an IPO or other performance metrics. Furthermore, against the backdrop of stricter A-share listing requirements, pressured localized liquidity in the Hong Kong market, and increased uncertainty surrounding overseas listings, the exit avenues for investment institutions have further contracted. This has driven the distortion of equity in name, debt in substance VAMs, transforming them from a risk-pricing tool and risk-sharing mechanism into an unbearable life-or-death contract for companies and, in some cases, a indenture contract for the founders of pharmaceutical companies/Biotechs.

In short, VAMs themselves are not the inherent problem. The deeper issue lies in the structural distortion caused by the misalignment between industrial realities and the capital market ecosystem, compounded by constrained exit options. When the expected investment return cycle of capital is too short, the industry cycle is too long, exit channels are too narrow, and patient capital is absent, innovative drug financing evolves into equity in name, debt in substance VAMs. In this scenario, ensuring a risk-free exit and a guaranteed return for the investment institution becomes the primary, overriding consideration in innovative drug financing.

Although China's innovative drug industry has experienced a decade of rapid development with encouraging and commendable achievements, there remain underlying concerns within its foundational ecosystem. For China's innovative drug sector, the negative impact of equity in name, debt in substance VAMs is not a catastrophic blow but rather an erosion that, like water dripping through stone, gradually undermines the industry's bedrock, quietly damaging the ecosystem necessary for its sustainable development.

The journey of innovative drug development, from target discovery and drug design through clinical trials to commercialization, typically spans a decade, with a failure rate exceeding 90%. This is the current industry reality—it cannot be compressed, shortened, or "financial engineered." While AI algorithms are increasingly being applied to drug discovery, to date, no drug fully designed by AI has received market approval.

Therefore, at least at this stage, a fundamental and significant mismatch persists between the timeline of drug R&D and the "raise, invest, manage, exit" timeline logic of investment institutions. This misalignment, exacerbated by the trend of increasing state capital among Limited Partners (LP) and state-owned entities directly engaging in investment (state-owned LPs/acting as GPs), leads to a more pronounced transfer of VAM risks and operational pressures.

In essence, equity in name, debt in substance VAMs attempt to constrain the non-linear drug R&D cycle with short-term, guaranteed returns. This approach not only fails to enhance corporate operational efficiency, R&D innovation, or productivity but actively distorts the company's own strategy formulation and execution.

It is undeniable that VAMs have achieved commercial success and created win-win outcomes in some industries, such as the case between Mengniu and Morgan Stanley. However, consumer goods operate on shorter cycles, carry lower risks, and have stable demand, relying more on channels and operational efficiency. In contrast, innovative drug development exists at the intersection of long cycles, high risk, and massive investment. The clinical and market value of its technology and drug pipelines does not depend on the cyclical logic of fundraising and exits but on scientific understanding, technological innovation and breakthroughs, and the executional efficiency and success rate of the drug development process itself.

Consequently, applying a VAM logic effective in consumer goods directly to the innovative drug industry disregards industry realities, distorts corporate behavior, hampers long-term development, and risks a lose-lose-lose outcome for investors, companies, and founding teams. What the innovative drug industry truly needs is a long-term oriented capital market ecosystem that respects scientific principles, industrial realities, provides rational space for trial and error, and shares the inherent risks.

In theory, equity investment implies "risk sharing and profit sharing," with the company and its investors on the same boat, rowing towards a common goal. In the financing practices of China's innovative drug sector, however, the pervasive presence of VAM clauses means that both parties are pulling in different directions from the very moment they embark on this journey.

Investors seek guaranteed returns and exit certainty, while companies strive for R&D exploration and the discovery, creation, and capture of clinical and market value. Capital demands a "predictable return timetable," whereas drug R&D requires "trial, error, and time." Such a contractual structure dooms both sides to exert force in divergent directions from the outset, leading to the gradual squeezing, dilution, and distortion of the original purpose of drug development within this gameplay.

The consequences of this mutually distrustful "state of gameplay" are starkly practical: the core focus of the founding team begins to shift away from addressing truly unmet clinical needs. It is no longer centered on how to develop more effective, safer, and more accessible drugs but on how to avoid triggering costly repurchase clauses. R&D pipeline planning is driven less by clinical value and scientific judgment and more by "fundraising/IPO timelines" and "financial metrics." The decision-making priorities of senior management also pivot from "rationally confronting drug development risks" to "ensuring the fulfillment of VAM agreement targets."

Ultimately, while investors and the entrepreneurial team are nominally both shareholders, the structure effectively transfers risk onto the company, reserving a risk-free exit and guaranteed returns for the investment institution. The company devolves from being "R&D-driven" to being "default-avoidance-driven," forcing the original intent of drug development into the background.

Here, the recently approved CEO compensation incentive plan for Tesla's Elon Musk provides an instructive contrast. Strictly speaking, this is not a VAM, but its agreement logic and performance targets bear the typical attributes of a "performance-based VAM."

Under this plan, Musk must achieve a series of highly ambitious performance goals over the next decade. These include delivering 20 million vehicles, manufacturing 1 million humanoid robots, securing 10 million Full Self-Driving (FSD) subscriptions, commercializing 1 million robotaxis, and generating up to $400 billion in core profit. Only upon the full achievement of all these targets would Musk be eligible to receive over 400 million stock options, with a potential value approaching $1 trillion based on target market capitalization estimates.

This means Musk faces immense performance pressure, but the potential compensation is equally monumental, and this reward is intrinsically tied to Tesla's sustainable technological innovation, efficient and forward-looking product development, and commercialization. This incentive mechanism fully embodies risk-sharing and profit-sharing between investors and the company's core management, forming a rational and equitable contractual arrangement. It incentivizes the management team to focus on the company's long-term development while avoiding the superficial harmony and conflicting agendas that can arise between company owners (shareholders) and operators (CEO + management).

In contrast, the prevailing "equity in name, debt in substance VAMs" in China's innovative drug sector often enable investors, through legal contracts, to transfer repurchase risks and operational pressure onto the company. This forces the company to adjust its strategy and behavior around risk avoidance, stifling innovation, harming the long-term development of pharmaceutical companies/Biotechs, and distorting the fundamental purpose of drug development: to focus on unmet clinical needs and develop more effective, safer, and more accessible medicines.

In reality, despite the emergence of numerous powerful multinational pharmaceutical and biotech companies globally, unmet clinical needs remain widespread. Taking rare diseases as an example: there is no precise, authoritative, and widely accepted statistic detailing "how many rare diseases have an unknown molecular cause." However, based on public databases and review analyses, the number of known rare diseases globally exceeds 10,000, affecting over 300 million people. Only approximately 5%–9% of rare diseases have an approved treatment available.

Applying this to the "10,000 rare diseases" figure suggests only about 500 to 900 distinct disease entities have approved therapies. Concurrently, a more reasonable current estimate is that roughly 2,000–5,000 rare diseases have not yet had their molecular pathogenic mechanisms clearly identified. This means that among the 4,100–7,500 rare diseases with identified molecular causes, hundreds of millions of patients are still anxiously awaiting effective, safe, and accessible treatment options.

In the United States' most mature biopharma innovation hubs—Silicon Valley and Boston—the core of the venture capital system is not merely an abundance of capital but capital that genuinely shares risk. Failure in innovative drug R&D is the norm, and the returns from successful ventures are sufficient to cover the losses from failures. The investment logic follows probability, not guaranteed-return finance.

Consequently, the U.S. has fostered a science and innovation soil and capital ecosystem that "allows for failure, does not punish failure, and even encourages it." Scientists dare to pursue novel targets, entrepreneurs dare to advance high-risk clinical projects, and capital is willing to back long-cycle, uncertain-return yet potentially disruptive drug development. Failure is not equated with ruin but seen as the cost of evolution. It is precisely this tolerance for error that allows the innovation ecosystem to cycle, grow, and continuously nurture new winners.

In stark contrast, the equity in name, debt in substance VAMs prevalent in China's innovative drug sector run counter to this mature global innovation system. They do not constitute risk sharing but rather risk transfer, guaranteed returns, and a risk-free exit. In effect, this model acts like a Sword of Damocles hanging over the heads of numerous entrepreneurs and teams in China's innovative drug field. It imposes an additional layer of financial failure risk and VAM-trigger risk onto the already high-risk endeavor of drug R&D, leading to severe distortion in the formulation and execution of companies' long-term development strategies.

If this financing structure persists, the sustainability of China's innovative drug development ecosystem will continue to be eroded. It will be exceedingly difficult to nurture entities that genuinely focus on clinical needs, sustainably develop globally competitive blockbuster innovative drugs, and ultimately provide patients with safer, more effective, and more advanced therapeutic solutions.

To end the practice of equity in name, debt in substance VAMs in China's innovative drug sector, a dual strategy of "blocking" and "channeling" is required. "Blocking" refers to restricting equity in name, debt in substance VAMs through legislative, judicial, and administrative measures, particularly curbing the practice of imposing unlimited joint and several liability on founders, their teams, and even their family members.

In reality, court rulings on the validity of VAM agreements remain inconsistent, and a blanket prohibition is not yet feasible. However, future legislation should explicitly focus on ending the use of equity in name, debt in substance VAM clauses. Concurrently, establishing a personal bankruptcy system would help alleviate the excessive burdens placed on entrepreneurs. This would ensure that innovative drug entrepreneurs, their teams, and investors bear only the inherent risks of the industry itself, allowing the entire innovative drug investment and financing system to return to a model of risk sharing and fostering a capital market ecosystem that is more transparent, rational, and sustainable.

Furthermore, capital market regulators need to strengthen the review of IPO prospectuses, paying particular attention to equity in name, debt in substance VAM clauses within financing agreements. Stock exchanges, as operators of capital market infrastructure who also perform self-regulatory duties under the oversight of the administrative regulatory system, bear significant responsibility in this regard.

For instance, when financing agreements stipulate that a VAM is temporarily suspended upon the portfolio company's submission of an IPO application but reinstated if the IPO fails, exchanges—even though they are not the primary capital market regulators—must enhance their review mechanisms. They should clearly establish red lines against such equity in name, debt in substance VAM structures to help equity investment return to its principle of risk sharing.

"Channeling," on the other hand, involves reshaping capital exit channels to restore market vitality and cultivate patient capital. For example, in September 2024, the Executive Meeting of the State Council studied measures to promote venture capital development, noting that venture capital is crucial for technological innovation, industrial upgrading, and high-quality development. It emphasized the need to promptly remove bottlenecks in the "raise, invest, manage, exit" cycle, support eligible technology companies in listing domestically and overseas, vigorously develop equity transfer and M&A markets (as illustrated by Sino Biopharm's acquisition of LaNova Medicines mentioned earlier), encourage social capital to establish market-driven fund-of-funds for M&A or secondary market funds for venture capital, and foster a virtuous cycle within the venture capital industry. It also called for transforming state capital into more responsible, long-term, patient capital by improving policies related to state fund investment, performance evaluation, error tolerance, and exit mechanisms. The meeting stressed the importance of building a solid institutional foundation for the healthy development of venture capital, implementing key capital market reform measures, improving capital market functions, further stimulating venture capital market activity, and promoting a positive cycle among technology, industry, and finance.

In fact, whether addressing national macroeconomic challenges like sluggish growth and deflationary pressures, or meeting the intrinsic developmental needs and momentum of the innovative drug industry and individual companies, there is a pressing need for more responsible, patient capital. Such capital is essential to participate in building a long-term oriented capital market ecosystem, continuously drive technological innovation and industrial upgrading, and enhance corporate innovation and productivity. Additionally, channeling can involve expanding financing channels. For instance, innovative drug companies could explore blockchain-based tokenized financing backed by real assets (such as capitalizable drug intellectual property and the future revenue streams of core pipelines). This approach could broaden financing options, reduce financing costs, and increase a company's bargaining power and risk resilience during the fundraising process.

In summary, the equity in name, debt in substance VAMs are not a problem intrinsic to pharmaceutical companies or Biotechs themselves, but rather a systemic issue within China's innovative drug capital ecosystem. They are not caused by a single factor but arise from a broader, systemic failure of the ecosystem. The fundamental purpose of ending this model is to restore innovative drug investment to its true essence: equity-based financing and genuine risk sharing. Only when patient capital is willing to make long-term investments in the future of China's innovative drug sector can it truly transition from "financial engineering" to "technological innovation + product innovation."

However, the emergence of equity in name, debt in substance VAMs stems from multiple overlapping factors: limited exit channels for investment institutions, underdeveloped merger and acquisition mechanisms, a scarcity of patient capital, and the relatively weak negotiating position of pharmaceutical companies in funding discussions. It is not surprising that after a decade of rapid growth, China's innovative drug industry is experiencing short-term and localized imbalances in its ecosystem. In the long run, the market will inevitably return to rationality, and innovative drug investment will revert to the principles of "risk sharing and profit sharing." This is because, in reality, unmet clinical needs remain widespread, and the innovative drive and capabilities of pharmaceutical companies and Biotechs continue to exist.

Looking ahead, there will come a day when China's innovative drug ecosystem matures sufficiently, a rational and multi-layered investment and financing system for innovative drugs is firmly established, and the "soil" of the capital market ecosystem becomes fertile enough. On that day, pharmaceutical companies and Biotechs will have the confidence to sit at the negotiation table. When an investor across the table presents the card of an equity in name, debt in substance VAM, the founder of the pharmaceutical company or Biotech will be able to say to their team: "This is not risk sharing. Let's walk away.