Between Split and Not Split: The Capital Path Choices for Innovative Pharmaceutical Companies' Red-Chip Structures

Recently, market rumors that red-chip structure companies are applying for a listing in Hong Kong and their applications would not be accepted have drawn significant attention from the innovative drug industry. In fact, the Stock Exchange of Hong Kong’s amendments to listing rules in the first phase have not yet involved red-chip structure companies. For Mainland companies seeking to list in Hong Kong, the key hurdle lies in the filing with the China Securities Regulatory Commission (CSRC).

Judging by the filing progress, as of March 20, among 41 Hong Kong IPO applications that were approved for filing in 2026, only Qunhe Technology is a red-chip structure company; and in 2025, the number was 34 for the whole year. Analysts from investment banks have suggested that some red-chip structure companies may have been asked to remove the structure again before reapplying due to insufficient necessity. Once viewed as a “golden channel” for domestic biotech companies to connect with international capital, this pathway now seems shrouded in fog.

Although there is still no clear “shutdown,” the cautious posture shifting from “automatic acceptance” to “case-by-case review” has put many innovative drug companies that have already set up red-chip structures and are queuing to list in Hong Kong in a dilemma: if they dismantle the structure, they face triple constraints of time, cost, and talent; if they do not dismantle it, they need to confront the risk that uncertainty in the filing could cause the listing to be stalled. Between dismantling and not dismantling, this has become the core proposition that the broader biopharmaceutical industry is currently paying widespread attention to.

What is a red-chip structure?

Simply put, a red-chip structure means that Mainland companies, for overseas listing, register holding companies in places such as the Cayman Islands and the British Virgin Islands, and “embed” their Mainland operating entities through equity-control or agreement-control arrangements. The listing entity is overseas, while the operating entity is in the Mainland—split in two, with each side getting what it needs. This structure cleverly sidesteps rigid constraints such as the domestic profitability threshold for direct listing, ownership-structure requirements, and foreign-exchange controls, allowing companies to both gain access to overseas capital markets and keep core assets in China. It was first widely adopted in industries such as internet and education, and later became the standard setup for domestic biotech companies to connect with international capital.

Why are innovative drug companies “partial” to red-chip structures?

The life sciences and biopharmaceutical industry is naturally international by design. Research requires global collaboration, clinical trials require multicenter data, and capital is also inseparable from U.S. dollar funds and international markets. Red-chip structures conveniently provide investment tools familiar to dollar funds, such as preferred shares and convertible bonds, making them willing to back such structures. From 2021 to 2025, the number of financing rounds for China’s innovative drug companies fell from 2,100 to 796, and financing amounts shrank from USD 43.5 billion to USD 10.2 billion, yet the allocation by dollar funds to quality targets has never truly stopped.

More importantly, red-chip structures give companies greater space for capital operations. Multiple rounds of financing, employee stock options, and M&A restructuring—operations that in the Mainland require approvals step by step—can be completed more flexibly under a red-chip structure. For innovative drug companies with long R&D cycles and heavy capital consumption, this flexibility is almost a lifeline.

Why is there now a push to “dismantle” the structure?

Behind the change in regulatory direction are three deep layers of logic.

First, macroprudential considerations. Under a red-chip structure, Mainland assets are taken out to be listed overseas, and the proceeds from financing are largely kept overseas. Against the backdrop of increasing pressure on cross-border capital flows, regulators naturally want to strengthen oversight.

Second, data security. Innovative drug companies hold large amounts of clinical data and genetic information. Under a red-chip structure, the agreement-based control relationship creates regulatory blind spots for taking data out of the country. With the implementation of the Data Security Law and the Regulations on the Management of Human Genetic Resources, regulatory authorities have put forward higher requirements.

Third, the maturation of the Mainland market. With the launch of the STAR Market and the National Equities Exchange and Quotations (NEEQ), and improvements to listing rules for unprofitable technology enterprises, the necessity of red-chip structures is being reexamined. Companies either dismantle the red-chip structure so that they can reapply with Mainland entities, or they keep it but demonstrate that it is not substitutable.

The “three ledgers” of dismantling red-chip structures

Dismantling a red-chip structure is by no means a simple change in legal procedures; it is a systemic reconfiguration involving capital structure, shareholder interests, and team stability. At minimum, companies need to get three ledgers clearly accounted for.

First is the time ledger. Dismantling a red-chip structure involves a chain of interlocking steps, including deregistration of overseas entities, offshore company liquidation, buyback of equity from investors, restoration of “round-trip” investments, cancellation of foreign-exchange registrations, cross-border tax clearance, and building a new equity structure for a Mainland entity, among other steps—leaving almost no possibility for parallel execution. Based on case statistics in recent years, this process typically takes 12 to 18 months.

For innovative drug companies that are in the crucial Phase II or Phase III stage, what does this more-than-a-year window mean? It could mean that the listing time gap with competitors targeting similar mechanisms is widened; it could mean that key clinical trials that could originally be advanced with listing financing are forced to slow down; and it could even mean that the company misses the valuation high point in the capital market. Even more troublesome is that the listing application needs to be zeroed out and restarted: the prospectus, compliance documents, financial audits, and all previously submitted materials must be reorganized from scratch. The millions of RMB in intermediary fees and the team’s efforts invested earlier could end up wasted.

Second is the cost ledger. The direct costs of dismantling a red-chip structure first come from handling investor equity. Under a red-chip structure, the shareholder structure is usually more complex, including multiple rounds of U.S. dollar fund investors, the founder team, employee option platforms, and so on. When dismantling, overseas investors need to convert their equity into Mainland entity equity. Either the company pays real money to repurchase the investors’ shares they hope to exit, or a complex equity-exchange agreement must be reached.

For biopharmaceutical companies that are not yet profitable and already have tight cash on their balance sheets, where would the repurchase funds come from? Many companies can only seek bridge loans with an annualized cost of 8%–12% or even higher, further increasing the burden on cash flows. If they choose an equity exchange instead, they may face valuation haircuts demanded by investors. When shifting from an overseas structure to a Mainland one, changes in liquidity premiums and exit expectations will all affect the assessment of equity value.

In addition to visible funding costs, there are also implicit financing costs. After dismantling, the company needs to negotiate a new round of financing with investors under the identity of a Mainland entity. At this time, the listing timeline is delayed, and uncertainty arising from the structural conversion affects the process; the company’s bargaining power in financing is weakened, and valuations that could have been negotiated may be forced into a discount. Furthermore, tax treatment related to overseas company deregistration and possible income-tax obligations triggered by restoration of “round-trip” investments may also bring additional tax burdens of several million RMB, or even tens of millions of RMB.

Third is the talent ledger. For innovative drug companies, the most valuable asset is not the pipeline, but people. Under a red-chip structure, one of the most important tools for attracting and retaining core talent is the employee stock option plan of the overseas listing entity. Dismantling a red-chip structure means that the existing employee stock option plan must be thoroughly adjusted: how are overseas options converted into Mainland equity? How is the exercise price re-set? How are rights and benefits protected? If these issues are not handled properly, it is highly likely to trigger anxiety among the core team and even lead to talent loss.

A more realistic problem is the timing gap. From initiating the dismantling to completing the listing for the new entity usually takes about a year and a half. During this year and a half, employees’ options cannot be exercised overseas or traded in the Mainland, leaving them in a suspended state. For core R&D personnel who, in the early stage, swapped higher option expectations for lower compensation, this waiting itself is a test. If core teams choose to leave due to options being suspended or suffering value shrinkage, the company faces not only talent loss, but also a substantive delay to R&D projects. And this portion of risk is precisely the hardest to measure in money.

These three ledgers are interdependent—each one affects the others. The time ledger affects the listing window, the cost ledger squeezes cash flow, and the talent ledger shakes the foundation of innovation. Intertwined and causally related, the longer the delay lasts, the higher the capital costs become, and the more the team’s patience is worn down.

Institutional supply: building diversified capital pathways

Faced with such a shift, innovative drug companies do not need a one-size-fits-all policy direction, but rather a set of diversified, predictable, and low-cost institutional options. The government should provide clear rules and selectable tools so that companies can choose the most suitable approach based on their own circumstances.

First, make the filing process more transparent. The biggest pain point for companies today is uncertainty. Establish a standing communication mechanism to promptly publish review focuses, compliance guidelines, and typical cases, enabling companies to anticipate risks in advance. For red-chip companies that meet the requirements, clarify the filing timetable and review standards, and avoid the listing process being stalled due to misinterpretation of policies.

Second, provide a “green channel” for dismantling red-chip structures. For companies that truly need to dismantle, simplify administrative procedures such as foreign-exchange registration, tax clearance, and deregistration of overseas entities. Explore special channels for “red-chip return,” enabling parallel approvals for dismantling and Mainland listing applications, so as to shorten the transition period.

Third, use financial tools to ease funding pressure from dismantling. Dismantling a red-chip structure often comes with large funding needs such as investor equity buybacks and employee option exercises. Encourage financial institutions to develop customized products such as cross-border capital pools, bridge loans, and convertible bonds, specifically to support capital operations throughout this process. State-owned capital and industrial funds can set up dedicated investment tools to participate via equity investments or cornerstone investments, solving companies’ short-term funding issues while also leveraging the long-term capital value discovery function.

Fourth, build a linkage mechanism across multi-level capital markets. Different companies have different choices. Some companies are suitable for the STAR Market “red-chip return” green channel, leveraging the high valuation and liquidity advantages of Mainland markets; others need to retain the red-chip structure to connect with international capital—then they are assisted in preparing “evidence of necessity” to seize the window for an overseas Hong Kong listing. Still other companies can pursue differentiated development through the NEEQ. The government can provide a listing-path planning service covering the entire lifecycle of enterprises, helping companies find the path most suitable for them.

Fifth, align industrial policies and capital policies to form synergy. During the period of adjustment to listing pathways, increase support for BD transactions, and encourage companies to accelerate cash recovery through methods such as License-out to maintain the continuity of R&D investment. At the same time, push for increased allocations to shares of innovative drug companies by long-term capital such as Mainland RMB funds, insurance funds, and pension funds, reducing companies’ excessive reliance on dollar funds.

Conclusion

For red-chip structures, the “dismantle” versus “not dismantle” is superficially a choice of listing pathway, but in substance it concerns how the biopharmaceutical industry, while deeply integrating into the global innovation network, can also build an autonomous and controllable capital circulation system. The original intent of regulatory adjustments is not to block companies’ route to internationalization, but to hope that companies can interact constructively with Mainland and overseas capital markets under a more transparent and compliant institutional framework. For innovative drug companies, the core value of institutional supply is to provide choice—so that companies do not fall into passivity due to the narrowing of a particular path, but instead find the one that best fits their development stage within a matrix of diversified institutions. As the policy environment continues to evolve, what we need is not to stand by and wait, but through institutional innovation to provide companies with certainty that can carry them through the cycle.

[Author Huang Wei is the Director of the Shanghai Institute of Accounting and Finance (Shanghai University) Shanghai Tech Industry Research Center, and Deputy Director of the Office for Education Quality Monitoring and Evaluation (in charge); Xu Lang is an engineer at the Shanghai Biopharmaceutical Science and Technology Industry Promotion Center. This article is also a phased result of the National Social Science Fund general project (22BJL026)]

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