The motivations and strategies for Chinese enterprises’ overseas acquisitions vary from industry to industry. In recent years, Chinese pharmaceutical enterprises have been implementing internationalization strategies in various ways, with overseas acquisitions playing a prominent role.
The growth in overseas acquisitions by the pharmaceutical industry in 2016 has been impressive, both in terms of the amount and the number of deals, with private enterprises and financial investors actively participating in acquisitions, giving rise to large transactions of US$1 billion or more.
Overseas acquisitions by Chinese pharmaceutical enterprises continue on an upward trend. According to the requirements of the 13th Five-Year Plan for the Chinese pharmaceutical industry, China aims to enhance the level of international development of the industry and promote international industrial capacity co-operation. Additionally, the Belt and Road initiative gives rise to an additive effect from numerous favourable policies. This provides Chinese pharmaceutical industries with a singular historical opportunity to “go global”. By these two policies, pharmaceutical enterprises are not only able to sell their products but can also stride out onto the international stage to make investments, dispose themselves in adjacent countries and regions, and grow in developed countries.
Seeking areas of growth in overseas markets is a choice Chinese pharmaceutical enterprises must make if they wish to grow quickly. In China, the pharmaceutical industry is fragmented among a number of big players and characterized by intense competition. In comparison, as overseas medical enterprises are more numerous and valuations lower, presenting a better price-performance ratio, a not insignificant number of pharmaceutical enterprises have set their sights on overseas acquisitions as a way of expanding their means of profitability. Through an overseas acquisition, a pharmaceutical enterprise can expand and optimize its product mix, find new sectors in which to grow, and find new points of entry into developed international markets.
A pharmaceutical enterprise must grow and accelerate its overseas acquisitions in order to develop into a multinational corporation. China has become one of the largest pharmaceutical markets, second only to the US. Massive market prospects beckon to the rise of a number of large pharmaceutical enterprises that have local and global influence. Accordingly, the internal desire by many well-known domestic pharmaceutical enterprises to venture out is brimming over, imbuing them with the hope of becoming one of the players in this huge market.
Overseas acquisition strategies. In an acquisition, the first key element is to expressly state the intent of an acquisition in light of its own strengths. Generally, when a domestic pharmaceutical enterprise proposes to carry out an overseas acquisition, it will harbour one of the following intentions: (1) seizing a sector in which growth is relatively fast, both in the global and domestic markets, to bring in advanced foreign technology and research and development pipelines, and expand its own fields of treatment; (2) further strengthening its research and development capabilities in its existing field, allying with other major players and expanding into overseas markets on the backs of overseas target customers, sales channels and business resources; and (3) a desire to expand beyond its existing field, e.g., entering into the upstream or downstream industry through acquisitions, rapidly securing a “pass” from the pharmaceutical manufacturing sector into the medical service sector.
Choosing a model suitable to one’s own development. As there are many roads to internationalization, and as there are differences in the markets faced, and in one’s own products, the models for adventuring out also vary. If an enterprise is of a large scale, with an extensive variety of products, it will use the model of establishing its own entities, and realize strict control over its own products and long-term benefits. Considering the relatively long period required before achieving returns through self-establishment, where products are numerous and new products insufficient, an enterprise can adopt the outsourcing model, utilizing the resources of professional outsourcing services to quickly enter a market. If one’s own products are limited, consideration can be given to relying on the existing platform and capabilities of a large pharmaceutical enterprise to carry out joint promotion.
If an enterprise needs to participate in a small, dispersed and complex market, granting a product operating licence can be of assistance in rapidly deriving benefits from product licensing. And if one wishes to rapidly secure a business operating platform and capabilities, then an overseas acquisition, provided that there exists a high-quality, reasonably priced target, is an indispensable means of accelerating the process of internationalization.
KEY POINTS IN IMPLEMENTATION
An overseas acquisition is a complex systematic project. It is necessary to create an awareness of risks and pay attention to the issues outlined below at different stages of the transaction, so as to guard against, manage and control the various risks involved.
Before investing, it is necessary to establish the objective, plan for the acquisition, create the acquisition strategy and consider what type of target is required, what selection criteria are to be used, and what kinds of resources and capabilities are required, so as to rapidly identify suitable potential targets and fully implement the group’s general and transaction strategies.
During the investment, the enterprise needs to conduct effective negotiations with the target company, achieve a consensus on the transaction framework, timing and direction, and design the transaction conditions on the basis of a comprehensive, detailed and effective assessment of the target company’s value, so as to achieve the objective of the transaction.
After the investment, it is necessary to consider how to ensure the continued growth of the target company’s business, ensure that the target company’s growth can assist in implementation of the group’s general strategy and transaction strategy, realize the integration of the business, and introduce the target products and technologies to the domestic market. Additionally, the spinning-off of unnecessary parts of the target company may be involved.
Compared with an acquisition effected in China, an overseas acquisition will bring an enterprise face to face with a different culture, policies, regulations and industry rules. The issues that will arise in the course of the acquisition will be more complex and the handling of them will be more difficult, making it imperative to engage professional assistance to aid in handling matters and effectively guard against, manage and control the risks that could arise.
Lin Zhong is a partner at EY Chen & Co. Law Firm