Medical M&A deals abroad to continue

Deloitte report downplays the impact of capital outflow controls on healthcare

Despite recent controls on capital outflows, Chinese healthcare and life science companies will continue to find ample opportunities for mergers and acquisitions or M&A abroad, according to a report by Deloitte Touche Tohmatsu, one of the “Big Four” global accounting firms.

The recent slowdown in health-related M&A notwithstanding, Chinese overseas investments will accelerate, especially in medical equipment and related services, given the inadequate research and development capabilities at home, expectations of the renminbi’s depreciation and overvalued domestic M&A targets, said the DTT report.

Local enterprises with sufficient capital will seek to go out for investment opportunities, and to explore overseas markets, acquire advanced technologies, enrich their product lines, extend their industry chain and enhance their brand image, it said.

Simon Li, a counselor at Anjie Law, said controls on capital outflows are meant to rein in irrational or speculative overseas investments in real estate, hotels, entertainment and sports clubs. So, such policies won’t affect the healthcare industry much.

The Chinese government is keen on the development of the healthcare industry and on implementing the “Healthy China 2030” program, he said.

“According to the ‘Made in China 2025’ strategy, pharmaceutical and healthcare industries will receive favorable policies and incentives for rapid growth. Through overseas investments, Chinese companies can rapidly obtain sophisticated technology and equipment, thus improving the level of China’s medical industry,” Li said.

The “Healthy China” guidelines were issued in October last year to promote and improve healthcare to a level seen in high-income countries.

The Belt and Road Initiative encourages Chinese companies to go global, invest abroad and cooperate with foreign companies, the DTT report said.

But, since the second half of last year, the government tightened scrutiny of outbound investment proposals. Such proposals were subjected to heightened regulatory scrunity in foreign countries as well.

For instance, on July 31, news agencies such as Bloomberg and Reuters reported that India may reject Shanghai Fosun Pharmaceutical Group Co’s proposed $1.3 billion takeover of an Indian drugmaker, Hyderabadbased Gland Pharma Ltd.

When the deals plan was announced earlier, it was touted as the biggest-ever Chinese corporate acquisition in India.

But an Indian official told Reuters that reasons for the delay in approval at the highest level “have more to do with giving control of a large pharma company to a Chinese entity that itself is facing questions from the regulators at home”.

Overseas investments by Chinese companies in the medical sector fell to just 10 deals worth $1 billion in the fourth quarter of last year, and to nine deals worth $1.26 billion in the first quarter of this year.

In January, SanPower Group Co Ltd, a private Chinese company with total assets of 120 billion yuan ($17.8 billion), signed an agreement with Canada’s Valeant Pharmaceuticals International Inc to buy 100 percent stake of US biopharmaceutical company Dendreon Corp.

In 2016, 29 Chinese pharmaceutical companies clinched outbound M&A worth $56.67 billion, significantly surpassing $34.42 billion in 2015. Five transactions were worth over $500 million each, the DTT report said.

Last year, China’s overseas and domestic healthcare M&A rose to a five-year high in terms of both the number of deals and transaction value, while globally, M&A in the sector declined.

The DTT report predicted that the domestic M&A boom is expected to continue this year.

Public hospitals, run by the government or owned by State-owned enterprises, will likely become hot targets for M&A, it said.