- Israeli companies are actively heading to China to expand in the colossal market there.
- The Russian government is offering perks to local companies while also welcoming foreign investment in infrastructure projects.
- The Chinese appetite for overseas investment is growing, though the companies often lack the necessary local expertise to enter new markets.
2020 has been a disruptive year in many industries for one obvious reason, the global pandemic. The healthcare and life sciences branches also seem to be struggling with the new challenges, this is despite the opportunities that the situation may bring. The Covid-caused fluctuations have pushed the need to restructure global supply chains, find new ways to manage the workforce as well as to promote digital transformations.
According to a recent E&Y poll, several life sciences businesses are considering M&As to empower such changes. Thus, 58 percent of the respondents plan to actively pursue mergers and acquisitions in the next 12 months. However, more than three-quarters of these say that their planned M&A activity will include bolt-on acquisitions or deal-making for transitional capabilities.
How has this volatility impacted cross-border M&As in this sphere? During our topical webinar, our panelists analyzed the situation from the point of view of three countries, China, Israel, and Russia.
Israel: Looking for New Markets
‘It is a very interesting time for life sciences as a whole, and particularly those which concern China’s and Israel’s M&As,’ thinks Oren Gez, the founder of Eight Bridges Consulting. Israel has great resources and shown significant achievements in the R&D and innovation sectors. However, being a small country, it often lacks the proper market capacities, and here China seems to be a strategic partner for the Israelis to leverage their know-how potential.
Chinese investors are generally very knowledgeable and share the same vision with their Israeli counterparts. ‘They have great plans, not only for the Chinese healthcare market but also for the global one,’ Gez points out. From the Israeli point of view, he is sure that it is a good time for Israeli companies to go and explore investment opportunities in China, as the healthcare industry is rapidly growing there. Gez also suggests that the Chinese should do the same in Israel. ‘Chinese and Israeli have many common values, namely family and relationships, so there are a lot of common connections to build upon.’
Nevertheless, most of the M&A activities in Israel’s healthcare industry are being conducted with US companies. 2020, though, showed a decline in such deal activities while several companies are instead going public. The primary interest of American businesses, Oren says, is the oncology sector. The Russians, he adds, are also not to be excluded since they are ready to support the Israeli healthcare sector with their capital and research capacities.
Russia: Strengthening Local Producers
‘The Russian market is worth about $20 bn in terms of commercial value, sure it is significantly smaller than those of the US, EU, or China. However, here you can find a lot of international players who have been active in this market for the last couple of decades,’ says Aleksandr Lobakov, Managing Partner in Novus Capital.
Nevertheless, he points out, recently the positions of the multinational corporations in the Russian healthcare market have weakened due to the government’s efforts to support local producers. Despite these ‘localization’ policies, Moscow is still welcoming foreign investment, especially those directed at the infrastructure and R&D segments.
Still, the M&A environment in Russia is rather volatile, mostly because of geopolitical issues, Aleksandr adds. Before 2013, deal activity was very high, 2014-2016 showed a significant slowdown, later the market again showed an upward trend.
The multinational companies present in the local market have preferred to invest in products, i.e. new acquisitions or to bring products from other markets. ‘Their main strategy is to become commercially stronger,’ Lobakov says. The local players, meanwhile, are active not only on the product side but also on the equity side to extend further.
In terms of Russia-China cross-border investments, Aleksandr explains, Chinese strategic investors in the pharma industry are incredibly cautious. ‘The normal way would be by going through the Russian government, specifically from the joint Russian-Chinese investment fund. There are several large consolidation cases when big holdings like Sistema have attracted Chinese capital.’ Ultimately, it comes about through government or quasi-government money mixed with private capital and then invested in the creation of large platforms in the industry.
What about Russia and Israel? There aren’t so many M&A activities conducted by large players. However, smaller actors from Israel are more dynamic in terms of mergers and acquisitions. For instance, the Israeli are interested in infrastructure projects in Russia, like a plasma processing center with an estimated investment of $100mln.
China: Ambitions and Challenges
Quite often, says Alvin Syh, CEO of Anrich Capital and CEO of BC Asset Management, large Chinese companies have no or very little expertise in doing an M&A deal abroad. Especially, with respect to both the legal and the financial sides of a negotiation, so that the players from China have to do is; involve third parties with knowledge of local practices to power up their deals.
Another challenge that Chinese investors face is culture, i.e. the cultural peculiarities of the target countries. Advisors or consultants from there could make the process smoother since they understand the specifics of the conduct, compliance, negotiations, etc. Moreover, Syh adds, it would be good practice for Chinese investors to conduct a market study before entering the deal to help them to get to know the product, and its environment, better.
The way the Chinese companies are doing business with American, Israeli, or Russian counterparts is also changing, believes Dr. Ruilin Zhao, Partner at CD Capital. ‘We are seeing a lot of companies coming to China with innovative products to make a deal rather than doing the traditional equity fundraising type. This is great for such companies since it helps them to do fundraising in a non-exchange way.’
Meanwhile, he adds, Chinese companies’ appetite for overseas investments is growing, and there are several cases where Chinese buyers have been competing for a single target.
Moreover, in the last 6 months, says Dr. Zhao, the values of MedTech companies, both private and public, have been skyrocketing. One of the factors leading to this is the change in the MedTech landscape. Previously, he explains, the price of a company would jump after receiving government certification for a product that is ready. Now, it is enough to have a product pipeline to attract the attention of investors, our panelist adds.
Local expertise is still necessary, stresses Alvin Syh. ‘It would be wrong to do a cross-border M&A deal — regardless of it being in China, Russia, Israel, or the US — and think that the business in the target country is done in the same way as it is done in yours. To succeed, you’ll need an internal team of professionals who know how the target market, business, and how the government works,’ he concludes.