China and Russia: Behind the Scenes of Healthcare and Biotech M&As

  • Beijing’s ‘Belt and Road’ initiative has given a substantial boost to Chinese activities in its neighboring countries, with biotech and healthcare being no exception.
  • An M&A deal can go through much more easily if a local partner supports the buyer side and helps them to understand the country’s realities.
  • The Russian healthcare market is lucrative for potential investors due to a large number of state-owned and poorly managed assets. 

In 2020, the pharma and biotech industries may not be facing the same challenges the tourism and retail sectors are experiencing. Nevertheless, the global pandemic has introduced several issues to these verticals. Swift development of supply chains, uncertainty about the capital available, rapid restructuring of demand due to COVID-caused medical needs have all influenced the M&A landscape in the field.

As this PwC report states, key players in the industry are currently using their resources for internal growth, as well as getting ready for disruptions in supply chains. While pharma deal volumes in Q2 2020 showed a small bump in volumes (from 19 M&As in Q1 2020 to 22 in Q2), their values were at their lowest since Q1 2018. Biotech deal values, meanwhile, are at their minimum since Q2 2017.

On that background, the deal scene in China and Russia is especially interesting since both countries have great ambitions in the global pharma and biotech markets. Moreover, the state plays a significant role in both of them, however, international political tensions may push Beijing and Moscow closer together. How does it look from the M&A side? The panelists of the ‘Healthcare Cross-Border M&A Between China, Israel And Russia’ webinar provided some insights on the topic.

What is Driving Chinese Biotech Investments into Russia

‘In this industry, there are a lot of learning curves’, says Carl Xiao, SVP of SPH HK Investment, pointing out at the relatively long deal processes in the healthcare industry. Recently, his company entered a $400-million M&A deal with their Russian counterparts in the sphere of monoclonal antibodies. The negotiations lasted for a year and a half. From his point of view, there are several cornerstones that define the future success of any potential deal.

The first factor is trust. It takes time to build the reputation of the company, as well as establishing connections in the industry. In terms of cross-border M&A deals, one can start building a business network from small local partners and steadily expanding it. A history of successful partnerships increases the company’s visibility in the industry, Carl adds.

Another reason fueling Chinese M&A deals in this market is Beijing’s ‘Belt and Road’ initiative. This global infrastructure development strategy, which was adopted by the Chinese government in 2013, aims to invest in nearly 70 countries and promote regional connectivity. The companies, either private or state-owned, act in line with these plans and receive government support. ‘This is a very good action plan that helps to bring you overseas and find new partners, other than Western countries like the U.S. or EU members. Russia is within our scope, and a good choice for investments in the pharmaceutical industry,’ the panelist explains.

The biotech industry in Russia is also lucrative to Chinese investors due to its significantly lower entry prices in comparison to the ‘high-end’ European or American ones. Xiao also points out that the quality of the workforce in Russia is more than satisfactory. That’s crucial for the biotech industry which relies heavily on well-educated specialists and researchers.

Russian Market and its Peculiarities

‘If you want to enter the Russian market, you should first of all go to the local authorities and talk to them,’ says Dmitry Sidorov, Horizons Country Partner in Russia. He also recommends finding a local partner who can help establish a dialogue with the local authorities and give some useful hints and insights.

‘As a part of its Soviet legacy, the major player in the Russian healthcare market is the state.

Local authorities, being de-facto branches of the government, are the main regulators and competitors all in one.’ Dmitry recommends that investors look first for assets that are being used inappropriately, i.e. those which are not being managed effectively.

The choice is broad, he adds, as many state-controlled factories, clinics, labs, and MedTech companies are showing poor results. The reason is simple, the government-appointed management often doesn’t have a business approach. So, Sidorov adds, the best way for them is to sell those assets to professionals who can bring investment, technologies, and new partners. 

Dmitry gives an example of a typical situation in the Russian healthcare industry. His company assisted in an M&A deal in which a foreign investor bought a pharmaceutical factory in Russia. ‘The premises were in horrible condition since it wasn’t the owner’s main business activity,’ he explains. After the deal, the buyer renovated the factory and brought new technologies and specialists to the production facilities. Thanks to that, the company has grown into a successful player in the internal market, even winning government contracts.

Another way to enter the Russian market, Sidorov adds, is via public-private partnerships. The government has plenty of poorly managed assets in the biotech sphere, to which an investor can bring business expertise, as well as advanced technologies.

Large infrastructural projects, promoted by the government, can also serve as an entry point, like the Skolkovo innovation center where a huge healthcare/biotech cluster is being built. There, several clinics by companies from China, Israel, South Korea, and the US should emerge. The state supports such activities by creating special rules for international clusters, making their creation and operation easier, Dmitry says.

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