Chinese healthcare M&A activity surges in 2015 as Big Pharma acquires small domestic players

According to Reuters data, Chinese healthcare merger and acquisition (M&A) activity jumped to USD54 billion in 2015, from USD18.8 billion the previous year; the figures exclude joint ventures and licensing agreements. In 2016, M&A deals have already reached a total value of USD9 billion.

Small Chinese biotech firms and research and development (R&D) firms are particularly attractive to pharmaceutical heavyweights, due to their knowledge of local regulations and policy, networks of contacts, and potential funding from the Chinese government. The result is potentially accelerated access to the world's second-largest pharmaceutical market, which remains notorious for its considerable drug-approval delays and bureaucratic red tape (see China: 17 March 2015: China's drug approval backlog increases by one-third in 2014). In addition, by partnering with an innovative Chinese firm, overseas drug makers effectively gain a cost-effective means of conducting China-based drug development. At the same time, small domestic firms stand to gain access to multinational drug makers' assets, as well as exposure to overseas markets.

Interest in international partnerships is reportedly growing. Last month, WuXi AppTec (China) and Juno Therapeutics (US) announced the establishment of a new China-based company, JW Biotechnology, focusing on novel oncology treatments (see China: 8 April 2016: WuXi AppTec and Juno Therapeutics set up new company to develop cancer immunotherapies in China).

The rise in M&A in China's healthcare sector comes as Chinese authorities seek to cultivate a greater number of innovative domestic companies, and to raise drug-quality standards. Citing GlaxoSmithKline (GSK, UK)'s China head Hervé Gisserot, the source stated that Chinese authorities were putting pressure on off-patent generics, curbing drug prices, and attempting to eliminate low-quality medicines, implying that the rate of price erosion would outpace the marketing-approval process for new drugs (see China: 7 January 2015: China's FDA pledges to strengthen "grim" drug safety control following US warning letter).

Outlook and implications

The overall trend of rising M&A in China's healthcare market is expected to continue, which in itself is unsurprising given expectations that the country's healthcare spending will rise to USD1.3 trillion by 2020, with the Chinese pharmaceutical market expected to become the world's largest. In addition, multinational drug makers are keen to offset their own slowing organic growth in China by partnering with promising candidates on the ground.

However, the phenomenon also provides a further indication that China's healthcare reforms – despite multiple high-level announcements and new guidelines in several areas – is moving too slowly in comparison to market dynamics. A notable example is the sentiment of GSK's Gisserot that China's marketing-approval access is far outpaced by price erosion, due to long-standing red tape which has frustrated many multinational drug makers (see China: 22 January 2015: China to speed innovative drugs to market amid pharma industry complaints over red tape). Additionally, international partnerships also bridge the gap for China's smaller, innovative but under-funded biotechs, which are struggling despite recent policy adjustments (see China: 6 November 2015: China launches pilot scheme to facilitate new drug approvals). China is home to a small but prominent number of innovative domestic companies, the foremost of which (for example Hutchison China Meditech [Chi-Med, China] and BGI [China]) have the benefit of substantial financial backing.