China's life science sector will see rising mergers and acquisitions and joint ventures, mainly triggered by a growing middle class, aging population and continued urbanization, according to a recent KPMG report on the sector.
The report, titled “Healthcare & life sciences in China – Towards growing collaboration”, notes that China is set to become a crucial player in the life science and healthcare industry and within a decade is expected to be a global leader in drug discovery and innovation.
Norbert Meyring, head of KPMG Life Science in China and Asia Pacific, says: “Looking forward, we assume there will be 18 to 20 percent annual growth in Chinese drug spending through 2015. The life science sector in China will maintain its rapid pace of growth due to demand generated by robust economic growth and a rising middle class. Additional factors including government support, urbanization pressures and changing lifestyles, as well as an aging population and increasing awareness for the need for quality healthcare, are also key drivers of the industry boom.”
Between 2011 and 2012, China registered 132 deals in pharmaceuticals sector, with a total disclosed transaction size of USD5.2 billion for 94 deals, the report notes.
Meyring adds: “The number of deals and the sheer size of transactions exceed those carried out either in Germany or Japan. This is an indication of how confidently China has advanced to the position of the second largest pharmaceutical market, right behind the US. Multinationals have plenty of motivation to increase M&A activities within the country – as do their domestic peers. In addition, the patents cliff, faced mostly by multinationals, will lead to more acquisitions and joint ventures. Multinationals, whose businesses mainly rely on patented drugs, are keen for opportunities to diversify and reach new growth points. These aims can be achieved by finding the right Chinese partner.”
The report highlights that foreign enterprises are looking to harness the vast potential of smaller cities, towns and grassroots markets and to penetrate the lower-end segment. To jumpstart this process, they are keen to collaborate with local companies who have strong market penetration and regional networks. On the flipside, Chinese enterprises are also keen to expand their portfolio of low-cost goods and move towards products that bring them higher margins. Forging partnerships with foreign companies, looking for domestic joint ventures and going overseas in search of technical upgrades are options.
“For pharmaceuticals, we expect competition will become more intense as a result of dealing with lower profit margins and containment policies. Companies will increasingly formulate a basket of strategies, including expanding the application of current drugs, accelerating R&D on new drugs and attempting to add new pipelines through M&A, along with rationalization of capacity building,” Meyring adds.
In terms of challenges, China's life science and healthcare industry – be it pharmaceuticals, medical devices or distribution - is characterized by a highly fragmented structure. Also, large parts of this layered market continue to be flooded with low priced, low quality products. The market, however, is undergoing major changes and becoming more mature. Two reasons are driving these changes – first, a new regulatory system is forcing companies to focus on quality and safety; second, companies themselves are becoming more sophisticated and gearing up to meet the stringent regulatory requirements. Together this is driving the fundamental maturing of the life science industry, the report points out.
Meyring concludes: “The development of the life science industry calls for the emergence of strong players who can ensure that quality healthcare is delivered to China’s massive population. In this context, consolidation and collaboration between local companies, as well as between domestic companies and multinationals, will be inevitable. More active transactions with sizable transaction value will come up, accelerating industry integration and advancement.”
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KPMG China has 13 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Fuzhou, Xiamen, Guangzhou, Shenzhen, Hong Kong and Macau, with around 9,000 professionals.