Cross-Border M&A Of Chinese Pharmaceutical Enterprises Based On Valuation Difference

With the rapid development of China’s economy and the continuous improvement of its comprehensive strength and people’s health awareness,China’s pharmaceutical market ranks second in the world and the United States ranks the first.The main motives of transnational mergers and acquisitions of Chinese enterprises are: obtaining high-quality resources,advanced technology and expanding international markets and sales channels.Due to the particularity of the pharmaceutical industry,when Chinese pharmaceutical companies decide whether to implement cross-border M&A strategy,in addition to considering the general motives,the valuation level of target firm will also affect the decision-making of pharmaceutical companies.Generally speaking,the economic and political environment of the country,the industry and the characteristics of the industry,the competitive pattern of the market,the competitiveness of the company in the market,the prospect of the company’s operation and development,and the stability of the net profit will all affect its valuation.For pharmaceutical enterprises,the R&D capability of innovative drugs,the pharmaceutical capacity and substitution rate of generic drugs,and the relevant national medical policies will affect the valuation system of enterprises.For those pharmaceutical companies that have advantages in innovative drug R&D capability and pharmaceutical technology,their value is often underestimated due to the high cost and long period of initial investment and the strong uncertainty of subsequent returns.China’s drugs are mainly generic drugs,while the domestic generic drug companies have excess profits compared with overseas pharmaceutical companies.Although they will be affected by the national medical policy,they have certain advantages in competition pattern,profitability and sustainability of operation,which will generate a certain valuation premium.Based on this valuation difference,Chinese companies will prefer to buy undervalued overseas pharmaceutical companies when other conditions are basically the same.Based on this phenomenon,this paper analyzes the inherent reasons for this phenomenon and the performance of Chinese pharmaceutical enterprises in cross-border mergers and acquisitions under such conditions,and provides experience and suggestions for Chinese pharmaceutical enterprises to conduct cross-border mergers and acquisitions.Based on the case that Humanwell Healthcare Group bought Epic Pharma,a U.S.generic pharmaceutical enterprises,this paper analyzes the differences in valuation between Chinese and American pharmaceutical companies,and studys the cross-border M&As behaviors of Humanwell Healthcare Group based on this difference.Humanwell Healthcare Group is mainly engaged in R&D,production and marketing of pharmaceuticals.Its products cover chemical products,chemical raw materials,biological medicines and so on.It has been consolidating and strengthening the leading position in the fields of nervous system drugs,fertility regulators and Uygur Medicine.It has certain advantages in product,marketing network scale,quality control and R&D investment.Epic Pharma is mainly engaged in drug research and development,production and sales.It has rich experience in drug production and management,strong ability in drug research and development,and has the production qualification of controlled drugs in the United States.In 2016,the company acquired all shares of Epic Pharma and its affiliates for $550 million.In the case analysis,this paper uses DEA empirical analysis and other analysis methods to analyze the benefits of cross-border M&A of Humanwell Healthcare Group,which based on the valuation differences between Chinese and American pharmaceutical enterprises.Based on the valuation level of Chinese and American pharmaceutical companies,this paper finds that the value of Epic Pharma has been underestimated,and this cross-border M&A has brought positive performance to the acquirer,which is a successful cross-border M&A.Through the analysis of cross-border M&A of Humanwell Healthcare Group,some suggestions on cross-border M&A of domestic pharmaceutical enterprises are also drawn.That is,fully do the pre-preparation work and post-integration work.