MNCs Favor M&A While Domestic Pharma Firms Prefer Wealth Management Amid Industry Transformation

Recently, the wave of mergers and acquisitions by leading multinational corporations (MNCs) and major pharmaceutical companies has swept from overseas to China. Well-known enterprises such as BMS, AstraZeneca, GSK, Boehringer Ingelheim, Johnson & Johnson, Roche, Amgen, Eli Lilly, AbbVie, and Novartis have all completed mergers, acquisitions, or business development (BD) deals in the past year.

Within just one month, two Chinese biotech companies have partnered with international giants to pave a new path for successful exits amid the industry's downturn. On December 26, 2023, AstraZeneca (AZ) announced the acquisition of Gracell Biotechnologies for a total transaction value of approximately $1.2 billion, representing an 86% premium over Gracell’s closing price on December 22, 2023, and a 192% premium over its 60-day VWAP. On January 8, 2024, Johnson & Johnson announced a definitive agreement to acquire Ambrx (Ambrx Biopharma), offering $28.00 per share in cash for all outstanding shares, which is about a 105% premium over the closing price, valuing the total equity at approximately $2 billion.

In an environment filled with pharmaceutical M&A and BD news, Kanghong Pharmaceutical announced on January 10 that it agreed to allow the company and its subsidiaries to use part of their idle proprietary funds to purchase wealth management products (including structured deposits) within a limit not exceeding 2 billion yuan. The purchasing principle is to select products with high safety, good liquidity, and short-term principal-guaranteed wealth management products (including structured deposits) issued and guaranteed by commercial banks.

After making money, both foreign and domestic companies seem to love "buying buying buying," but the former prefer to buy innovative pharmaceutical companies and new drug pipelines, while the latter prefer to buy financial products. What is the logic behind this? What signals does it send? Let's take a look together.

In fact, the phenomenon of listed companies purchasing wealth management products has long existed and is relatively "hot." According to Wind data, since 2023, 1,085 listed companies have subscribed to wealth management products, with a combined scale reaching 787.844 billion yuan.

It is reported that in 2019 alone, more than 110 listed pharmaceutical companies purchased wealth management products, with a total investment scale exceeding 100 billion yuan.Companies such as Hengrui Medicine, Dabo Medical, Weixinkang, Qianyuan Medicine, Chenxin Pharmaceutical, Kangchen Pharmaceutical, Aipeng Medical, Kangdelai, Autobio, Jianfan Biotech, Dezhan Health, Livzon Group, Jiangzhong Pharmaceutical, Harbin No.3 Pharmaceutical, Health Yuan, Erkang Pharmaceutical, and Yuheng Pharmaceutical are all keen on purchasing wealth management products.

Nanjing MicroMed, Chipscreen Biosciences, Hotgen Biotech, and ZRX Biotech, among other STAR Market enterprises, are also keen on financial management.

In July 2023, Zhi Xiang Jin Tai announced that it agreed to use temporarily idle funds of up to RMB 2 billion (inclusive) for cash management under the premise of ensuring no impact on the implementation of fundraising investment projects and ensuring the safety of the funds. According to the announcement, the funds for cash management were sourced from the company's previous IPO which raised 3.2 billion yuan. In June 2023, Zhi Xiang Jin Tai was just listed on the STAR Market, issuing 91.68 million ordinary shares at a price of 37.88 yuan per share. After deducting issuance expenses, the net amount of funds raised was 3.291 billion yuan.

In addition, traditional Chinese medicine enterprises such as Yiling Pharmaceutical and Taiji Group also have financial-related investments.

After making profits, if pharmaceutical companies do not invest heavily in the industry chain or strengthen their layout in the medical field but instead buy low-return financial products, is it "neglecting their core business"?

Taking Kanghong Pharmaceutical as an example, its Q3 2023 financial report shows that the company's revenue was 2.999 billion yuan, a year-on-year increase of 13.96%; the net profit attributable to parent company was 825 million yuan, a year-on-year increase of 9.36%.

Specifically, by product, the core revenue of Kanghong Pharmaceutical mainly comes from biopharmaceuticals and traditional Chinese medicine, while revenue from chemical drugs has slightly declined. The revenue from traditional Chinese medicine was 990 million yuan, a year-on-year increase of 10.85%; biopharmaceutical revenue was 1.461 billion yuan, a year-on-year increase of 36.89%; chemical drug revenue was 532 million yuan, a year-on-year decrease of 18.64%; medical device revenue was 6.797 million yuan, a year-on-year decrease of 25.42%; other business revenue was 325,800 yuan, a year-on-year decrease of 19.62%.

Conbercept, the core biopharmaceutical product of Kanghong Pharmaceutical, is the third VEGF monoclonal antibody globally and the first one produced in China. Its launch filled the market gap for drugs treating age-related macular degeneration in China and broke the monopoly of high-priced imported drugs in the Chinese ophthalmology market. In 2022, Conbercept sales revenue accounted for up to 40.32% of Kanghong Pharmaceutical's total revenue, with a gross profit margin of 92.01%. Relevant data shows that Conbercept has accumulated 7.2 billion yuan in revenue over eight years, surpassing 1 billion yuan annually for the past four consecutive years.

On the other hand, Kanghong Pharmaceutical has several exclusive new proprietary Chinese medicines, such as Songling Xue Mai Kang Capsules, Shugan Jieyu Capsules, Ke Luo Xin Capsules, and Dan Shu Capsules. In 2022, traditional Chinese medicine (TCM) products contributed 1.169 billion yuan to Kanghong Pharmaceutical's revenue, representing a year-on-year increase of 7.86% and accounting for 34.5% of total revenue. In the first quarter of 2023, the sales revenue of its TCM products continued to grow rapidly, reaching 337 million yuan, a year-on-year increase of 10.72%, and accounting for 38.06% of total revenue.

In addition, according to data compiled by VBInsight, Kanghong Pharmaceutical's R&D expenditures from 2018 to 2022 were 3.49 billion yuan, 7.88 billion yuan, 9.55 billion yuan, 10.29 billion yuan, and 4.35 billion yuan, respectively.

This shows that Kanghong Pharmaceutical has invested significantly in both R&D and financial management, and is not "neglecting its core business."

On the other hand, the pharmaceuticals industry has a longer profit cycle. Therefore, many companies with good financial conditions are purchasing short-term, principal-guaranteed wealth management products using their own funds or idle raised funds. This is done without affecting the normal operations of the company, in order to generate additional income.

Compared with the conservative financial management and profit-making methods of pharmaceutical companies in China, overseas pharmaceutical companies or MNCs tend to prefer high-risk, high-return mergers and acquisitions or BD transactions. For this kind of "adventurous" behavior, overseas companies clearly have their own logic and do not buy indiscriminately.

While discussing the Ambrx deal at the 2024 JPM conference, Johnson & Johnson mentioned its preference in business development (BD), which is to acquire "assets near the Proof-of-Concept stage, as this allows Johnson & Johnson to leverage its scale advantages in clinical, manufacturing, and sales to maximize the value of the assets."

Analyzing recent BD transaction cases of Biotech companies, it is not difficult to find that the core pipelines of these Biotechs that have successfully cooperated with large pharmaceutical enterprises are almost in the early clinical stage, and the early trial data is good, which exactly fits the above logic.

Moreover, according to a December 2023 article in The Times, GSK Chief Commercial Officer Luke Miels publicly stated that the company would focus on transactions worth $2 billion within the next six months to expand its drug pipeline. Meanwhile, in the report, Miels emphasized...GSK Focuses on "One or Two Highly Targeted Products". The core pipelines of such companies often have enormous market potential.

Compared with overseas companies spending heavily on mergers and acquisitions and BD, a person in charge of a listed pharmaceutical company said that domestic pharmaceutical companies have no choice but to use the raised funds to purchase wealth management products. The raised funds of listed companies are deposited in banks and can only be used for specific purposes. Sometimes, these funds may become idle; for example, if the purpose of fundraising is to build a production line, the funds will only be spent after the project is completed. In order not to let this part of the funds "sit idle," they can only temporarily purchase wealth management products.

Whether it is overseas companies or domestic pharmaceutical enterprises, does this frenzy of "buying buying buying" reflect that the capital market is gradually warming up?

On the one hand, the global economy has now entered a period of low growth. Governments and insurance companies may seek to reduce the prices of pharmaceuticals in order to lower healthcare costs. In response to this situation, large companies choose to achieve rapid expansion through mergers and acquisitions (M&A), which is an important measure to address the overly slow economic growth. M&A can achieve synergy and optimize cost structures. On the other hand, Chinese pharmaceutical companies, while ensuring good revenue, have not aggressively pursued frequent business development (BD) and M&A activities. This could be considered a more prudent approach during challenging times.

In short, it is uncertain when the pharmaceuticals industry will recover. However, in this wave of "shopping spree" in the pharmaceuticals industry, we have witnessed various enterprises actively responding to new market trends. Perhaps enterprises make different choices when facing a crisis, but they will reach the same destination by different routes. As the ice and snow gradually melt, the buds hidden beneath the snow are reviving. We look forward to new development opportunities for the pharmaceuticals industry.

References:

1. PharmaNet: "This Pharmaceutical Company Plans to Invest 2 Billion Yuan in Wealth Management!"

2. International Finance News "112 Companies Participated, Scale Exceeds 100 Billion! Listed Pharmaceutical Companies' Financial Management This Year Is Too 'Crazy'"

3. CCMTV Insight: "Recent Surge in MNC Pharmaceutical Company Mergers and Acquisitions – What Signals Are Being Sent?"