Xianju Pharmaceutical Acquires Two Italian Drugmakers for Approximately RMB 8.37 Billion to Expand Global Footprint

In recent years, Chinese pharmaceutical and healthcare companies have continuously expanded into overseas markets through acquisitions or partnerships, with annual transaction values reaching tens of billions of yuan. Target assets include pharmaceutical companies, health supplement firms, hospitals, and research institutions, making overseas mergers and acquisitions a persistently hot trend.

Recently, another pharmaceutical company has joined the ranks of overseas expansion. According to an announcement by Zhejiang Xianju Pharmaceutical Co., Ltd., a listed pharmaceutical company on China’s A-share market, its proposal to acquire Italy’s Newchem S.p.A. and Effechem S.r.l. has been approved by the shareholders’ meeting, marking the commencement of substantive progress in the acquisition and integration process.

Xianju Pharma is an integrated manufacturer of active pharmaceutical ingredients (APIs) and finished dosage forms. Its core business focuses on the research, development, production, and sales of steroidal APIs and formulations. Its main product portfolio comprises three major categories: corticosteroids, sex hormones (for gynecological and family planning applications), and anesthetics and muscle relaxants.

The annual report shows that Xianju Pharmaceutical achieved an annual revenue of RMB 2.504 billion last year, a year-on-year increase of 0.95%, with domestic sales reaching RMB 2.104 billion and overseas sales approximately RMB 400 million; the net profit was RMB 146 million, representing a year-on-year increase of 37.20%.

From an industry perspective, steroid drugs occupy a significant position within the chemical pharmaceutical system. Currently, more than 300 varieties of steroid drugs are produced worldwide, and the steroid drug industry has become an important component of China's pharmaceutical industrial system. Global manufacturers of steroid drugs are primarily a few large multinational pharmaceutical companies, such as Pfizer, Bayer, Merck & Co., and Sanofi-Aventis.

In recent years, driven by China’s distinct advantages in raw materials and continuous improvements in production processes, a trend of industrial relocation has emerged in the global production of steroid drugs, with China gradually becoming the world’s manufacturing hub for these pharmaceuticals. Currently, corticosteroid active pharmaceutical ingredients (APIs) have become one of the major categories of bulk APIs exported from China.

Xianju Pharmaceutical stated that it is the largest and most comprehensive manufacturer of steroid drugs in China, with integrated capabilities in producing both active pharmaceutical ingredients (APIs) and finished dosage forms. The company possesses strong capabilities in commercializing scientific and technological achievements, with extensive experience in scaling up production from small-scale trials (laboratory technology) to mass production. It maintains a leading position among domestic peers in optimizing product manufacturing processes and controlling production costs. The market share of most of its core products ranks among the top in the industry, placing it in the first tier of the steroid hormone sector, where it has maintained a stable position for many years.

On June 19 this year, the Fifth Meeting of the Sixth Board of Directors of Xianju Pharmaceutical Co., Ltd. reviewed and approved the "Proposal on Acquiring 100% Equity Interests in Italy's Newchem S.p.A. and Effechem S.r.l.," agreeing to invest €110 million (approximately RMB 837 million) to acquire 100% equity interests in Newchem S.p.A. (hereinafter referred to as "Newchem") and Effechem S.r.l. (hereinafter referred to as "Effechem").

In terms of acquisition targets, €109 million was allocated to acquire 100% equity interest in Newchem S.p.A., and €1 million was allocated to acquire 100% equity interest in Effechem S.r.l. The actual controller of both companies is Ms. Carletti Speranza, who holds 100% equity interests in the two companies directly and through affiliated entities.

Among them, Newchem was established in 1998 and is primarily engaged in the research and development, production, and sales of active pharmaceutical ingredients (APIs), particularly steroids and hormonal drugs, as well as applied research in fields such as agriculture and the food industry. In the first quarter of 2017, Newchem reported operating revenue of €17.751 million and earnings before interest and taxes (EBIT) of €4.9355 million; for the full year 2016, its operating revenue amounted to €63.2462 million, with EBIT of €14.4083 million.

Effechem, established in 1975, is primarily engaged in various sales activities within the pharmaceutical industry. In the first quarter of 2017, Effechem reported operating revenue of €201,700 and earnings before interest and taxes (EBIT) of €31,700. For the full year 2016, its operating revenue amounted to €1,439,600, with an EBIT of €82,500.

Xianju Pharma stated that, upon completion of the transaction, Newchem and Effechem will become its wholly-owned subsidiaries and be included in the scope of its consolidated financial statements.

From the perspective of acquisition objectives, this acquisition represents a significant step in the Company’s implementation of its international development strategy for active pharmaceutical ingredients (APIs), facilitating the accelerated advancement of its API internationalization efforts. Secondly, it will further optimize the Company’s steroid drug industry chain, thereby supporting the expansion of its international API business and increasing the scale of its export operations. Thirdly, it will significantly enhance synergies within the Company’s core business lines, further strengthening the competitive advantages of the listed company and improving its overall market competitiveness. Fourthly, it will reinforce the Company’s expansion in the international API market and foster closer alignment and cooperation with global customers, creating new profit growth drivers while laying a solid foundation for the Company’s APIs to compete effectively on the international stage.

Regarding risk disclosures, Xianju Pharmaceutical stated that this transaction involves an overseas acquisition and is still subject to approval or filing by the relevant Chinese government authorities as well as those of the countries involved. Meanwhile, the company needs time to familiarize itself with and adapt to the corporate management, corporate culture, and regulatory policies of the overseas entity, thereby entailing market risks.

In fact, Xianju Pharma’s overseas expansion has long been in the making. In its 2016 annual report, the company disclosed that it had already established business relationships with more than 40 active pharmaceutical ingredient (API) manufacturers, finished dosage form producers, and traders across over 30 countries, including the United States and India. However, such pure trade-based interactions could not fully satisfy Xianju Pharma’s ambitions; its primary objective is to go global through acquisitions, leveraging these deals as a springboard for international market entry.

According to historical announcements, Xianju Pharmaceutical also invested in and acquired a stake in the U.S. company Occulo this year, with an investment of $12 million. Upon completion of the acquisition, it will hold 36.5854% equity interest in the target company.

The company’s core business is to provide biopharmaceutical companies with technical services or research and development (R&D) outsourcing services for the prediction, analysis, and engineering of protein drug immunogenicity; to advance the clinical translational research of innovative low-immunogenicity bactericidal proteins in China and the United States; and to develop novel low-immunogenicity protein therapeutics with innovative bactericidal and infection-preventive properties.

Occulo was jointly founded and funded by Professor Karl Griswold and Professor Christopher Bailey-Kellogg, biomedical experts from Dartmouth College, an Ivy League institution in the United States, with each holding a 50% equity stake. As of the date of this announcement, the company had not yet commenced business operations. It is evident that Xianju Pharmaceutical values the founders’ backgrounds and technological reserves.

From an investment perspective, biologics (protein drugs and antibody drugs) represent one of the primary directions for the development of the modern pharmaceutical industry. U.S.-based Occulo holds patents for bactericidal proteins targeting superbugs, high-expression production strains, super lysozyme, and low-immunogenicity protein therapeutics. By taking an equity stake in the company, investors will secure preferential rights to these products.

By taking an equity stake in the U.S.-based company Occulo and engaging in deep collaboration with its leading international team of scientists and technologists, the Company facilitates overseas R&D partnerships in specific therapeutic areas, including anesthesiology, gynecology, and respiratory medicine. This strategy promotes the Company’s global R&D footprint and enables leapfrog development in its research and innovation capabilities.

This move will help the company expand into the new field of biopharmaceuticals, building upon its existing foundation in active pharmaceutical ingredients (APIs) and chemical drugs. It will also enhance the pipeline reserve of novel biologics, thereby further strengthening the company’s core competitiveness in the pharmaceutical industry.

Across the industry, there are numerous companies like Xianju Pharmaceutical that have pursued overseas expansion through mergers and acquisitions. According to a PwC report, the total value of overseas M&A transactions in the healthcare sector reached $8 billion in 2016, with a total of 85 deals completed.

From the perspective of M&A drivers, the enthusiasm of Chinese capital for overseas mergers and acquisitions is driven by both endogenous factors and external influences. The growth of the domestic pharmaceutical market has been constrained by policies such as healthcare insurance cost containment, the separation of prescribing from dispensing, and the Two-Invoice System. In contrast, foreign targets possess leading technologies and strong capabilities in technological application, making their product R&D prospects highly attractive to Chinese pharmaceutical companies. Industry experts believe that the fervor for overseas M&A by Chinese capital will continue in the near future, with acquisition targets becoming increasingly diversified.

As of the market close on July 18, Xianju Pharmaceutical’s stock price fell by 1%, closing at RMB 7.91 per share, with a total market capitalization of RMB 7.247 billion.