Drug companies keen to mergers and acquisitions**

In recent days, the “listed company PE” model has become popular in the medical circle, and many companies such as Aier Ophthalmology, Yixintang and Peking University Pharmaceutical have set up M&A investment funds one after another. In this wave of “occupationism”, the M&A fund of the medical industry has gradually become a way for pharmaceutical companies to rapidly achieve an extensible growth. However, market participants pointed out that whether the new thinking and the new model of investment in the pharmaceutical industry are in line with the future development trend remains to be tested.

Drug companies set off mergers and acquisitions fund fever In 2013, Jingxin Pharmaceutical became the only listed pharmaceutical company in the A-shares market to participate in mergers and acquisitions fund cooperation and industrial integration. In the first half of 2014, there were 3 pharmaceutical companies involved, namely Dean Diagnostics, Aier Eye, and Zhongheng Group. In the second half of 2014, the enthusiasm of listed pharmaceutical companies participating in M&A funds broke out. Up to 10 companies participated, including Aier Ophthalmology, Yixintang, Daan Gene, Peking University Pharmaceutical, Wuyuan Pharmaceutical, Zhongyuan Concord, and Le. General Medical, Tiger Medical, Zhongheng Group and Dinglong.

Aier Ophthalmology announced on the evening of December 11 that in order to seize the historical opportunity of the great development of the medical industry, the company plans to use its own funds of RMB 98 million to jointly establish the Hunan Aier Zhongye Department of Ophthalmology with Dalai County Zhonghao Health Venture Capital Fund. The medical industry merger and acquisition investment fund serves as the investment platform for the integration of the company's industrial mergers and acquisitions. The investment fund has a total investment of 1 billion yuan and focuses on investing, operating, and managing ophthalmic specialist hospitals and its supply chain services. The main methods are mergers and acquisitions, new construction, cooperative operations, and trusteeship.

Unlike the direct involvement of Aier Ophthalmology, Yixintang chose the preferred acquisition model. Yixintang disclosed that the actual controller, Qi Hongxian, intends to co-sponsor the establishment of Yunnan Kunming Yuxin Medical Industry M&A Investment Fund (Limited Partnership) with Zhongmu Capital. The investment fund will formulate mergers and acquisitions and investment directions centering on the long-term development strategy of the One Heart Church. When the subject matter reaches the conditions for mergers and acquisitions agreed by the parties, it will be given a priority purchase under the same conditions.

Not only pharmaceutical companies are actively involved in the creation and acquisition of M&A funds, but also listed companies in some financial sectors are targeting the “fat” of the pharmaceutical market. On December 16, Kunming Pharmaceutical Group, Ping An Securities and Industrial Bank signed an agreement in Kunming to establish the Kunming Naughtai Pharmaceutical Industry M&A Fund.

Market participants pointed out that although the pharmaceutical industry has its own particularities, but with the gradual liberalization of online sales of prescription drugs and other related policies, the traditional pharmaceutical market structure and drug marketing model will undergo major changes, the health care industry listed companies to participate in mergers and acquisitions funds to become industry benchmarks.

The aforementioned persons emphasized that since 2009, the merger and acquisition of the pharmaceutical industry has continued to be active under the influence of the new healthcare reform and the national series of industrial policies. From an investment point of view, although the pharmaceutical industry has the advantages of a wide range of opportunities and high returns, it is also difficult and risky. By participating in investment funds, pharmaceutical listed companies can reduce investment risks and reduce R&D investment and labor costs through in vitro incubation.

M&A Funds Opportunities and Risks Coexist Since 2014, many VC/PE capital markets have made subtraction in investment business and cut off many investment departments, but the most retained are TMT and health care. Statistics from the Zero2IPO Research Center show that VC/PE invested a total of 210 medical and health enterprises in 2013, reaching the highest level since 2008. The total amount of investment was 1.99 billion U.S. dollars, which was just below the fiery 2011 “National PE”.

This year, the M&A and reorganization of the A-share market has been very lively. Among them, the pharmaceutical industry has always been the highlight. From the perspective of the second half of the year, the pharmaceutical industry is not only the area in which the Shanghai and Shenzhen stocks have initiated reorganization and mergers and acquisitions, but also the industry in which mergers and acquisitions funds are most concentrated.

Zhang Jian, chief investment officer of Shenzhen Chuangdongfang Investment Co., Ltd., stated that “in the operation mode of this M&A fund, the selection of the target company by the listed company is very clear, but the target needs to be hatched. In fact, this is a kind of creditor's right. A mezzanine fund-raising fund method for adding equity, for example, letting major shareholders participate in the company first, and then we go back to financing, and finally the big shareholders realize asset injection and merge into listed companies to help the listed companies achieve control investment targets. Acquisition."

According to market participants, the domestic pharmaceutical industry needs to achieve development through the form of mergers and acquisitions. The reason is that the number of pharmaceutical companies in China is large and dispersed. The total investment in R&D of Chinese drug companies is insufficient. The new drugs will take about 6 to 8 years to complete the examination and approval. The whole process is full of great uncertainty, and through mergers and acquisitions, listed companies can achieve rapid and episodic growth.

With the increase of the pharmaceutical industry's threshold, the increase in industry concentration will be inevitable, the differentiation between strengths and weaknesses will become clearer and clearer, and companies with strong financial strength in the industry will seek new growth points through out-growth growth, thereby triggering an upsurge of industry mergers and acquisitions.

It should be pointed out that the fact that listed pharmaceutical companies set up M&A funds does not mean that M&A funds are easy to operate. There are some problems in the smooth progress of M&A fund projects. First, it is difficult to find the ideal investment target. For PE institutions, not only rich M&A experience is needed, but also a very professional understanding of the industry chain integration. In particular, it should be pointed out that even if there are fund institutions that have professional ability to discover value, they will face difficulties in successfully achieving the target acquisition.