Restructuring the Pharma Industry
The central reality of the Chinese pharmaceutical industry is that a vast proportion is state-owned, equipped with outdated equipment, and not profitable. One of the priorities of the Chinese government is to restructure and modernize this industrial sector.
The China Huayuan Group, which is state owned, is a leading player in the pharmaceutical industry. Its subsidiary, China Huayuan Life, acquired a 40% stake in Beijing Pharmaceutical Group for $113 million. The Beijing Pharmaceutical Group is owned by the Beijing city government and includes some of the most well-known drug companies. This acquisition illustrates the tensions between the central government and regional or local governments in liberalizing state enterprises and rendering them more modern and profitable.
Saddled with large, inefficient, overmanned state enterprises and limited in investment capital and access to new technology, the Chinese government has been amenable to foreign participation in state drug companies. The Harbin Pharmaceutical Group Holding (also known as the Hayao Group) has been a major state pharmaceutical group with over 29 companies, with sales in 2005 of RMB 10 billion ($1.29B).
Hayao sells over 700 products, its core business is antibiotics, but it is also involved in Traditional Chinese Medicine (TCM) and has a major distribution network. In 2004, Warburg Pincus and two Chinese financial groups acquired 55% of the Hayao Group for $246 million. The Harbin city government remains the single largest shareholder with 45% of the company’s shares.
One of the most interesting transactions involves Guangzhou Baiyunshan Pharmaceutical (www.gzby.com). The Guangzhou government created Guangzhou Baiyunshan through the merger of four companies. This group now consists of 11 companies whose manufacturing facilities meet GMP standards. Its 2004 revenues were RMB 2.5 billion ($323M), earned mostly on sales of antibiotics, however, TCM products are an important aspect of its business.
Hutchison Whampoa, a major Hong Kong financial group, invested $20.86 million in a joint venture, Baiyunshan Hutchison TCM (www.813zy.com), that focuses on research, production, and marketing of TCM, primarily for cancer and immunological disorders. Another company in the Hutchison Whampoa Group, Hutchison MediPharma (www.hmplglobal.com), recently invested $30 million in a new TCM R&D center in Shanghai.
These strategic moves allow for the infusion of new capital into companies that are either state-owned or have government (national or regional) involvement. The new investors acquire manufacturing facilities, distribution networks, and established product lines.
In most of these cases, TCM products are an important part of the mix. These efforts are directed toward expanding market share in China. However, these acquisitions and consolidations address only the need for new financing. It is less clear how they will deal with the need for R&D and new technology.