Growing opportunities for Nordic life science companies in China
Despite past years’ various headwinds, the life science sector in China has performed relatively well. The pandemic has highlighted the need to further upgrade China’s healthcare infrastructure, and the shifting demographics, together with raising awareness of future needs, have accelerated efforts to make healthcare more accessible, driving investments in the sector.
Given the strong niche positions globally, Nordic companies are well positioned to capture China’s next phase of healthcare development, where the sector is expected to grow faster compared to rest of the world, driven by the following growth drivers.
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Shifting demographics, more affluent consumers with funds to meet growing medical needs.
Healthcare reforms paving path towards broader healthcare access
The goal of China’s overall health reform is to establish a universal basic health care system providing safe, effective, convenient and affordable health services. Health financing improvements are to ensure that financial resources are better allocated throughout different population groups, especially the most vulnerable and high-risk groups.
2030
Healthy China highlights
Promotion of healthy lifestyle
Greater focus on prevention
Increase health literacy and diet
Increase doctors per 1,000 residents
Increase government share of expenditure
Central procurement of drugs (volume vs. price)
The government has launched major reforms to encounter rising healthcare costs, to improve the major imbalance between rural and urban health coverage, through reformed legislation and institutional reorganization.
China’s government health expenditure has more than tripled since health reforms began in 2009. In 2020, the total expenditure on health care in China reached over CNY 7.2 trillion, representing around 7% of the GDP, still far below the OECD average of 12.5% and 16.7% in US.
Growth indicators in the life science industry
Pharma
China is the world’s second largest pharmaceutical market after the US, expected to reach USD 468bn by 2029, more than doubling from USD 150bn in 2019, implying a CAGR of 12%.
Acceleration of new drug access and approval processes, and expanding medical insurance access are expected to drive volume growth in the coming years.
Biotech
China’s Biotech market is still at fairly early stages, estimated at USD 23bn in 2020, and expected to reach USD 35bn by 2025, implying a CAGR of 9%.
Biotech is a key strategic growth area for China, likely to see growing allocation of R&D resources and tax incentives to drive growth and investments in the sector.
Medical devices
China’s medical device market was estimated at around USD 93bn in 2020, and expected to reach USD 218bn in 2030, implying a CAGR of 9%.
The medical device market is expected to grow further with faster approval processes and following expected growth in government annual health expenditure.
Unlocking market potential with a strategic partner – sources of strategic benefits
While China offers major growth opportunities, go-to market (early stage companies) and expansion (mature companies) can be challenging due to various roadblocks and the unique operating environment. China has it’s own playbook, and engaging a local partner can bring strategic benefits and speed up the commercialization process. Through speed to market, revenue and cost synergies, there is a wide spectrum of benefits to tap into with a strategic partner.
Additional customers
Cross-selling of products to partner’s existing customers
Upselling: Ability to apply in-house expertise to accelerate partner’s sales
Target new customers in new geographies, using partner’s network
Additional products
Cross-selling of partner’s products to existing customers
R&D/BD capabilities: Benefit from partner’s unique technologies, IP or various business licenses
Access to new activities that may bring benefits, e.g. new licenses
Better negotiation position
Improving reputation/standing in the market (partner being a market leader, or better known locally)
Eliminating competition: Competing bidders or higher market share (overlaps in customer base)
Economies of scale
Eliminating duplicating functions between organizations (R&D/ sales force streamlining)
Better procurement terms due to higher order volumes
Overview of cooperation spectrum
- Nordic company control
Licensing and distribution
Useful where regulation prohibit direct control, or as first step to evaluate potential long-term value creation
Distributors in China can be retained on an exclusive or non-exclusive basis
For an exclusive distributor, the Nordic company can decide on a minimum revenue level after a certain period of time. If the Chinese company fails to meet the target, the exclusivity expires
For the exclusive China license, the Chinese company pays the Nordic company (1) an upfront payment (2) a fixed percent of the revenues in royalty, or a combination
Joint venture
Useful where regulation prohibit majority control, or where significant entry barriers exist to foreign companies
Typically roadmap to include path to majority control, e.g. through call options/ pre-emption rights to subscribe to new shares/ rights of first refusal, if possible
Or for specific aspects which enable synergy even without corporate control e.g. exclusive agency rights
Nordic company to provide China product rights to the JV combined with a guarantee of technology transfer services
Minority investment and acquisition
Most powerful alternative to ensure mutual framework regarding resources, operations and cross-selling
Acquisition of Chinese company more likely for mature targets
Potential to structure in a way that Nordic company acquires a minority up front with option to acquire the rest of the company at the same valuation after X years
Nordic acquiror need to consolidate target financials when reaching majority ownership thus, require the target company to have good financials and sensible valuations
If you are interested in the above topic,
or if you have any enquiry, feel free to contact us
Klaus Björkgren
Vice president｜Copenhagen
klaus.bjorkgren@nordic-match.com
Tony Wang
Partner｜Shanghai
tony.wang@nordic-match.com
About Nordic Match
Nordic Match is a boutique M&A and Strategy Advisor headquartered in Shanghai, China. Dedicated to Sino-Nordic transactions, we have a clear vision – to support aspiring corporates and investors in search for value-creating opportunities between Nordics and China.
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