Clinica Article Inside China: When Dragons Go Shopping (Med Device Outbound Investment)

Screen Shot 2013-10-18 at 11.30.07 AMThis article by Michael Alper, Managing Director of NeuvoMedica was published in the October 2013 issue of Clinica MedTech Intelligence.

Clinica October 2013 Column

“Enter the Dragon” Seeking Chinese Investment Capital for the Medical Device Industry

Recently, the idea of raising money in China has been a hot topic in the medical device community.  With venture money drying up in the US and Europe, small medical device companies and VC funds are looking to China with renewed hope as a source of potential funding or potential exit strategy.  China is brimming with newly created wealth, lacks innovation, has a growing market and is looking to expand internationally or so that is the common perception.

In the past year, I’ve had several requests from small medical device companies looking to raise money in China as well as discussions with Chinese companies including med tech, pharma and Traditional Chinese Medicine (TCM) companies about their interest in acquiring foreign medical device technology.

Though I have maintained a healthy skepticism on this subject matter, I decided to investigate further by organizing a roundtable discussion with the Healthcare Catalyst (HCC), a Shanghai based professional network, on this very topic.   16 industry experts participated including business development leaders of Chinese medical device companies and multinational med device companies covering China, representatives of local VCs, banking and other financial institutions and other medical device related professionals. Our panel covered a broad range of issues and summarized key “take-aways” below:

China outbound investment into medical device companies can be classified as coming from four major areas:

1)   Medical (Pharma and Med Device) Corporate M&A – Chinese medical companies acquiring foreign med device companies
2)   non-Medical Corporate M&A – Chinese non-medical companies acquiring foreign medical device companies
3)   China VCs – Chinese VC companies investing into foreign medical device companies
4)   investment for China manufacturing and distribution rights – Chinese medical companies investing into foreign medical device companies in  exchange for equity, manufacturing and distribution rights (or some combination of)

Growing but In its Infancy

Overall, though there has been a significant increase in outbound deals in the past couple of years, the number is still relatively small.   In the Medical Corporate space, the recent deals include Microport’s $290 million acquisition of Wright Medical’s OrthoRecon business, Fosun Pharma’s purchase of Israel based Alma Lasers for $240 million, BGI’s purchase of Complete Genomics for $120 million and Mindray’s purchase of Zonare Systems for $110 million.  In these deals, the acquired companies have been those with relatively mature products and have helped the acquirers access new international and therapeutic markets.  In fact after the Wright acquisition, Microport turned from a company with 90 plus percent of it’s revenue coming from stents to a company with a majority of it’s revenue coming from orthopedics.

As for non-Medical Corporate M&A deals these appear to be even fewer.  Like many developing markets, China is known for having many conglomerates and it is very common to see acquisitions from unrelated industries.  However, Ming Feng Group’s crossing of industry and national boundaries via its investment in US based FMI Medical Systems is the only deal that I have heard of like this.

Chinese VC companies investing in foreign medical device companies seems to be something new as well and may be an emerging trend.  Hony Capital’s investment into Singapore based Biosensors and Legend Capital’s investment in JenaValve are two examples of such deals.  Usually such deals involve a China play.  For instance, Biosensors has a significant portion of its revenue coming from China, and Legend Capital was quoted as stating they are investing in companies with clear China strategies.

Finally, in the area of investment for foreign distribution rights, though also not very common, there are a few known examples.  Kanghui before its acquisition by Medtronic had invested and obtained equity in US based Consensus in exchange for China manufacturing and distribution rights.

Though China outbound investment in the medical device sector is relatively small, it’s definitely an emerging trend.  However, companies looking to raise money in China need to make sure they are the right fit for the Chinese investment environment to ensure they are using their time most effectively.

“Window shopping but rarely stopping to buy” 

Chinese companies are good at window-shopping and will be happy to learn more about your company and products; however getting them to invest is extremely difficult.  One of the concerns from companies who may be looking for capital and engaging in the early stages of this process, is that the intent is indeed to better learn about the company, its finances and technologies with no real intent on the part of the China suitor to enter into formalized negotiations.

The Chinese medical device market is growing at 15-20%.  From the Chinese companies’ perspectives there is also more risk in investing in foreign companies because they have less capability, knowledge and relationships.  Therefore they end up being more short-term oriented and more risk averse when looking at outbound investment.

In general, good candidates for Chinese investment are those that at least already have approval in their home country (having CFDA approval is major plus), have proven technology not already in the Chinese market, or have some other strong synergy with the acquiring company.  Companies whose products are not yet commercialized will probably be wasting their time, as they will find it extremely difficult to raise money in China.

On October 18, 2013, posted in: News by

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