In February this year, China Resources Double Crane acquired 100% of the equity of China Resources Zizhu for 3.1 billion yuan, enriched Double Crane's specialty product line through Zizhu's core products such as Yuting and Jin Yuting, formed a "women's health + pediatrics" specialty product sequence, and improved the product matrix; in March, Xintian Pharmaceutical, which mainly engages in traditional Chinese medicine business, announced that it plans to acquire 85.12% of Huilun Pharmaceutical's equity through issuing shares, expanding its business to the field of small molecule chemical drugs; in June, the domestic contrast agent leader Beilu Pharmaceutical acquired Chengde Tianyuan Pharmaceutical for 202 million yuan. 80% equity, expanding its coverage in the field of traditional Chinese medicine; in October, the plan for SinoVac (Shijiazhuang Pharmaceutical Innovation) to acquire Shijiazhuang Baike was released. SinoVac will acquire 100% equity of Shijiazhuang Baike for a total price of up to 7.6 billion yuan to enhance the innovation ability of its biopharmaceutical platform; in October, China Resources Double Crane acquired 89.681% equity of Guizhou Tianan Pharmaceutical with 260 million yuan of its own funds to further enrich its diabetes drug product line; in November, Northeast Pharmaceutical, one of the "four major old-brand pharmaceutical companies", acquired 70% equity of Beijing Dingcheng Peptide Source for 187 million yuan, and entered the field of innovative drugs from TCR-T.

The industry has entered a period of medium- and low-speed growth and stock game. Some companies are more willing to exit, and some companies are taking advantage of the appropriate valuation of the target to make large-scale acquisitions. On November 18, at the 44th China Pharmaceutical Industry Development Summit Forum, Peng Yuping, vice president of Nanjing Pharmaceutical Co., Ltd., said that China's pharmaceutical industry has changed from a high-speed growth incremental game development model to a medium- and low-speed growth stock game development model, and the return on investment of endogenous growth has gradually declined.

According to data from the China Pharmaceutical Enterprise Management Association, in the first half of 2024, the national pharmaceutical industry's revenue and profits both declined, down 1.4% and 1.2% year-on-year, respectively. Except for the three sub-industries of Chinese herbal medicines, pharmaceutical excipients and packaging materials, and biological products, the revenues of the six sub-industries of chemical pharmaceuticals, chemical APIs, medical instruments and equipment, sanitary materials and medical supplies, Chinese patent medicines, and pharmaceutical special equipment all declined.

According to a report by Donghai Securities, in the first three quarters of this year, listed companies in the pharmaceutical and biological industry achieved an overall operating income of 1,814.157 billion yuan, a year-on-year decrease of 0.39%; net profit attributable to the parent company was 145.04 billion yuan, a year-on-year decrease of 9.01% (a total of 432 stocks in the A-share Shenwan Pharmaceutical and Biological Industry were included as analysis samples). During the same period, the profitability of listed pharmaceutical and biological companies declined slightly as a whole - the overall gross profit margin in the first three quarters was 32.06%, a decrease of 0.88 percentage points from the same period last year; the net profit margin was 8.45%, a decrease of 0.78 percentage points from the same period last year.

In the capital market, IPOs have decreased significantly. Within one year after the China Securities Regulatory Commission proposed "phased tightening of IPO rhythm" on August 27, 2023, 484 companies terminated their IPOs, an increase of 71.03% year-on-year; 135 new IPOs were accepted, a year-on-year decrease of 74.67%; 329 companies were in line for review, a year-on-year decrease of 57.82%. At the same time, 128 companies raised 93.844 billion yuan through listing, and the number and amount also fell by 69.69% and 80.03% year-on-year respectively. Peng Yuping mentioned that under the pressure of slow or even declining overall industry growth, the demand for integration between upstream and downstream of the industrial chain has become increasingly strong, and some pharmaceutical companies have taken the initiative to initiate industrial mergers and acquisitions to find a "second growth curve."

The buying and selling that hit it off is the different mentality of buyers and sellers in the downturn of the industry. When facing the pressure of revenue and profit indicators, large pharmaceutical companies with money in hand will use mergers and acquisitions as the fastest way to bring in revenue and profits; and for pharmaceutical companies eager to exit and their shareholders behind them, selling themselves becomes an easier choice than persistence when the environment is not good.

Policy support is also an important driving force for restructuring and mergers and acquisitions. In September this year, the China Securities Regulatory Commission issued the "Opinions on Deepening the Reform of the Listed Company Merger and Acquisition Market", supporting listed companies to transform and upgrade to new quality productivity, encouraging listed companies to strengthen industrial integration, and at the same time clearly stated that the efficiency of restructuring market transactions will be improved; in October, the Shanghai Stock Exchange held a symposium for securities companies, focusing on promoting the implementation of the "Six Mergers and Acquisitions" and the "Eight Science and Technology Innovation Board". With the changes in the market environment and the introduction of a series of policies, the current M&A market has gradually returned to the track of "industrial mergers and acquisitions" from "arbitrage mergers and acquisitions", and the transformation of mergers and acquisitions from market value orientation to industry orientation is accelerating.

Before joining Nanjing Pharmaceutical, Peng Yuping had more than ten years of work experience in investment institutions such as Jiangsu High-tech Investment and Coastal Capital. She frankly admitted that compared with primary market investment, mergers and acquisitions between companies are more complicated. Strategically guided industrial mergers and acquisitions and restructuring transactions are not a capital game between two companies, but require deep industry insights and corporate management experience to support them.

On the one hand, before launching mergers and acquisitions, companies must first clarify their own industrial positioning and direction, treat many "trends" rationally, and focus on improving the core competitiveness of the main business. Focus on long-term benefits, reasonably formulate development plans and M&A rhythms, and avoid blind mergers and acquisitions. Secondly, understanding the target assets is also a prerequisite for high-quality mergers and acquisitions, including the target company's business model, business model, resource organization model, etc.

At the same time, it is also necessary to judge the risks of the target company in combination with the industry background, such as whether its gross profit margin level matches the industry status, whether there are special circumstances that deviate from the industry, and whether there are abnormal fluctuations in accounts receivable, inventory prepayments, net cash flow, etc. From a longer time perspective, companies should proceed with mergers and acquisitions step by step. Companies that are not familiar with the field of mergers and acquisitions should start with small-amount mergers and acquisitions and cash mergers and acquisitions, and should not blindly pursue large and fast. They can also introduce phased acquisitions and other forms, and decide whether to acquire the remaining shares based on the completion of performance commitments and integration.

On the other hand, post-merger management after completing the transaction process is more important. Peng Yuping pointed out that both parties need to carry out a full-scale integration of "money, people, and culture". In terms of "money", it is necessary to manage bank accounts and approval authority; in terms of "people", it is necessary to manage legal persons, key positions, and assessment and evaluation rights; in terms of "culture", it is necessary to reach a consensus on value orientation and confirm the best way to cultural integration by accurately grasping the current cultural status of both parties.

In order to maximize the value of mergers and acquisitions, enterprises need to gradually upgrade from shallow integration of equity and financial statements to deep integration of business, team, culture, management, values and other links in the industrial chain. The acquirer can improve the operating efficiency and profitability of the target company by injecting funds, resources and management experience into it. The horizontal or vertical expansion brought about by the merger of the target company will also improve the company's layout, enhance the scale effect, and synergistically enhance the overall value.

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