A vacuum in quality healthcare has emerged as a key challenge for the world's most populous nation, as policymakers wrestle with problems including a shortage of skilled professionals, slow drug clearance procedures and services that are unaffordable to most ordinary Chinese.
President Xi Jinping put the issue in perspective at August's National Healthcare Conference when he said it was at the heart of the country's policy-making machinery. State leaders later approved the “Healthy China 2030” blueprint, the first long-term national strategic plan for the sector since 1949.
Acquisitive Chinese firms, always sensitive to the mood of the national leadership, have been quick to add health assets to their overseas shopping baskets. In the latest such deal, Nanjing-based conglomerate Sanpower Group made China's first move into the cutting-edge world of cellular immunotherapy, concluding on June 29 its $819.9 million acquisition of Dendreon Pharmaceuticals from Canada's Valeant Pharmaceuticals International.
The conclusion of the deal came at a time when regulators are keeping outbound M&A activities on a tight leash; and the careful choice of target, means the deal stands out among the $8.882 billion of overseas healthcare deals – according to Dealogic – Chinese companies set up in the 12 months to June 30.
It gives Sanpower access to a sector at the frontline of medical science, and to a technology that, according to the American Cancer Society, shows more promise in treating cancer than any other.
‘Milestone’ deal
“It is a milestone [for us] because we moved from the easier part of healthcare sectors – [namely] senior living, rehabilitation, comprehensive hospitals and cord blood banking – to the most advanced area of medical science research,” Jeffrey Jing, executive vice-president of Sanpower Group, told FinanceAsia on Saturday.
The group, which also has retail and financial services interests, previously acquired China’s biggest homecare operator, AnKangTong, Israel’s biggest senior care services group, Natali, and A.S. Nursing Company in Israel. And with the purchase of China Cord Blood Corporation and Shandong Cord Blood Bank in 2016, Sanpower now owns the world’s largest cord blood banking network. “We wanted to create a synergy between our cord blood banking and immunotherapy, which we believe represents the future of medical science, especially in the area of precise medicine,” Jing said.
Cellular immunotherapy – a form of treatment designed to fight cancer by stimulating the immune system to attack cancer cells – has so far largely been restricted to clinical trials. Amid reports of severe side effects in some cases, the US Food and Drug Administration (FDA) has approved only a few such products. Dendreon’s flagship product, Provenge, was the first therapeutic cancer vaccine approved by the FDA, and remains the only FDA-approved cellular immunotherapy for prostate cancer, according to the US National Cancer Institute.
Announcing the deal completion on June 29, Sanpower said it planned to harness biodata gleaned from its bank of cord blood to develop precision medical treatments. The deal for Dendreon allowed it to use this data in the development of new treatments.
As Jing emphasised: “We are not only buying a medicine; we have bought the whole platform of research and [its] new products in the future, a cellular plant which strictly follows the CGMP standards [Current Good Manufacturing Practice regulations enforced by the FDA], and a team of people who are the top experts in the US in this area.”
The deal represents a tidy profit for Valeant, which bought Dendreon out of bankruptcy in 2015 for $495 million.
But Jing said: "We definitely did not over pay," adding: “Valeant spent another $150 million in capex on Dendreon” to help it turn around and today “we paid a little more than six times [Dendreon’s] Ebitda [earning before interest, tax, depreciation and amortisation] – $130 million.”
With no shortage of financial woes itself, Valeant decided to offload non-core assets including the Provenge producer.
Though once tipped as a blockbuster drug, Provenge was bogged down for eight years as it awaited FDA approval. After finally hitting the market in 2010, several operational issues – including the fact many insurance policies didn’t cover the $93,000 cost of each treatment – hampered Dendreon, which declared bankruptcy in 2014.
The promise of the treatment and the strategic importance of health all weighed in favour of the deal, at a time when Chinese regulators are shackling big-ticket outbound investments and placing more stringent controls over foreign exchange flows, as they grow wary about Chinese buyers making irrational purchases.
The transaction is the second largest Chinese outbound pharmaceutical deal over the past 12 months, after Shanghai Fosun Pharma’s acquisition of 86.08% interest of India’s Grand Pharma, which was announced last July and is yet to close.
Regulatory approval
Sanpower entered into a definitive agreement to acquire Dendreon in January, soon after China placed sweeping restrictions on foreign acquisitions toward the end of 2016.
“Even under these tough circumstances, our case was approved by the NDRC [National Development and Reform Commission], Mofcom [Ministry of Commerce] and Safe [Administration of Foreign Exchange],” Jing said. “I think the government still encourages companies to go out for assets that support the real economy. And we are buying an American innovative product, with the original FDA approval.”
China’s cell-based treatment market is in chaos in the absence of standards and rules. Pioneers of advanced treatment often hit roadblocks of red tape and corruption, while a high-profile case brought attention to the use of out-of-date or untested cell therapies even in official hospitals.
In April 2016, a 21-year-old college student, Wei Zexi, died after receiving unauthorised cellular immunotherapy for a rare cancer called synovial sarcoma at a military hospital in Beijing. The Chinese government then called off the use of cell therapy at all hospitals nationwide, until the China Food and Drug Administration (CDFA) established a set of regulations around the research and application of this type of treatment.
“Some jurisdictions see immunotherapy as a therapy, and the threshold for approvals is lower than those that treat it as a drug,” Jing told FinanceAsia. “But the CFDA clearly is stalling the US system of using much higher standards in approving cellular immunotherapy as a medicine rather than a therapy; the future of immunotherapy [in China] will be very stringent,” he said.
According to Jing, after completing the Dentreon deal Sanpower hopes to work with the CFDA to assist in “the whole systemic regulation for the application and assessment of cell immunotherapy in China, including creating the most proper criteria of cellular treatment” in the country.
The deal has a “social impact” because traditionally, Chinese patients wait for a long time for access to US FDA-approved drugs. And with the creation of the CFDA rules, more home-grown advanced medical research and technologies can be commercialised too, he said.
The annual mortality rate from prostate cancer in China has increased by 156.7% since 1990, an average of 6.8% a year, according to HealthGrove data.
Sanpower is still at the early stage of getting CFDA approval for Provenge in China, according to Jing, given the regulator is now finalising the rules. The CFDA in December rolled out draft regulations for consultation.
China CITIC Bank provided 60% of the financing for the deal, while Sanpower took 40%, according to Jing.
US regulations
In the meantime, US regulators are getting concerned over Chinese investments and are planning to amend the powers of Cfius, the Committee on Foreign Investment in the United States. Some Chinese dealmakers have experienced delays or cancellation of foreign deals over Cfius concerns.
For Cfius purposes, national security has been broadly defined to include defence, energy and telecommunications.
In memos to clients (here as an example), bankers and lawyers listed several sectors, including agriculture and food, biotech, and pharmaceutical products, as likely targets for enhanced scrutiny under an amended statute.
But so far, none of these amendments have materialised.
In the Dendreon deal, Sanpower cleared all the US regulatory approvals as of late March, according to Jing. “This is nothing that poses a potential risk to [the US] national security,” he said, although he noted the increasing pressure for securing Cfius approvals by Chinese buyers.
So far, “I’m not aware of any particular concerns surrounding immunotherapy technologies,” said Dan Roules, who advises on cross-border M&A as a partner at Squire Patton Boggs.
On another note, the Cfius process has sometimes been used by opponents of a particular transaction, and they have sought to block or modify a deal on grounds other than national security, said Stephen Kitts, managing partner for Asia at Eversheds Sutherland.
Most Chinese investments in the US have received Cfius approval, Kitts said, adding the fact remains that certain Chinese investments will be subject to a combination of political and national security concerns.
