Despite the challenges presented by the pandemic, the Chinese health care sector continues to be fertile ground for both inbound and outbound M&A activity. To explore the nuances of that market, Winston & Strawn brought together health care leaders and investors for a panel discussion during Winston's 2021 Health Care and Life Sciences Summit. The panel included James Jiang, head of the corporate practice at YuandaWinston (the alliance of Winston & Strawn and China's Yuanda Law Firm); Bagrin Angelov, Executive Director and Head of China Cross-Border M&A, China International Capital Corporation Limited (CICC), and Richard Lu, Managing Director, SDIC Fund Management Co., Ltd. Highlights of the discussion included the following:


The pandemic's disruptions led the number of new foreign invested enterprises (FIEs) in China to decrease by 21 percent in 2020. However, the total amount of capital invested in those firms increased by 113 percent. Within the technology sector (which includes life sciences), the capital influx is even stronger, increasing more than 20-fold during 2020 compared with 2019. It is also worth noting that the number of new FIEs is slowly rebounding: While 35 percent fewer FIEs were registered in May 2020 vs. the previous year, by November, the gap narrowed to 11 percent.


China cross-border investment has dropped by 70 percent or more since its peak in 2015-2016, when it represented approximately 30 percent of all Chinese M&A activity. But at that peak, 90 percent of capital was money flowing out of China. Since then, inbound investment has increased steadily and now roughly matches outbound numbers. This development reflects a more stable environment for foreign investors, including more stringent IP protection and enforcement, and in health care, a streamlined and accelerated drug approval process.


Foreign investors have taken comfort in the amendments China made last year to its patent regime, bringing its IP regulations more in line with those of the United States and allowing for corporate governance beyond joint ventures. Just as important as the regulations themselves is the establishment of a judicial infrastructure, including specialized IP courts racing to build a body of case law. The changes are trickling down to local courts as well, which are not just granting sizable awards for infringement, but for the first time, awarding punitive damages. However, the particular technical complexities of adjudicating life sciences make for extended resolution times.


The vast potential of digital health has made health care the hottest sector of Chinese M&A. While a robust framework is already in place that allows patients to do everything from choose a clinic to receive test results on their devices, opportunities for further cross-sector integration abound: Witness, for example, the acquisition of drugstore chains by the Chinese internet giants and the acceleration of the licensing of online hospitals.


Both Chinese funds and strategics are broadening their view when looking for deals outside of China. The longstanding focus on medtech has moved upstream from devices such as scanners to the sensors and chips that power them. In addition, China's growing lifestyle brands are looking to expand their presence in dietary supplements, beauty, and pet health. (Foreign investors are attracted to China's consumer market as well—but understanding the nuances of the local market remains a significant hurdle.)


The evolution of China's IP environment goes beyond regulation and enforcement. Foreign companies are no longer looking to China primarily for materials, manufacturing, and market access; Shanghai, Beijing, Hong Kong, and Shenzhen are vibrant innovation hubs in their own right. One sign of this can be seen among China's health care AI startups, where 21 percent of financing rounds in 2020 were Series D and above, up from 7 percent in 2019.


The attractiveness of China's health care market has led to an appreciable increase in valuations, even if 80 percent of China's health care companies are pre-revenue. This dynamic has led foreign investors to partner with Chinese counterparts to increase the ability of those foreign investors to seize early-stage opportunities quickly.

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