Capital and Consultancy – how to tackle the expansion to China

(The following is a summary of a contributed article by Inna Gehrt, head of German Office at Mandarin Capital Partners, published in “Pharmaproduktion”, the most important German pharmaceutical media, on November 8, 2017.)
Tapping the promising Chinese sales market is a luring proposition – not least for companies in the pharmaceuticals industry. Still, many shy away from this step. Cooperation with an investor can bring the decisive impulse.
German SMEs in the pharmaceutical industry with growth ambitions need to look beyond the saturated European markets. With a still growing economy, and as one of the world export leaders, China is an attractive target. Domestic demand has been on the rise for some time, the Chinese middle class is growing and with this the demand for high quality goods, safe medicines and a clean environment. These are ideal circumstances for German SMEs.
So why are not more of them present in China? Obviously, time and money are issues, but also market knowledge: What products are in high demand in China at the moment? Which companies might be interested in cooperation? How to secure intellectual property and maintain control over e.g. a joint venture? Political insecurities and a lack of rule of law do not help the situation.
In this situation, a partner can bring in the necessary capital and knowledge. But how should a company identify the ideal partner? Important criteria are industry knowledge and local experience. The partner should also offer continuous consultancy regarding the evaluation and choice of investments in China as well as in detail decisions. Longstanding experience on the ground in China is helpful, as is a team of well-networked professionals who know about the local customs and trapdoors.
Example: Euticals
Euticals is a producer of fine chemicals from Lodi, near Milan, and has branches in Germany, France and the US. When MCP bought the company, turnover was at 52m Euros. Euticals is a leading Italian player in the pharma-chemical business specialized in the production and marketing of Active Pharmaceuticals Ingredients (“APIs”), intermediates, specialty chemicals and R&D services (“Custom Synthesis”). The group serves 100% of the global top 10 pharma-companies and about 90% of the top 50.
In 2008 the main shareholder (the Carinelli family) was looking for a financial partner to further fund the group’s development, especially in Asian markets. This was a good moment for such an expansion: Euticals aimed at creating a one-stop shop for pharma-companies with a diversified industrial platform and a large portfolio of APIs and R&D services (“Custom Synthesis”), in a market momentum where Big Pharma players were implementing restructuring plans aimed at cost optimization firstly through the outsourcing of several phases (i.e. clinical trial management, APIs and intermediate manufacturing, drug formulation, etc.). Also, the ongoing consolidation process in the industry offered a number of opportunities to scale the business up through mergers and acquisitions.
Mandarin Capital Partners bought out the majority stake in the company (83%) and confirmed Mr. Maurizio Silvestri as CEO of the Group (who invested in the MBO as well).
MCP helped the management to put a successful cost saving program in place in China, focusing on supply chain efficiency. Euticals obtained a significant EBITDA margin increase. MCP assisted Euticals in implementing an ambitious buy & build strategy with the acquisition of Poli (Italy) in March 2010 as well as with the acquisition of Archimica group (Italy) in February 2011. MCP co-invested with Euticals in Suzhou Tianma Pharma Group Tianji Bio-Pharmaceutical, a Chinese manufacturer of APIs, intermediates and dosage forms, with the goal of entering into the Chinese market and expanding the production capacity on some growing APIs (e.g. Cyticoline).
Between 2008 and 2012 Euticals increased its turnover by the factor 4 to 226m Euros. The company’s supply chain became more efficient and margins could be raised, leading to an EBITDA development from 10m Euros in 2008 to 35m Euros in 2012. In 2012, MCP decided to bring in further co-investors in order to finance the rapid growth.
In July 2016, MCP and other investors sold their shares in Euticals to Albany Molecular Research Inc. (NASDAQ: AMRI) for 315m Euros and acquired AMRI stock at the same time. AMRI is active in the life sciences with branches in North America, Europa and Asia. It is a key developer of active pharmaceutical ingredients. With the takeover of Euticals, AMRI significantly broadened their client base in Europe and their expertise in the API sector, supporting the company’s positioning in the pharma industry. With their experience and their contact network in the European pharma industry, MCP has facilitated this development.
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