M&A

He owes it all to Sun Tzu

How highest-valued Chinese pharma firm grew through 13 acquisitions

Definitely a deal junkie: Liu

In The Art of War, Sun Tzu says to win a battle, it is important to keep the costs of a victory as low as possible. Ideally one should attain victory without a field battle, conquer hostile opponents without large-scale offensives and destroy the enemy without a lengthy war.

Liu Gexin is no doubt aware of the principle. Between 2003 and 2009, Sichuan Kelun Pharma, the company he founded in 1997 with Rmb1 million in capital, completed 13 acquisitions worth Rmb150 million. By the end of 2009, these companies turned over Rmb1.5 billion in sales, 45% of Sichuan Kelun’s total revenue, and Rmb162 million in net profits.

Liu’s acquisition strategy is simple. “Ambition must be rationally matched with resources and capacities, or the business will fail during expansion,” says Liu. His rationale is straightforward: he targets the lowest cost companies with the highest number of complementary products – a strategy he says he picked up from Sun Tzu.

Sichuan Kelun Pharma, which is traded on Shenzhen start-up board ChiNext, is now one of the largest makers of intravenous solutions (IV) and equipment, claiming a 20% market share of the IV solution sector in China. More impressive, the Chinese drug maker has seen its market capitalisation soar to Rmb30 billion ($4.55 billion). Its stock has doubled over the past year and has the highest price-to-earnings valuation of any pharmaceutical company in China, surpassing even Shenzhen Hepalink (see WiC63). As Liu told 21CN Business Herald: “In 14 years, our company has grown 30,000 times.”

The secret? Sichuan Kelun was able to grow quickly thanks to acquisitions. Its profits are based on an ability to leverage economies of scale and relentless cost-cutting. The companies it bought also filled out its own distribution network. Sichuan Kelun is one of a few Chinese pharma firms that boasts both manufacturing facilities and sales on a national scale, says Liu.

Another tip: use the “rent and then buy” method in identifying potential acquisition targets. Sichuan Kelun offers to rent the manufacturing capacity of a potential target for a period of time, says Liu. During the trial period, it also looks at the target’s sales pipeline and manufacturing capabilities.

Unconventional? Definitely, but it has made good sense for a fast-growing firm like Sichuan Kelun.

Take Hunan Kelun, a company Sichuan Kelun recently acquired (they weren’t connected: Kelun is a popular name for drugs firms in China, meaning ‘scientific theory’). The Hunan-based company also made IV solutions, and after renting its manufacturing facilities for an extended period, Kelun made an offer to buy 90% of the firm. Analysts say the deal will enhance Kelun’s offering as well as bring more customers in Hunan, one of the largest provinces in China and a market that has seen steady growth in healthcare spending.

Another reason Sichuan Kelun is so popular among investors is that the company is one of the few Chinese firms that actively touts its corporate governance practices. Every deal the company has made requires the unanimous approval of the investment committee, argues Liu. The process is to make sure that every acquisition is backed with strong business logic.

But there was one instance in which Liu was adamant about consummating a deal, even when the investment committee could not reach a consensus. As the majority shareholder, he managed to push the deal through. But he promised the company’s board that if the acquisition failed to add value, he would sell his own shares to make up for the investment loss in a show of accountability. Now, that’s something that is not in The Art of War.


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