Direct Transactions Between Different Companies Without PEF... Companies Entering the Bio M&A Market

Domestic first-generation bio companies have now grown to the scale of trillions of won. The required capital size is increasing, but the capital market shows no signs of loosening. The pharmaceutical and bio industry is called a "money-eating hippo" or a "bottomless jar" because it requires endless R&D funds. Since R&D is core, succession to the second generation is difficult without specialized knowledge. Early-stage bio companies can receive venture capital (VC) investments, but there is no PEF willing to pour funds indefinitely into grown bio companies. Here, cash-rich mid-sized companies seeking new growth engines have emerged as main players in the domestic bio industry.

Recently, two major M&As were completed in succession: the integration of OCI Group and Hanmi Pharmaceutical Group, and Orion Group's acquisition of LegoChem Biosciences. The fact that M&A occurs between companies without PEF is a significant recent feature in the pharmaceutical and bio sector. A PEF industry insider said, "VC can invest in early-stage bio companies, but once they reach a certain scale, PEF should get involved. However, due to the long R&D period and uncertain sales timing, it is difficult to engage in this field."

Recently, as MBK Partners conducted a tender offer against Korea & Company and hostile M&A cases increased, wariness toward funds has grown, which also supported inter-company transactions, analysts say. An investment banking (IB) industry insider said, "PEFs have maturities and may seem to prefer cash-rich companies, but their post-management systems are superior to general companies, so the final outcome should be observed."

Pharmaceutical and bio companies have recently suffered financial pressure. Lee Seung-gyu, Vice Chairman of the Korea Bio Association, explained, "Due to the impact of interest rate hikes, bio companies have been under financial pressure, increasing interest in M&A. Previously, R&D costs were raised from the investment market, but that has become difficult, which is a main reason for the recent active M&A." He analyzed, "M&A has provided a breakthrough for financing. The needs of bio companies with technology but requiring funds and companies hoping to enter the bio market for 'future food' have matched."

The uniqueness of the bio industry also encourages M&A between companies. To enter the pharmaceutical and bio industry, where R&D requiring significant time and cost is core, securing personnel with technology is most important. The fastest way to secure this is through M&A, targeting companies whose technology is already verified or producing results.

OCI, whose main business is solar power, and Orion, whose core business is food, conducted M&A with companies in different fields, so it was called a "heterogeneous combination." They also share the commonality of excellent cash flow. As of the end of 2022, OCI held cash equivalents of 1.246 trillion won, and Orion also had 610 billion won in cash equivalents.

In contrast, among 63 listed pharmaceutical companies during the same period, none held cash equivalents exceeding 300 billion won. The same applies to Hanmi Pharmaceutical and LegoChem Biosciences. It is common to invest surplus funds in R&D. However, Hanmi Pharmaceutical is one of the top domestic pharmaceutical companies, and LegoChem Biosciences is globally recognized in the antibody-drug conjugate (ADC) field. The interests of non-bio companies seeking business expansion and bio companies needing capital injection have aligned.

M&A market experts analyze that fundamentally, deals were made because companies positively evaluate the bio market itself. Jung Kyung-soo, head of the M&A Center at Samil PwC, said, "In an aging society, the desire for well-aging inevitably leads to interest in bio, making it a future industry. Both OCI and Orion had already positioned bio as a new business, so the counterpart companies must have appeared attractive."

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Recent M&A trends show signs of overheating in the bio industry. According to Bloomberg league table data, the total M&A transaction amount in the domestic bio sector from Q1 to Q3 last year was $5 billion, a 50% increase compared to the same period in 2022. The total M&A market size shrank by 37% to $64.8 billion during the same period. The overseas market shows a similar trend. The global bio M&A market size in 2023 was $191 billion, a 34.5% increase from the previous year. The total market size including bio decreased by 32.2% to $2.495 trillion compared to one year ago. Global accounting and consulting firm PwC forecasts a 23% increase in the bio M&A market this year.

There are voices of concern about side effects if excessive interest in the pharmaceutical and bio market and active "heterogeneous combinations" beyond industry boundaries continue. Vice Chairman Lee said, "The key is whether companies from other industries can endure the unique speed and rhythm of the bio industry. Since new drug development itself has a low probability and will face many ups and downs during the process, whether the M&A counterpart can endure the bio industry's unique 'time of accumulation' is a point to watch." For this reason, stock prices may fluctuate after M&A. He added, "If such concerns are resolved, M&A activation could be an opportunity for Korea's bio industry to make a quantum jump."

Among recent M&A deals, Medipost, where the founder sold most shares, and the OCI-Hanmi Group share swap cases are not welcomed as exemplary cases by the pharmaceutical and bio industry. They are viewed more as profit-seeking than M&A for industry development and competitiveness. In contrast, the Orion and LegoChem Biosciences deal is recognized as a developmental M&A in the bio industry.

Jisoo Kang, partner at BNH Investment, said, "Reading the letter sent by LegoChem Biosciences' CEO to shareholders right after the acquisition, one can feel the sincerity that M&A was chosen to focus on new drug development. If it remains a good precedent, various M&A attempts and bio-entering companies will increase." Yeojeong Moon, executive director at IMM Investment, said, "Dr. Yongju Kim, founder of LegoChem, is respected by all in the bio industry. It is a globally recognized company for technology, and I see it as a wise choice for a step forward." LegoChem Biosciences CEO Yongju Kim stated in the shareholder letter, "I have lived my life with the belief that 'there is only new drug development.' This strategic alliance was the most important decision remaining to realize my long-held dream. I will devote my passion until the day we stand tall as a global company."

The boom in the bio sector in the M&A market is expected to continue. Byungjun Ko, senior manager and pharmaceutical and bio industry M&A expert at Samjong KPMG, said, "This year, active M&A will be promoted mainly targeting biotechs developing new drug candidates. The number of pharmaceutical industry assets entering the M&A market to resolve inheritance issues is also expected to increase."

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While mid-sized companies seek M&A with domestic pharmaceutical and bio companies, large corporations are expanding new businesses through global pharmaceutical and bio company M&A. With a global shortage of biopharmaceutical production facilities, fierce competition among domestic conglomerates for the bio industry, which is highly valued for future potential, has begun in earnest. Among the top five domestic groups, except Hyundai Motor, Samsung, Lotte, SK, and LG have all entered the pharmaceutical and bio industry. Among them, Samsung and Lotte stand out the most, putting their group's fate on the new growth bio sector.

A senior IB official known for pharmaceutical and bio investments said, "All major groups have entered the bio industry. People were somewhat surprised that Lotte started bio late, but now there are talks that Lotte might do better than Samsung." He added, "I was really surprised to see Lotte quickly acquiring good assets. Pharmaceutical and bio is a battle of scale and know-how. One successful M&A can change a group's future."

Samsung Biologics, considered the 'one-top' in this market, is being fiercely chased by latecomer Lotte Biologics. This is a positive structure of competition and growth for the entire Korean bio industry.

Lotte Biologics acquired the Syracuse plant in the U.S. from global pharmaceutical company Bristol-Myers Squibb (BMS) two years ago. They retained over 90% of the workforce there, absorbing BMS's expertise in biopharmaceutical production. The Syracuse plant produces 35,000 liters of antibody drug substance, which is not large in production volume. However, by acquiring this plant for 220 billion won, Lotte instantly secured biopharmaceutical production know-how and skilled personnel.

Having absorbed know-how in the U.S., Lotte is now building a large-scale plant domestically. Lotte Biologics plans to construct three bio plants in Songdo, Incheon by 2030, with a total antibody drug production capacity of 360,000 liters. The first plant is scheduled for completion in 2025, the second in 2027, and the third in 2030, aiming for full operation by 2034.

The reason large corporations invest huge funds and grow the pharmaceutical and bio industry through global M&A is that it is a high-growth industry with clear business potential. According to the Korea International Trade Association, the global bio industry market size is expected to grow at an average annual rate of 6.1%, from $11.3183 trillion (about 1,518.4 trillion won) in 2020 to $16.1919 trillion (about 2,171.6 trillion won) in 2026.

Currently, Samsung leads in sales and operating profit. It surpassed 3 trillion won in sales two years ago, and securities firms estimate that operating profit exceeded 1 trillion won last year. Its market capitalization reaches 50 trillion won. Samsung continues its growth by focusing on two pillars: expanding contract development and manufacturing organization (CDMO) for biopharmaceuticals and developing biopharmaceuticals in-house. Upon completion of the fifth plant, it will have an annual production capacity of 784,000 liters. The current capacity of 604,000 liters is already the world's largest. The IB industry expects Samsung to continue M&A for bolt-on (acquisition of similar companies) strategies.

SK has also steadily invested in the pharmaceutical and bio industry. It has secured production capacity by acquiring BMS's Ireland Swords plant, U.S. CDMO Ampac, and France's Epoceci. However, SK's pharmaceutical and bio industry is somewhat dispersed, divided into three pillars: new drug development (SK Biopharm), CDMO (SK Pharmteco), and vaccine business (SK Bioscience).

Although currently trailing other groups slightly, LG played a midwife role in Korea's bio industry. LG Chem started bio business about 20 years earlier than Samsung. However, the timing was too early, and the 1997 Asian financial crisis hit. LG Chem spun off its pharmaceutical and bio business into LG Life Sciences after the crisis, revising its business strategy to focus on maximizing profits and conducting large-scale restructuring. At that time, hundreds of bio talents left LG, with over 50 founding companies, becoming the driving force of Korea's bio industry today.

Recently, CEOs of leading domestic bio companies such as LegoChem Biosciences, Bridge Biotherapeutics, Peptron, Alteogen, PharmAbcine, and SuzenTech are all LG alumni. Although LG Chem reabsorbed LG Life Sciences in 2017, it seems time is needed to regain past glory. LG Chem reinforced its pharmaceutical and bio industry last year by acquiring U.S. oncology company Aveo Pharmaceuticals for 701.1 billion won.

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