[BEIJING] When a branch of the Chinese army set up a medicine factory in 1939, it was intended mainly to help in the fight against the Japanese. It would later be used by Communist fighters during China's civil war before evolving into a state- owned drug company.
Today, the facility is privately owned and on the front line of a different type of struggle. Its owner, Hong Kong-listed China Grand Pharmaceutical and Healthcare Holdings, has big ambitions to scale up and compete against Big Pharma firms around the world.
That means doing deals to break into markets from the US to Africa or to bring international brands into China, said Shao Yan, chief executive officer of China Grand Pharma, in an interview.
"Even though China's pharmaceutical industry is still in the middle of consolidation and price wars, we hope to escape from this and do more work in terms of innovation and internationalisation," said Mr Shao, 53, who's been CEO since 2008, and overseen a twelve-fold increase in the company's revenue to more than US$400 million last year.
Such a two-pronged strategy is typical among front-runners in China's health industry today. Drugmakers are seeking an edge in the domestic market, where price competition is cut-throat.
At the same time, they're trying to upgrade from selling raw chemicals to exporting finished pills around the world.
Chinese companies have announced more than US$5.2 billion of overseas health-care acquisitions this year, according to data compiled by Bloomberg, a fifteen-fold jump from 2012.
Among the most prominent deals, Humanwell Healthcare Group, a Chinese maker of anesthetics and contraceptives, bought US-based generic drug maker Epic Pharma for US$550 million. Shanghai Fosun Pharmaceutical Group, backed by Chinese billionaire Guo Guangchang, agreed to buy Indian drugmaker Gland Pharma for about US$1.3 billion, gaining drug factories that supply to the US.
Chinese drugmakers still face challenges making global deals because they are up against larger international rivals.
Many are still unknown entities overseas and must prove to sellers that they have the financial wherewithal to close the deal. But if they succeed, consumers around the world can expect to see more and more "Made-in-China" drugs in their medicine cabinets.
Mr Shao said his closely held parent company, China Grand Enterprises, has made international bids, including one for Swedish drugmaker Meda AB's US operations and another for the American generic drug business of Belgium's UCB SA. At the time of the bidding process last year, people familiar with the matter valued those deals at about US$1 billion each.
The Chinese company lost out in both instances. Mylan NV, which is run from Canonsburg, Pennsylvania, ultimately won Meda by agreeing to buy all of the company for US$7.2 billion and Philadelphia-based Lannett bought the UCB business.
Mr Shao said China Grand continues to look for other deals.
China's exports of finished pharmaceutical products grew by 11 per cent last year, according to industry groups. But that expansion came even as safety questions around some Chinese products have lingered, and as US inspections uncovered violations at several factories.
A drug application overhaul by the Chinese regulator last year turned up widespread problems of incomplete and fraudulent data.
While some Chinese companies have been pulled up by regulators, others say they have taken measures to boost standards. China Grand Pharma mainly aims to export finished drugs to developing markets and hasn't faced regulatory actions from the US or European drug quality watchdogs, according to the company.
Meanwhile, a string of smaller Chinese firms are also seeking to become bigger suppliers to Western multinationals, and are trying to forge international deals to boost this side of their business.
Tucked away in China's southwestern Chongqing metropolis, Porton Fine Chemicals which employs about 1,600 people and had about US$162 million in revenue last year, supplies chemical components that are used in HIV and hepatitis drugs worldwide. Porton in its annual report says it serves 16 of the world's 20 largest drugmakers, and mainly supplies to two major clients, Johnson & Johnson and Gilead Sciences Inc.
While Chinese companies have long been a source of ingredients for generic drugs, multinationals have largely sought to control the supply chain for the newest medicines, Ju Nianfeng, chairman and co-founder of Porton said.
Mr Ju hopes to break into this area by acquiring established manufacturers of pharmaceutical ingredients in Europe and the US.
"Clients prefer to source from Western companies which already have better track records," said Mr Ju. "It will take us time to build such trust and track records."
Even with a willingness to pay up, Chinese companies haven't always succeeded in nabbing the most attractive overseas assets.
In an e-mail, China Grand Enterprises, the parent company, said that when it sought to buy the UCB generics business, the seller was concerned about uncertainties related to national security screenings of foreign buyers in the US. UCB declined to comment.
The listed company Mr Shao oversees is looking for assets worth US$100 million to US$500 million focused on eye treatments and cardiovascular drugs.
Meanwhile, the parent, which owns businesses ranging from real estate to financial services, continues to scout for US deals, potentially using the Hong Kong traded unit and partnering with private-equity firms, Mr Shao said.
His company bought a 33 per cent stake in a small German maker of cardiovascular devices called Cardionovum last year, and hopes to bring its products to China by 2018.
"We've been through three or four cases, one succeeded and two did not," said Mr Shao. "These are special stories about Chinese companies trying to do overseas M&A, and they're a learning process."