Key Takeaways
- AstraZeneca is the largest foreign owned pharmaceutical company in China based on revenue, and they’re continuing to increase investment in the country
- Growing tensions between China and the US are making many companies nervous about their operations in China, and AstraZeneca is no exception
- They’ve reportedly drawn up plans to split their Chinese operations and list in Hong Kong or Shanghai, but the company has shrugged this off as a “rumor”.
AstraZeneca is the UK’s largest publicly traded company, but in a sector that’s known for big bets, big wins and big losses, there’s always plenty of room for growth. And that’s especially the case for Astrazeneca, who, despite a market cap of over $170 billion, only just cracks the global top ten when it comes to pharmaceutical company revenue.
But areas for growth are becoming harder to come by. Growth in the US, the UK and Europe is low, and pharmaceutical companies face increased pressure from lawsuits and regulation.
So with that in mind, AstraZeneca appears to be looking east. Specifically, to China. Despite undergoing plenty of economic problems of its own, China still boasts economic growth rates that are the envy of most of the G20.
At the same time, increasing tensions between China, the UK and the US make increasing investment in the country a risk. With grandstanding on both sides about regulatory crackdowns and trade wars, investors are right to be somewhat wary.
So where does that leave AstraZeneca, and (how) do they plan to continue their push into China?
AstraZeneca looks to China for Growth
So far, it appears that AstraZeneca isn’t too concerned about the geopolitical issues happening between China and the US. They’re already heavily embedded into the country.
Revenue from the country made up 13% of global sales for the company, and the figure of $44 billion makes it the biggest foreign pharmaceutical company in China by revenue.
AstraZeneca’s chair Michel Demaré has even gone so far as to state that, “When you are a global company like AstraZeneca you have always to cope with geopolitical risk and you have to try to manage that without getting too involved.”
Essentially, if there’s money to be made…
And while China is an attractive target for AstraZeneca due to the potential for new customers, the company also sees it as a hotbed for high quality scientists. Please use the sharing tools found via the share button at the top or side of articles.
“The innovation power has changed. It is no more ‘copy, paste’. They really have the power to innovate and put all the money in. There’s a lot of start-ups and we are a part of that” says Demaré.
There has been a particularly noticeable trend in cancer drug research in China, with the country now accounting for almost 25% of all early-stage cancer drugs globally. That’s up from close to 0% back in 2007.
Is AstraZeneca spinning off its China business?
A number of months ago we saw rumors surface that AstraZeneca may be looking to spin off their growing Chinese operations. The company had supposedly created an outline as to what the process would be for ring fencing different components of the company, sheltering it from any tensions that might arise.
The plan would reportedly see AstraZeneca split its holdings in China to a separate legal entity, which would then list on a public market in Asia. The likely landing spot would be Hong Kong or Shanghai stock market, with AstraZeneca UK holding a controlling interest in the company.
In short, they could stay at arms length when it suited them, and still exert control and influence (while taking profits) from the Chinese entity.
So all this sounds like it makes sense, and in many ways it does. Even so, it hasn’t stopped AstraZeneca themselves from pouring cold water on the idea. In public, at least. And it’s not that hard to see why.
AstraZeneca won’t want to be seen, in any way, to be making any judgment calls or forming any opinions on the rising tensions between China and the US. Leon Wang, AstraZeneca’s, China and international president, categorically ruled out the spinoff speculations as “rumor.”
The reality of the US/China situation
The truth is that it wouldn’t be at all surprising if someone in the risk management department at AstraZeneca has drawn up plans for just this situation. But at this stage, it appears as if these plans are being drawn up to serve as an ‘emergency eject’ button rather than a long term plan for growth.
AstraZeneca is perfectly able to grow their business in China without operating via a separate Chinese entity. But should tensions get to a point where it could be looking to have a negative impact, having a separation plan already in place is likely to be a major advantage.
And it’s almost surely not just AstraZeneca drawing up plans like these.
Geopolitical risks are a major concern for big multinationals, who have to contend with wide scale operational challenges such as anti-trust lawsuits, broad legislative changes and even wars.
The tensions between China heighten the concern over how it could impact a company’s business, and their bottom line. For investors, these kinds of risks can float under the radar, so it’s important to understand how the companies you hold positions in could be impacted by geopolitical issues.
Of course it also depends on the market segment they’re operating. Any company that poses a cybersecurity risk (e.g. TikTok), or provides advanced warfare capability (Nvidia chips) comes at a higher geopolitical risk. Many companies in this position have long been taking substantial steps to limit this risk.
The bottom line
China remains an incredibly attractive market for companies, with an economy that continues to grow and a population that continues to increase their spending power. Even so, it doesn’t come without risks, and the challenges thrown up by the geopolitical environment aren’t to be ignored.
Even so, it appears that AstraZeneca is determined to continue to work to build a foothold in the country. For investors who are prepared to take the risk that comes with the strategy, it could be a recipe for impressive long term success.
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