An Era for M&As in the Health Food Industry

Original 王维众陈淳中伦视界 2022-05-18

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With the upgrade of domestic consumption and improvement of the Chinese health awareness in recent years, the Chinese health food market is developing rapidly along with a growing demand for health food by people of different ages. Early in 2014, Boston Consulting Group (BCG) released the market report of “From Insight to Action—Capturing a Share of China’s Health Food Consumer Market”, forecasting that China’s health food consumer market will expand by 10%-11% annually in the future and will be doubled by 2020. According to the relevant statistics, China’s nutritious health food industry has achieved the annual growth rate of 10%-15% during 2010 to 2015[1]. Based on the 2017 analysis on the import and export of China’s nutritious health food released by China Chamber of Commerce for Import & Export of Medicines & Health Products, the import and export volume of China’s nutritious health food reached US$3.56 billion in 2017, which is 12.2% higher than that of 2016 and hit a historical high[2].

The rising trend of health food market has led to the boom of M&A transactions in the health food industry. These M&A transactions can be classified into the following two categories:

M&A among health food enterprises, especially the acquisition of other health food enterprises by existing health food tycoons so as to expand their scale and achieve growth. For example, Synergy acquired the Australian company Swisse in 2015 and West King Food acquired the Canadian company Lovate in 2016.

Cross-industry M&A where non-health food enterprise (such as pharmaceutical company) acquires existing health food enterprise to march into the health food business. For instance, Feihe Dairy acquired the American health products company Vitamin World in 2017; Harbin Pharmaceutical Group Co., Ltd. subscribed for the shares of American GNC Corporation in 2018. Such M&A transactions are not only motivated by enterprises’ strategic demand to speed up their business diversification, but also are related to the huge market potential of health food industry. With the rise of “Healthy China” as a national strategy, it is believed that the market potential for health food industry will be further stimulated, which will lead to more M&A transactions in such industry. This article aims to outline the regulatory requirements on health food registration/filing, production, entrusted production, sales, import and export, advertising and other aspects with reference to the existing PRC laws and regulations regarding health food, and make a comparison between different acquisition methods for acquiring health food enterprises.

I. Common Licenses for Health Food Enterprises

To acquire a health food enterprise, it is necessary to first get an overview of the laws and regulations involved in the entire flow of health food circulation and the licenses required for each circulation step. The following is a summary of common licenses required for each circulation step of health food:

1. Registration/Filing of Health Food

Pursuant to the relevant provisions under the Administrative Measures on Registration and Record Filing of Health Food,

(1) It is legally required to make health food registration and obtain the Registration Certificate of Health Food for the production and importation of (a) health food using raw materials other than those listed in the catalog of raw materials for health food; and (b) health food imported for the first time (excluding vitamin supplements, minerals and other nutritional health food).

(2) It is legally required to make record filing to obtain the Record Filing Number of Health Food for the production and importation of (a) health food using raw materials listed in the catalog of raw materials for health food; and (b) health food imported for the first time, which belongs to vitamin supplements, minerals and other nutritional health food.

“Health food” without the registration certificate or record filing number shall not claim itself as health food or be claimed to have health promotion function. In other words, it is prohibited to advertise or promote unregistered/unfiled “health food” under the name of health food in the market.

2. Production and Entrusted Production of Health Food

(1) Production of health food:

According to the relevant provisions under the Administrative Measures on Food Production License, any food production activities in China shall be subject to Food Production License. And for the production of health food, a Food Production License for health food is required. China Food and Drug Administration is responsible for regulating and guiding the Food Production License throughout the country; while the provincial food and drug administrations are responsible for issuance of Food Production License for health food and other types of special food.

(2) Entrusted production of health food:

Health food enterprises who do not produce health food and wish to entrust a third party to produce health food, must ensure that the entrusted third-party manufacturer obtains the above-mentioned Food Production License for health food. In addition, China Food and Drug Administration released the Administrative Provisions on Entrusted Production of Health Food (Draft for Comments) (hereinafter referred to as the “Draft for Comments”) on September 24, 2013, pursuant to which entrusted production of health food shall be filed with the competent authority. Since the Draft for Comments has not been officially promulgated, the local regulators’ requirements vary among different provinces. Some provincial food and drug administrations (such as Qinghai, Shanxi and other provinces) have promulgated local regulations stipulating that enterprises that entrust third-party manufacturers to produce health food shall make record filing of entrusted production; while other provincial food and drug administrations (such as Beijing, Shanghai and etc.) have no such requirements.

3. Sale of Health Food

According to the relevant provisions under the Administrative Measures on Food Operation License, sale of food is subject to Food Operation License, which is further categorized into (1) sale of prepackaged food, unpackaged food and special food; and (2) sale and production of hot food, frozen food and etc., among which sale of special food includes sale of health food, food for special medical use, infant formula milk powder and other infant formula food. Based on such, sale of health food is subject to a Food Operation License that duly covers the operation item for the sale of special food (health food).

4. Import and Export of Health Food

Import of health food refers to domestic company’s importation of health food from foreign enterprises for sale in China. Analogous to the direct sale of health food in China, import of health food is also subject to Food Operation License that duly covers the operation item for the sale of special food (health food). In addition, it is noteworthy that according to the relevant provisions under the Administrative Provisions on Registration of Overseas Manufacturing Enterprises to Import Food, if the food produced by overseas manufacturer is under the Implementation Catalogue for Registration of Overseas Manufacturing Enterprises to Import Food (hereinafter referred to as the “Catalogue”), the overseas manufacturer shall register such food with the competent PRC authority before importation. Certain health food such as bird’s nest is listed under the Catalogue. Therefore, if the imported health food is listed in the Catalogue, it is important to check whether the overseas manufacturer of such imported health food has been registered with the PRC authority.

With respect to export of health food, according to the Administrative Provisions on Record Filing of Manufacturing Enterprises to Export Food, manufacturers for exported food (including health food) are subject to record filing with the competent PRC authority before exportation.

5. Advertising and Promotion of Health Food

According to the relevant provisions under the Advertising Law of the PRC, the contents of the advertisements for medical, drug, medical machinery, pesticides, veterinary drugs and health food shall be verified by the relevant government departments prior to its publication. According to further provisions under the Interim Provisions on the Censorship of Health Food Advertisement, prior to the release of health food advertisements, health food advertisement license number must be obtained, which will be valid for 1 year. In addition, according to further provisions under the Interim Provisions on the Censorship of Health Food Advertising, the contents of the health food advertisements shall be identical to the instructions and label previously approved by China Food and Drug Administration, which shall not be expanded without the authority’s approval. In addition, no comparison shall be made between the functions of health food and other health care equipment or medicines. Feudal superstitious activity is not allowed for promotion of health food.

II. Acquisition of Health Food Enterprises:

Share Deal vs Asset Deal

It is of prior importance to choose a transaction method when planning an acquisition. The choice of a share deal vs. an asset deal may have great implication on the achievement of transaction purpose, tax exposure and etc.

With respect to the acquisition of health food enterprises, considering the fair amount of licenses involved in the health food enterprises and the difficulty and lengthy application procedures for such licenses (especially the registration certificate of health food and health food production license as mentioned above), how to keep the existing licenses of the target health food enterprise to the maximum extent is one of the key elements when determining transaction method. Below is a brief analysis and comparison between a share deal and an asset deal in the acquisition of a health food enterprise:

Under a share deal, the target company will retain all the existing assets in most cases, while the shareholder of the target company will be directly or indirectly changed. Under an asset deal, the acquirer will buy out all or substantial assets of the target company to achieve new production line, operational capabilities, new products, customer groups, specific intellectual property and etc. The acquirer will establish a new company and make capital contribution to the new company with the acquired assets. Under asset acquisition, the newly-established company may still carry out similar or even the same business at the address of the original target company, while the newly-established company is completely independent of the original target company.

As mentioned above, health food related licenses are extremely valuable for health food enterprises. Whether such valuable licenses can be kept after the completion of the acquisition is the top priority for the acquirer. Under an asset deal, considering that the newly-established company is completely independent of the original target company, all the existing licenses held by the original target company can hardly be transferred to the new company, and the new company needs to re-apply for relevant licenses so as to continue carrying out the intended health food businesses. Therefore, it is more practicable to acquire a health food enterprise through a share deal rather than an asset deal, considering the fact that the health food related licenses will be retained under a share deal.

In summary, health food is a special industrial considering that the flow of health food circulation is strictly regulated and the application process for licenses related to health food is time-consuming and complex. Therefore, when acquiring a health food enterprise, share deal is recommended to keep the relevant licenses to the maximum extent.

Special thanks to Echo Huang

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David Wang

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