Shanghai Pharmaceuticals has agreed to buy Cardinal Health’s China drug distribution business for $557 million, winning a highly competitive auction in a move that will greatly expand its presence nationwide.
The deal will also help Shanghai Pharma, China’s third-largest drug distributor, become a leading importer of foreign medicine into the world’s second-largest drug market.
Including shareholder loans, the deal gives Cardinal’s business in mainland China and Hong Kong an enterprise value of $1.2 billion, equivalent to about 15 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ended June.
By comparison, Shanghai Pharma, which is backed by the Shanghai government, trades at 11 times EBITDA.
Cardinal Health put its China business up for sale in July amid worries that the country’s upcoming drug distribution reform could slow its growth. The sale drew keen interest from state-backed Chinese pharmaceutical companies and private equity firms.
“It was a very competitive bidding process as a target like this is very rare in the market,” David Liu, head of M&A at Shanghai Pharma told Reuters on Wednesday.
Warburg Pincus and a consortium led by Cardinal China’s management team were also among bidders in the final stage of the auction, said two people with knowledge of the matter, declining to be identified as they were not authorized to speak to the media.
Warburg Pincus declined to comment while representatives for Cardinal China did not immediately respond to a request for comment.
Beijing introduced a so-called “two-invoice” procurement system in January on a trial basis as part of an overhaul of the country’s fragmented healthcare sector aimed at streamlining the distribution chain.
Under the new system, expected to be fully implemented in 2018, drug manufacturers can only work with a single distributor that directly supplies products to healthcare facilities such as hospitals.
The overhaul is expected to reshape China’s drug distribution landscape and squeeze margins for distributors lacking links to big manufacturers and healthcare facilities in China.
Cardinal’s China business is the 8th largest drug distributor in the country, operating 14 direct sales units and 17 distribution centers that cover 322 cities and 11,000 medical institutions, Shanghai Pharma said in a statement.
It generated 25.5 billion yuan ($3.85 billion) in revenue for the last financial year, compared with 22.6 billion yuan a year earlier.
Executives from Shanghai Pharma also told Reuters that the company is looking to acquire more than 3,000 domestic retail stores in a drive to expand its retail network to 5,000 within five years.
Morgan Stanley and China Merchants Securities advised Shanghai Pharma on the deal, which is subject to an anti-monopoly review by China’s Ministry of Commerce.
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