July 20, 2017 / 9:27 AM / in 4 months

Exclusive: U.S. Cardinal Health puts $1.5 billion China business on block - sources

HONG KONG (Reuters) - U.S. drug distributor Cardinal Health has put its China business up for sale, drawing keen interest from state-backed Chinese pharmaceutical firms in a deal that may be worth up to $1.5 billion, sources familiar with the matter said.

Logo of Shanghai Pharmaceutical Holding Co Ltd is seen outside a building in Shanghai, China May 25, 2012. REUTERS/Stringer

Shanghai Pharmaceutical Holding Co Ltd, China Resources Pharmaceutical Group Ltd and Sinopharm Group Co Ltd are among those wanting to buy Cardinal Health China, one of the nation’s largest drug distributors, said the first source who had direct knowledge of the matter. A second source confirmed the sale process.

Cardinal wants to exit over worries China’s upcoming drug distribution reform could slow its growth, according to the first source. The Ohio-based company has also been diversifying, and in April announced a $6.1 billion deal for Medtronic Plc’s medical supplies units.

It has hired Lazard as an adviser for the China sale, according to the sources. The first round of bidding is due around Friday, said the first source.

Cardinal’s China business, which operates 16 distribution centers in 20 cities, generated over $3.5 billion in revenue last year, compared to over $3 billion in 2015, according to its earnings report.

The U.S. company could fetch a price in the range of $1.2 billion to $1.5 billion, said the first source.

Cardinal, Shanghai Pharma and CR Pharma declined to comment while Sinopharm and Lazard didn’t respond to Reuters’s request for comment. The sources declined to be identified because the talks are not public.

The planned sale comes after Beijing in January introduced a so-called “two-invoice” procurement system for drug distribution on a trial basis, as part of a broader overhaul of the country’s fragmented, disorganized healthcare sector.

China has for over a decade been considering streamlining its multi-layered drug distribution system which profits intermediaries and drives up drug prices.

Under the new mechanism, which is expected to be fully implemented in 2018, drug manufacturers can only work with a single distributor which directly supplies products to healthcare facilities such as hospitals.

The overhaul is expected by industry insiders and analysts to reshape China’s drug distribution landscape, with distributors that lack links to strong manufacturers and healthcare facilities liable to be cut out of the supply chain.

“The new policy is likely to squeeze margins for most distributors in China. They will be under pressure for future profitability,” said the first source. “It does make Cardinal and others worried.”

The source added that while the move will also impact state-owned pharma firms, strong backing from Beijing to create “national champions” in key industries and post-deal synergy gains still make the target appealing to them.

The state-owned pharma firms have been looking to expand.

Shanghai Pharma, backed by the Shanghai government, said in May it may bid for German generic drugmaker Stada, but Reuters later reported it had failed to reach an agreement with a bidding consortium.

CR Pharma, a unit of state-backed conglomerate China Resources Holdings, manufactures and distributes drugs in China under well-know brands, including “999”. It raised about $1.8 billion through its Hong Kong listing late last year, which helped replenish its coffers.

In 2010, Cardinal became the first major U.S. wholesaler to invest in China’s drug distribution market with its $470 million takeover of privately held Zuellig Pharma China, known locally as Yong Yu, the largest pharma importer in the country.

Cardinal has since acquired several other Chinese distributors and rebranded the whole business as Cardinal Health China.

Reporting by Julie Zhu and Kane Wu; Additional reporting by Carl O'Donnell in NEW YORK; Editing by Muralikumar Anantharaman

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