Shanghai Pharma says bid for U.S. Cardinal Health's China business

[October 18, 2017] By Julie Zhu

HONG KONG (Reuters) - Shanghai Pharmaceuticals Holding Co said it has bid for Cardinal Health Inc's China business, as the U.S. drug distributor looks to exit over worries China's upcoming drug distribution reform could slow its growth.

Shanghai Pharma submitted two non-binding bids to buy Cardinal Health China, one of the country's largest drug distributors, on July 21 and September 15, it said in a filing with the Shanghai stock exchange on Wednesday.

The company, backed by the Shanghai government, did not disclose the financial terms of the deal, but said it has not entered into exclusive talks with the seller.

Reuters first reported in July that Cardinal Health had put its China business up for sale, in a deal that could fetch about $1.2 billion to $1.5 billion.

The sale has drawn keen interest from state-backed Chinese pharmaceutical companies and private equity firms such as FountainVest, according to sources with knowledge of the matter.

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

It has hired Lazard as an adviser for the China sale, according to the sources.

FountainVest and Lazard did not immediately respond to requests for comment. The sources declined to be identified because the talks are not public.

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 healthcare sector.

Under the new mechanism, 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 new policy will likely squeeze margins for many distributors that lack links to strong manufacturers and healthcare facilities in China.

In spite of the overhaul, state-owned pharma firms with strong backing from Beijing to create "national champions" in key industries have been looking to expand.

Shanghai Pharma, for instance, said in August it was bidding for a stake in U.S. specialty drugmaker Arbor Pharmaceuticals LLC.

(Reporting by Julie Zhu; Additional reporting by Kane Wu; Editing by Biju Dwarakanath)

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