Investors rush Into China health care

After hitting a record level last year, dealmaking in China’s health-care sector is expected to grow feverish as the Chinese government further opens hospitals to foreign investment and the nation’s drug companies become ripe for consolidation.

The total value of health-care deals in China last year jumped 23%, and has more than tripled since 2007, to a record $10.5 billion in 2013, according to data provider Dealogic.

That included some of the biggest-ever deals in the Chinese sector. Among them, U.S. medical device maker Stryker Corp. SYK -0.34% bought Trauson Holdings Co. for $764 million, and Switzerland-based Sellas Clinicals Holding AG entered a $531 million agreement with a subsidiary of Shanghai Fosun Pharmaceutical 600196.SH -1.17% (Group) to develop diabetes and lung cancer therapies.

This year, TPG Capital and Fosun Pharma bought New York-listed Chinese hospital operator Chindex International Inc. CHDX -0.13% for $369 million.

“There is a lot of momentum from financial investors and traditional health-care operators trying to acquire a controlling interest or some kind of stake in health-care institutions in China,” said Arthur Mok, a partner at law firm Ropes & Gray who leads the firm’s China life sciences practice.

“You’ve got the perfect storm of private-equity investors looking for assets that are underfunded and U.S. and European health-care providers seeking to access the massive patient population in China.”

China’s health-care needs are growing. The number of people in China who either have diabetes or signs of the disease is greater than the entire population of the U.S. Lung cancer is becoming more common, too. China is now home to 32% of the world’s lung cancer patients, according to Martin Murphy, founder of CEO Roundtable on Cancer-China, a cancer-focused nonprofit.

Foreign investors are particularly interested in China’s hospital sector which, like hospitals across Asia, offer especially attractive margins. They are now limited to 70% stakes, but that cap is expected to be removed eventually. Meanwhile, in the Shanghai Free Trade Zone, investors are allowed to set up 100% foreign-owned hospitals.

“Investors see opportunity to grab market share during this period of transition in foreign ownership limitations,” Mr. Mok said. “Deal frenzy is sure to ensue based on existing levels of investor activity and interest in the sector.”

Hospital margin across Asia are attractive, particularly compared with those in developed markets. Ramesh Rajentheran, head of Barclays BARC.LN +3.77% ‘ Asia Pacific investment banking health-care group, said hospital margins in the region can run from 20% to 30% and up, compared to high single digits in the U.S. or UK.

“If you could give private equity a wish list of what they want to spend on, hospitals are usually near the top of the list,” Dr. Rajentheran said.

Then there’s China’s pharmaceutical industry, which is booming as the country’s middle class rapidly expands. More manufacturers are producing the same drugs, pushing down prices and opening the door to consolidation.

“Midsized companies have been under pressure to merge and get scale,” Dr. Rajentheran said, adding that a government pricing system has also weighed on drug prices in China.

China was previously seen only as a place to produce pharmaceutical ingredients for export. Not anymore. For multinational drug companies, as for so many others, China’s domestic market is too big to ignore.

“What’s changed in the last five years has been the view of major multinational pharmaceutical companies in relation to the domestic Chinese pharma market,” Mr. Mok said. “It’s huge and has an expected continued growth rate which will make it the second-largest in the world by 2020. Big pharma simply cannot ignore the domestic China market.”

Source: The Wall Street Journal

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