Sinopharm Group Co. agreed to make its largest acquisition since going public in 2009, offering to buy a stake in units of Le Ren Tang Pharmaceutical Group Co. to expand in China’s northern Hebei province.
Sinopharm, China’s largest drug distributor, will pay as much as 1.3 billion yuan ($197 million) for 60 percent of two Le Ren Tang, or LRT, units that include its distribution and retail businesses, the closely held company said today. Sinopharm will also invest 60 million yuan in the distribution unit.
The purchase is priced at 20 to 25 times LRT’s 2010 earnings, making it Sinopharm’s largest and most expensive acquisition since the initial public offering in September 2009, according to Jinsong Du, an analyst at Credit Suisse AG. Sinopharm said the purchase gives it the biggest drug distributor in Hebei province with a 30 percent market share.
"My initial reaction is it’s still a shock to me that the P/E is this much,” Du said in a telephone interview from Hong Kong. “I wouldn’t consider this acquisition a bargain, definitely not, but at least it’s not negative.”
Du is one of 13 analysts tracked by Bloomberg who recommend buying the stock. None have a “sell” rating.
Sinopharm fell 0.6 percent to HK$27.25 at the midday break in Hong Kong trading, giving the Shanghai-based company a market value of HK$61.7 billion ($7.9 billion). The stock has declined 29 percent since reaching a record of HK$38.40 on April 7, 2010.
Multiple Acquisitions
Sinopharm has made at least six acquisitions since its IPO, according to data compiled by Bloomberg. “Many tiny” ones haven’t been disclosed, according to Du. Most of its previous purchases have been at less than 10 times earnings, and the company expects to pay an average of 15 times this year, the analyst said, citing Sinopharm management.
Competitors including Shanghai Pharmaceuticals Holding Co. have made acquisitions at as much as 50 times earnings, suggesting Sinopharm would have to pay more to expand, Du said.
Sinopharm only has a small position in Hebei, Wu Aimin, a deputy general manager at the company, said by telephone. The drug distributor, which has operations in about 100 Chinese cities, plans to expand to 300 cities in China within the next two years, he said.
The company expects the purchase to boost revenue from the province, which borders the capital, Beijing, and the port city of Tianjin, to 10 billion yuan by 2012, Wu said.
Sinopharm’s revenue rose 36 percent to 31.6 billion yuan in the half year ended June 30, and net income climbed 27 percent to 628.6 million yuan.
China’s government is implementing a plan to spend 850 billion yuan to expand basic health-care services throughout the country by this year. The nation’s pharmaceutical-industry sales will expand as much as 27 percent in 2011 to more than $50 billion, making it the world’s third-biggest drug market, IMS Health Inc. said in October.
LRT sells more than 20,000 kinds of Chinese-made pharmaceutical products to more than 1,000 hospitals across the province, according to the statement.
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