(Yicai Global) Jan. 16 -- Chinese medicine-makers are dropping their hospital investments, as the sector has proven to require longer investment cycles than expected.
Hunan province-based Jingfeng Pharmaceutical, Guizhou's Yibai Pharmaceutical, Shenzhen's China Resources Sanjiu Medical & Pharmaceutical and other Chinese drug companies have announced their plans to sell stakes in hospitals.
Hengkang Medical Group is one of the Chinese firms that has invested heavily in hospitals in recent years, which has put downward pressure on its earnings. The Chengdu-based firm's former major shareholder had to sell the stake due to poor performance and alarming debts last November.
Drugmakers started piling into the hospital management sector in 2013 after profits were crimping in their own line of business. A peak in mergers and acquisitions appeared in 2016. The number of Chinese hospital M&As last year was still the same as in 2016, but the transaction amount dropped to half, public data show.
"Many funds stormed into this sector without proper preparation," Liao Zhiren, the chairman of Shenzhen Association for Non-Government Medical Institutions, told Yicai Global. Investors fixed their eyes on cash flows and steady growth, while ignoring the fact that the sector requires mid- to long-term investment, he added.
An ordinary level-two hospital needs CNY200 million (USD29.6 million) to CNY300 million in initial investment, said Liao, adding that this kind of public hospital will need three to five years to break even, and eight to ten years to return a profit. But investors are usually willing to wait for gains from three to five years, he added.
Drug companies' investment can develop institutions and promote talent, but short investment cycles hinder growth within the sector, Liao said. In order to meet investors' requirements, some hospitals have even signed a valuation adjustment mechanism agreement, he said, referring to a deal that binds the target company to achieve certain conditions to retain its agreed-upon market value.
Knowing the nature of the sector will enable hospital managers and investors to achieve a situation where one plus one is greater than two, Liao added.
Editor: Emmi Laine