Chinese Drugmakers Walk Away From Hospital Investment as Profits Are Pending
Lin Zhiyin
/SOURCE : yicai
Chinese Drugmakers Walk Away From Hospital Investment as Profits Are Pending

(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 

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Keywords: M&A , Pharmaceutical Companies