Sorry, when I did cut & paste something??? happened, here it is again - Article appeared in UOB KayHian technical analysis and focuses on government directed consolidation in healthcare industry. Significant amount of Hony is owned by Chinese Gov't, so my conjecture this government move may have impacted BIG value

Healthcare – China

 

Consolidation gaining traction; Sinopharm and GPC are leading

 

beneficiaries

 

What’s New

 

• Policies for restructuring and M&A. The Chinese government has

 

recently issued the “Guidance on speeding up the restructuring of the

 

healthcare industry“. One of the key points of the guide is to encourage

 

restructuring and M&As across different areas with an attempt to promote

 

economies of scale and industry consolidation. The guidance has set an

 

explicit target for the top 100 pharmaceutical companies to achieve over

 

50% of the industry’s total revenue within the next five years from 42% as

 

of end-09.

 

• Increasing M&A activities. Sanofi-Aventis closed two deals in November,

 

one of which hit a transaction value of US$521m, the highest in the history

 

of Chinese OTC drug producers acquired. Nycomed also acquired a local

 

drug manufacturer in November for a consideration of US$210m. There

 

were also occasions of local players taking over foreign enterprises. On 9

 

Nov 10, HEGLN Pharma, a local pharmaceutical company, acquired a

 

Canadian medical device producer, URO Technology.

 

• Wholesaling – accelerating consolidation ahead. “Consolidation”

 

would be a key word of the 12th Five-Year Plan for the pharmaceutical

 

wholesaling industry. It is the government’s vision to speed up the

 

consolidation and promote the concentration of the industry so as to

 

improve safety and lower the prices of drugs. As a result, the number of

 

distributors across the nation is expected to decline from over 12,000

 

currently to 2,000 within the next 10 years.

 

Action

 

• Sinopharm leading the consolidation. Sinopharm has made four major

 

acquisitions and some 50 small ones during 1H10 to extend its footprint

 

into almost all provinces across China. Management expects the company

 

to at least carry on with the momentum in 2H10 and 2011, if not speeding

 

up. The coverage of Level 3 hospitals, the most lucrative segment, stood

 

at 83% as of 1H10 and is expected to reach 100% by end-11.

 

• Two potential contributors of earnings surprise. Besides its major

 

battlefield in the hospital market, Sinopharm has started to explore

 

opportunities in the following: a) the rural markets, and b) the medical

 

equipment segment, both of which are likely to contribute additional

 

earnings growth, in our view. The company is catching the superior growth

 

in the new rural cooperative medical care markets by acquiring a Jiangxi

 

company, based on which it will set up a separate division focusing on the

 

low-tier market. On the other hand, Sinopharm has also tapped into the

 

equipment market by acquiring a small medical devices and consumables

 

distributor with annual sales of Rmb100m. Management expects to ramp

 

up equipment sales for 2011 to over Rmb200m, which, although minimal

 

compared to Sinopharm’s overall revenue, would still add to the bottom

 

"Healthcare – China

Consolidation gaining traction; Sinopharm and GPC are leading

beneficiaries

What’s New

•

recently issued the “Guidance on speeding up the restructuring of the

healthcare industry“. One of the key points of the guide is to encourage

restructuring and M&As across different areas with an attempt to promote

economies of scale and industry consolidation. The guidance has set an

explicit target for the top 100 pharmaceutical companies to achieve over

50% of the industry’s total revenue within the next five years from 42% as

of end-09.Policies for restructuring and M&A. The Chinese government has

•

one of which hit a transaction value of US$521m, the highest in the history

of Chinese OTC drug producers acquired. Nycomed also acquired a local

drug manufacturer in November for a consideration of US$210m. There

were also occasions of local players taking over foreign enterprises. On 9

Nov 10, HEGLN Pharma, a local pharmaceutical company, acquired a

Canadian medical device producer, URO Technology.Increasing M&A activities. Sanofi-Aventis closed two deals in November,

•

would be a key word of the 12th Five-Year Plan for the pharmaceutical

wholesaling industry. It is the government’s vision to speed up the

consolidation and promote the concentration of the industry so as to

improve safety and lower the prices of drugs. As a result, the number of

distributors across the nation is expected to decline from over 12,000

currently to 2,000 within the next 10 years.Wholesaling – accelerating consolidation ahead. “Consolidation”

Action

•

acquisitions and some 50 small ones during 1H10 to extend its footprint

into almost all provinces across China. Management expects the company

to at least carry on with the momentum in 2H10 and 2011, if not speeding

up. The coverage of Level 3 hospitals, the most lucrative segment, stood

at 83% as of 1H10 and is expected to reach 100% by end-11.Sinopharm leading the consolidation. Sinopharm has made four major

•

battlefield in the hospital market, Sinopharm has started to explore

opportunities in the following: a) the rural markets, and b) the medical

equipment segment, both of which are likely to contribute additional

earnings growth, in our view. The company is catching the superior growth

in the new rural cooperative medical care markets by acquiring a Jiangxi

company, based on which it will set up a separate division focusing on the

low-tier market. On the other hand, Sinopharm has also tapped into the

equipment market by acquiring a small medical devices and consumables

distributor with annual sales of Rmb100m. Management expects to ramp

up equipment sales for 2011 to over Rmb200m, which, although minimal

compared to Sinopharm’s overall revenue, would still add to the bottom

line given the segment’s higher profitability with 30% gross margin and

10% net margin."Two potential contributors of earnings surprise. Besides its major

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