China's forays into healthcare abroad carry risk on management, valuations

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A rush by Chinese companies to buy healthcare-related assets abroad is in full swing, but analysts note that risks include keeping local management onside and ensuring valuations hold up.

Bloomberg, citing its own data, said Chinese firms totaled over $3.9 billion of purchases in pharmaceutical, biotechnology and healthcare services so far in 2016--on track to beat the 2015 total and up tenfold from 2012.

John Wong, chairman of Greater China at Boston Consulting Group, told the news agency that targets fall into a $100 million–$300 million range for sales with purchase prices in a range of $300 million to above $1 billion.

But Wong cautioned on risks in the buying spree, including the discovery of a weaker than expected portfolio after purchase, and the prospect that the "the local management team disappears after the sale."

"Then the Chinese company is left with a declining asset," he explained.

One way to enter newer markets, Franck Le Deu, a senior partner at McKinsey & Co., told Bloomberg is to look at Indian drug firms that have demonstrated expertise in developed markets such as the U.S. by in selling generic products.

India last month eased foreign investment rules for so-called brownfield drug firms, allowing stakes up to 74% without detailed regulatory approval.

The move comes as China's Shanghai Fosun Pharmaceuticals is in a scrap to buy the unlisted Hyderabad-based injectables maker Gland Pharma, joining Baxter International ($BAX) and buyout firm Advent International, for a company valued at around $1.5 billion.

India is certainly watching the efforts by China to expand into the generic end of the industry and export market.

A report released this week by the country's commerce ministry said pharmaceutical exports reached $12.54 billion in 2015, up 7.55% with the U.S. serving as the top market despite a slew of import bans related to manufacturing quality, according to the country's commerce ministry, pipping rival China, which showed sales abroad of $6.59 billion last year, up 5.3%.

Le Deu added however that he expects Chinese companies to ramp up the purchase of assets abroad and that the fast start in 2016 is "only at the start of the wave."

- here's the story from Bloomberg

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